The development of Australian corporate law vis-à-vis other areas of Australian law

Sir Anthony Mason has been credited with the development of “a body of common law and equitable principle that was distinctly Australia” during the late 1980s to early 1990s. There are important public and private law judgements that are referred to during this time, which can be said to have ‘altered the common law in Australia’ during this period. Yet, corporations law seems to have bucked this trend. What gives? Major developments in Australian corporations law (as it is called in Australia) have come from statute rather than from courts. Further, Sir Anthony Mason’s much quoted 1992 statement about this area of law captures the big problem in Australian corporations law: “Oscar Wilde would have regarded our modern Corporations Law not only as uneatable, but also indigestible and incomprehensible.” In late 2022, we are still grappling with this problem. Not only have various scholars expressed concerned on this issue, but the ALRC has also set out to remedy this.

But is complexity the only thing that sets Australian corporate law (or corporations law as it is called here) apart? Rather than looking to develop uniquely Australian principles in this area, the statutory amendments have sometimes borrowed from outside. For example, the introduction of the business judgment rule in 2000 took inspiration from the corporate law in the American State of Delaware.

Even where courts have advanced (or could have advanced) the law in this area, it has not paid any particular attention to the development of UK common law. For instance, Australian courts have been more reluctant to pierce the corporate veil than UK courts.

Even in the absence of common law or statutory convergence however, corporate law, unlike other areas of law, offers another avenue for convergence in law – corporate governance codes. Not only this, market forces like institutional investor demands across jurisdictions can also bring convergence in terms of corporate governance best practices. I’m not trying to imply that Australian corporate law is not distinct in substance from other common law countries. Rather, my point is that Australian corporate law is also unique within Australia when we think of how its journey has been quite different from other areas of law.  

Rescue finance in Australia

While Australia doesn’t have a formal rescue finance regime, s 447A orders are often used to get court permission for rescue finance. An empirical analysis of rescue finance applications found that the annual average number of applications was five times higher between 2016 and 2021 than it was between 2001 and 2006. So a recent court order in Park (Administrator), in the matter of Ellume Limited (Administrators Appointed) v Evangayle Pty Ltd (Trustee) [2022] FCA 1102 approving such an application under s 447A is not novel or controversial. The court’s reasoning in approving the funding agreement was short and included a call-out to the goals of Part 5.3A.

However, the circumstances leading to the entry into the Funding Agreement were such that, had it not been entered, the business would cease to trade almost immediately.  This would likely have resulted in the termination of the employment of the vast majority of, or all, employees, a dividend to priority creditors, at best a nominal dividend to general unsecured creditors and no return of monies to shareholders.

Another fairly routine but important matter is for the administrator to avoid the personal liability arising under s 443A of the Corporations Act. The court approved this, again stating that the funding agreement is consistent with the goals of 5.3A.

Finally, the court also approved the application for a section 588FM order in respect of the registration time for security granted to the creditor (the one providing rescue finance). As is common the court decision does not provide details of the security granted.

The fact that these practices have developed to ensure that rescue finance is possible in Australia, despite there being no rescue finance regime like there is in other countries is an interesting illustration of the law in action (as against on the books).

Keep law lean

In an FT article Prof. Brian Cheffins (along with Dr. Bobby Reddy) writes that the UK Corporate Governance Code should be abolished. In its place, he proposes that the FCA’s listing rules could ‘mandate the disclosure of high-priority corporate governance arrangements and allow tailored solutions’. This is hugely provocative but also interesting. In criticising the Code, Cheffins writes that the Code is already lengthy without adding much value. He says that the Code, as it is, has ‘numerous platitudes that merely affirm widely-accepted governance propositions’. Indeed corporate governance codes across many jurisdictions have this problem. In a way there is value in a statement of ‘nice to have’ principles that companies can strive for but it starts to lose meaning as it gets more and more lengthy. But Cheffins’ strongest argument in my opinion is that the “soft law” option ‘allows policymakers to pass the buck’. He says:

According to a recent UK government report on trust in audit and corporate governance, the code beneficially permits the testing and refining of regulatory innovations. In fact, it rarely performs this function. Much more likely is for policymakers to use it to duck hard policy choices, such as when Theresa May’s 2016 commitment to worker representation on boards was translated into a provision affording companies plenty of latitude.

Ultimately I think it doesn’t matter whether you use the Code or use some other device – the key is to keep laws lean. When the law (hard or soft law) begins to get unwieldly, it stops serving the purpose. In Australia, the basic legislation governing companies, the Corporations Act has become so massive that the Australian Law Reform Commission has recognised that the legislation has become too complex and started work on reforming it. They have even published a really entertaining ‘conversation‘ between the Corporations Act and its parents (“Your father and I remember when you were just 1866 pages long. You’ve grown a lot since then, but don’t you think you should slow down a bit? You’ve really been bulking up. You’re now over 3,700 pages long, and that doesn’t even include your Regulations and other legislative instruments!”). Even as someone who has been teaching Australian corporations law since 2016 and has a fondness for certain parts of the Act, I agree that it needs to get a lot leaner. The Companies Act in New Zealand is something we can take inspiration from.

I think it may also be worth noting Cheffins’ arguments about the Code in the context of ASX Corporate Governance Principles. I’m not advocating for it to be scrapped entirely. Instead I’m saying is that even important rules can get lost in a crowd of too many rules, and when these rules are soft, they don’t do much more than allowing legislators to “pass the buck” as Cheffins says.

