IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE	
CIV-2019-404-1585
[2019] NZHC 1960	

UNDER	Part 15A of the Companies Act 1993	
IN THE MATTER OF	AUBURN DEVELOPMENT LIMITED (ADMINISTRATOR APPOINTED)	
AND	an application by BRYAN EDWARD WILLIAMS
Applicant	

Hearing:	On the papers	
Counsel:	M D Arthur and J Marcetic for the Applicant	
Judgment:	9 August 2019	

JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:
Chapman Tripp, Auckland	michael.arthur@chapmantripp.com Janko.marcetic@chapmantripp.com

Case officer:
Molly Smith	molly.smith@justice.govt.nz

Re an application by Williams [2019] NZHC 1960 [9 August 2019]

[1]	On  9  August  2019  I  considered  the  administrator’s  applications  under  ss 239AO and 239ADR of the Companies Act under pressure of time. A decision was required that day. Accordingly I issued a minute to make sure that the administrator had a decision in time. As the application required a decision on a new point, the validity of a deed allowing enforcement after the decision period, the decision may be of wider interest. I have accordingly made the minute a judgment. I have corrected parts of the minute but my reasons and orders have not changed.

[2]	Auburn Development Limited is the developer of the 92 unit block of apartments, the Sargeson Apartments, in Takapuna, Auckland. On 29 July 2019 Auburn Development Limited was put into voluntary administration under Part 15A of the Companies Act 1993. Mr Bryan Edward Williams is the administrator. He has applied without notice for directions.

PA View Opportunity VII Limited

[3]	PA View Opportunity VII Limited (PA View), a British Virgin Islands company, is a first ranking security holder. It has security over all the assets of Auburn Development Limited and has a mortgage over each of the 23 unsold apartments. Under s 239ABC of the Companies Act 1993 anyone with security over the property of the company may not enforce the security except with the administrator’s written consent or the permission of the Court. That is, however, subject to exceptions under Part 15 Subpart 10 of the Companies Act. Under ss 239ABK and 239ABL a creditor with security over the whole or substantially the whole of the property of the company in administration has 10 working days from the appointment of the administrator in which to begin enforcement of its charge. Today is the last day for PA View to decide. A likely enforcement option is to appoint receivers.

[4]	Mr Williams does not regard that as desirable or in the interests of creditors as a whole. The appointment of receivers of a company in voluntary administration would subject the company to a double insolvency administration. The increased costs would reduce the funds available to creditors. It also risks time being spent resolving disputes as to the relative priority of payments between receivers and the administrator. Mr Williams also considers that the appointment of receivers may

decrease the possibility of the company and creditors generally entering into a deed of company arrangement. If PA View is given time to consider its options, it may be persuaded not to enforce its securities independently of the general body of creditors. The appointment of a single insolvency practitioner to deal with the company’s assets may lead to a better outcome for all creditors.

[5]	Accordingly, on 6 August 2019 Mr Williams entered into a deed of consent to enforcement with PA View. Under this deed, Mr Williams gave his irrevocable consent to PA View to enforce its security at any time during the administration. It is said to be  a  consent  to  enforcement  under  s 239ABC(a).    Mr  Williams  applies  under  s 239ADR of the Companies Act for a direction confirming the validity of the deed of consent to enforcement and alternatively applies under s 239ADO for an order that the decision period under s 239ABK be extended until the watershed meeting.

[6]	He has applied without notice. The urgency of obtaining a determination before the decision period expires means that the application cannot be conveniently made on notice to other parties, including creditors.

[7]	I am persuaded of the merits of extending the decision period, that is, reserving the rights of PA View to begin enforcement at any time during the administration. Giving it that flexibility means that PA View may be more willing to co-operate with creditors generally with a view to ensuring a more efficient realisation of company’s assets, not only for its only benefit, but also for other creditors.

[8]	Heath and Whale Insolvency Law in New Zealand says1:

Further, a practice has developed in Australia, whereby the fully secured creditor enters into a deed with the administrator, effectively refraining from appointment of a receiver on the condition that its right to do so at any time during the administration is preserved. Arguably, such deeds are contrary to the statutory provisions which present the “decision period” as an all-or- nothing opportunity for a fully secured creditor to appoint, after expiry of which it is not possible to appoint (ss 239ABK, 239ABL). It is arguable that the administrator cannot give a blanket future consent to appointment of a receiver during the administration (s 239ABC). Although the issue has been raised in Australia, no Court has yet ruled such deeds to be effective or ineffective.

1	Paul Heath and Michael Whale (eds) Heath and Whale: Insolvency Law in New Zealand (3rd ed, LexisNexis, Wellington, 2018) at [17.16].

[9]	Given the short time available to decide, it would be tempting to bypass the question of the validity of the deed of consent to enforcement and instead to use the Court’s own power to extend time under s 239ADO. That would sidestep the question of pronouncing on the validity of the deed without the benefit of a contradictor. But caution in pronouncing on the validity of the deed risks establishing a practice that administrators are to apply to the Court whenever they enter into a deed extending the decision period. Any applications to deal with extending the decision period are likely to require determination during the 10 working day decision period. If the deed is valid, it should not be necessary for administrators to apply for their decisions to be upheld. Accordingly, I address the validity question.

[10]	The submissions for Mr Williams referred to Australian decisions under the comparable Australian legislation: Commissioner of Taxation of the Commonwealth of Australia v Prescribing Biochemists Pty Ltd (controller apptd) (recs and mgrs. apptd)2, Australian Liquor, Hospitality and Miscellaneous Workers’ Union v Terranora Lakes Country Club Pty Ltd3and Australian Capital Reserve Ltd (admins apptd) v High Tower Investments Pty Limited.4. The question is also discussed in “Agreements with administrators to forbear in the exercise of securities during the ‘decision period’” by Bruce Hambrett and David Walter.5 The article notes potential risks for administrators:

… it should be expected that the courts will require that administrators act responsibly, almost  quasi-judicially,  in  exercising  their  discretion  under  s 440B of the Corporations Act.

Bearing that expectation in mind, and the fiduciary obligation of administrators not to fetter their discretion, it is feasible that a Court would determine that the fetter proposed in forbearance arrangements would be in breach of the administrator’s fiduciary duties to the company in administration.

Significantly for charge holders, it is likely that in many instances a charge holder will almost certainly be taken to have been on notice of such a breach of fiduciary duty by an administrator. It follows that there is a real risk that a

2	Federal Commissioner of Taxation v Prescribing Biochemists Pty Ltd (1994) 14 ACSR 703, [1994] 30 ATR 9.
3	Australian Liquor, Hospitality and Miscellaneous Workers’ Union v Terranora Lakes Country Club Pty Ltd [1996] 19 ACSR 687, 14 ACLC 1200.
4	Australian Capital Reserve Ltd (admins apptd) v High Tower Investments Pty Limited [2007] FCA 1028.
5	Bruce Hambrett and David Walter “Agreements with administrators to forbear in the exercise of securities during the ‘decision period’” (2007) 8(2) INSLB 25.

forbearance arrangement would be held to be unenforceable at the suit of the company in administration. Such a result might considerably prejudice the position of a charge holder.

There is another argument against the enforceability of forbearance arrangements. Such an arrangement does seem to cut across the spirit of Pt 5.3A; the secured creditor, by s 441A, is given a 10 business day decision period in which to act, and there is not mention of that period being capable of extension. An open-ended consent would circumvent this restriction.

[11]	Notwithstanding those words of caution, it seems reasonably plain that Parliament intended that an administrator can give written consent to the enforcement of a charge over the property of a company without first seeking the permission of the Court. That extends to the enforcement of a charge over substantially the whole of the property of the company when the statutory decision period under s 239ABK has expired. Parliament contemplated that an administrator, acting in the general interests of creditors and shareholders, could properly decide whether secured creditors should be allowed to enforce their charges during the administration, notwithstanding the general prohibition under s 239ABC. Recourse to the Court should be required only if the administrator refuses their written consent.

[12]	Subpart 10, ss 239ABK and 239AVL provide an exception. The holder of a charge over substantially the whole of the property of the company may enforce its security, so long as it does so within the 10 working days allowed. It can do so without the need for a court order and notwithstanding the absence of consent of the administrator.   Once the 10 working days are up, the bar on enforcement under        s 239ABC applies. That bar is subject to the consent of the administrator or the permission of the Court. Consent granted by the administrator under s 239 ABC(a) may allow enforcement after the decision period, even if the security holder has not taken the opportunity to enforce during the decision period.

[13]	In a slightly similar context the English Court of Appeal said in Re Atlantic Computer Systems Plc:6

The administrator should also make his decision responsibly. His power to give or withhold consent was not intended to be used as a bargaining counter in a negotiation in which the administrator has regard only to the interests of the unsecured creditors. When he refuses consent it would be helpful if, unless

6	Re Atlantic Computer Systems Plc [1992] Ch 505 at [529]-[530].

the reason is self-evident, he were to state succinctly why he has refused and also why he is not prepared to pay the rental arrears for at least the current rentals.

A similar approach should be adopted by the administrator when secured creditors seek his consent to enforce their security. It should not be necessary, therefore, for the Companies Court  to be swamped with applications  under s 11, or for administrators to be subjected regularly to the expense and destruction of such applications. Should it become necessary for a lessor or owner of goods, or the owners of a security to make an application to the Court, the Court has ample powers, by making orders as to costs and giving directions to the administrators, either as its own officer or as envisaged by   s 17, to ensure that the applicant is not prejudiced by an unreasonable decision of an administrator.

[14]	Given those considerations, administrators in New Zealand should likewise exercise their discretion whether to grant written consent under s 239ABC responsibly. It would in my view impose an unnecessary extra cost if administrators were required to seek Court approval every time they considered that it was appropriate to allow a secured creditor under s 239ABL to have extended time for enforcement. Given that Parliament was confident to trust administrators with the decision, the Courts should not be quick to treat extensions of the decision period with suspicion. The doubts suggested by Messrs Hambrett and Walter and Messrs Heath and Whale might be similarly raised against an administrator’s decision under s 239ABC(a) and can be discounted because of the obvious legislative purpose. Section 239ABC should not be read down. It should not bar administrators from giving consent to secured creditors under s 239ABL, such as PA View.

[15]	As I am satisfied with the validity of the deed of 6 August 2019, it is strictly not necessary for me to make the order sought under s 239ADO extending the decision period under s 239ABK. I record, however, that if I had not upheld the deed of 6 August 2019 I would have made an order under s 239ADO extending the decision period until the watershed meeting.

Extension of time for the watershed meeting

[16]	Under s 239AT the administrator must convene the watershed meeting within 20 working days after his appointment. The Court may extend that under s 239AT(3), as well as generally under s 239ADO. The convening period will expire on Friday 23 August 2019. The watershed meeting is required to be held by 30 August 2019.

The administrator seeks an extension of the convening date by 27 working days to 1 October 2019. This aspect of the administrator’s application is relatively routine. Mr Williams seeks more time to work out the best way in which the remaining 23 apartments can be sold. Options include selling apartments on an individual basis, selling them wholesale as a block, or some combination. Ten of the apartments are subject to restrictive covenants with the Auckland Council which require them to be sold to a community housing provider or to people meeting specified affordability criteria. The administrator says he has had discussions with agencies representing purchasers interested in one or more apartments. He has also engaged a real estate company to assist with marketing, with a view to a bulk-wholesale process. He says once the marketing process is complete he will be in a better position to decide the approach likely to optimise recoveries for creditors.

[17]	A first creditors meeting was held on 7 August 2019. Fifteen creditors were represented and seven creditors gave postal votes. The vast majority voted in favour of extending the convening period. In these circumstances I accept that an extension of time is appropriate to allow the administrator to make a thorough investigation to obtain enough information to prepare reports and statements required under s 239AU. Time is extended accordingly.

[18]	In summary:

(a)	The administrator is entitled to apply without notice.

(b)	The deed of 6 August 2019 is valid and effective under s 239ABC to allow PA View to enforce its security, notwithstanding the expiry of the decision period.

(c)	It is not necessary to make an order extending the decision period under s 239ADO, but I would have, if necessary.

(d)	The convening period under s 239AT is extended up to and including
1 October 2019.

[19]	I direct the administrator to give notice of these orders to each known creditor on the terms proposed in the application. Any documents to be served on creditors may be similarly sent. Leave is reserved for anyone who can demonstrate sufficient interest to apply to modify or discharge these orders after having given notice to the administrator.

[20]	Leave is reserved to generally apply for further orders.

[21]	The costs of this proceeding are an expense incurred by the administrator in carrying out his functions.

Associate Judge R M Bell