Saving the safe harbour

Australia’s (relatively) newly minted safe harbour to directors’ liability under s 588G (insolvent trading liability) has come under much criticism and for good reason. Still, I had been enthusiastic about a provision that can possibly change the incentives that s 588G seemed to create for directors. So, the government’s response to the independent panel’s review and recommendations to improve the safe harbour is welcome. Some of the recommendations are aimed at clarifying aspects of the safe harbour provisions.

I’m most interested in Recommendation 4 to which the government has agreed. It says:

The Review recommends that a plain English ‘best practice guide’ to safe harbour be developed by Treasury in consultation with key industry groups. The Review recommends that this guide set out general eligibility criteria for appropriately qualified advisers.

I think this does two things. First, it attempts to do away with spurious advisors becoming involved in advice re safe harbour. While this is good in theory, the devil will be in the detail and in the implementation. Second, the ‘plain English’ best practice guide to safe harbour will be useful because it might help small business owners understand and use the safe harbour effectively. Also, if key industry groups provide input as recommended, it might help flesh out how the safe harbour works in practice.

There is also an supplemental suggestion (although not a formal recommendation to the government) to updating ASIC’s Regulatory Guide 217 ‘to refer to the insolvent trading prohibition, and the safe harbour provisions, together with general guidance on the operation of the relevant provisions.

Recommendation 14 is also worth mentioning because it says that Treasury should ‘commission a holistic in-depth review of Australia’s insolvency laws’. It does not seem like this is on the government’s agenda, going by the fact that the response simply details the insolvency law reforms undertaken or in the pipeline. Here it is:

The Government notes this recommendation.
The Government has an extensive agenda regarding measures to improve Australia’s insolvency framework for both small and large businesses. On 1 January 2021, the Government introduced new insolvency processes suitable for small businesses, which are the most significant reforms to Australia’s insolvency framework in 30 years. The Government also announced reforms to creditors’ schemes of arrangement and conducted consultation on clarifying the treatment of corporate trusts in insolvency over the course of 2021.

Investor activism on ESG in Australia

A study (published in 2021) of shareholder resolutions on ESG in Australia finds that the pool of shareholder ESG filers is very concentrated:

The pool of filers of the shareholder ESG resolutions in Australia is particularly concentrated. Not including co-filers, the 83 resolutions were filed by only seven proponents… other than two resolutions filed by Galilee Blockade, every resolution since 2015 (70 resolutions) has been filed by one of only two filers – either ACCR or Market Forces.

On subject matter of these resolutions, the authors report:

Of the 83 shareholder resolutions advanced in listed Australian companies between 2002 and 2019, 48 concerned climate change,… A further 26 resolutions, at least notionally, related to governance. The other resolutions related to workers’ rights, human rights, free and informed consent, and gambling.

Nothing on diversity.

The authors explain [in FN 27]

All but one of the ESG resolutions categorised by ACCR as ‘governance’ resolutions involved proposals to amend company constitutions to allow shareholders to advance advisory resolutions [required because of how the law in Australia is structured]. The exception was a 2003 resolution in the company Boral, which was to allow Global Reporting Initiative (‘GRI’) style reporting with the company’s annual report. In this respect, Australia has not experienced the same level of shareholder governance resolutions relating to executive remuneration and board gender diversity as has been experienced in the US.

Calling it DIP does not make it DIP

Australia’s small business restructuring reforms (Part 5.1B of the Corporations Act) took effect early this year. The aim of that part of the legislation is stated on s 452A as:

                   The object of this Part, and Schedule 2 to the extent that it relates to this Part, is to provide for a restructuring process for eligible companies that allows the companies:

                     (a)  to retain control of the business, property and affairs while developing a plan to restructure with the assistance of a small business restructuring practitioner; and

                     (b)  to enter into a restructuring plan with creditors.

So obviously the “debtor in possession” model is supposed to be the star feature in this process.

Yet, the restructuring only begins when the restructuring practitioner is appointed! (s 453B)

So what is the restructuring practitioner supposed to do while the debtor company’s management remains in control of the business? Provide restructuring advice and help prepare the restructuring plan, amongst other things. The restructuring practitioner even acts as an agent of the company; and can terminate the proceedings by giving notice to the company and creditors.

For their part, the directors have “to give the restructuring practitioner information about the company’s business, property, affairs and financial circumstances”. This is starting to look a lot like a practitioner is in control right? The only real “DIP” flavour seems to be that a company under restructuring still “has control of the company’s business, property and affairs”; and the fact that directors are allowed to enter into transactions in the ordinary course of business. Other types of transactions should be approved by the restructuring practitioner. This approval can only be given if she or he “believes on reasonable grounds that it would be in the interests of the creditors for the company to enter into the transaction or dealing”.

So I don’t think this is a real DIP model.

I would think that a DIP model with the option for creditors to exit the process would have been much better. I know Professor Jason Harris has been writing/ speaking about the process being too costly for many small businesses and I agree. However, the main point of this post (rant) is to caution against mislabeling the model.

I will end with an extract from Professor Aurelio Gurrea Martinez’ article about MSME restructuring which I highly recommend:

Unfortunately, even if this system reduces the direct costs of the procedure for debtors, many insolvent MSMEs might not even have the resources to afford the appointment of an insolvency practitioner. In these situations, countries may adopt two possible strategies. On the one hand, they can recognize this situation as a “market failure” and respond with a governmental intervention consisting of the appointment of a public trustee. Alternatively, a country can adopt a “private solution” based on a (purely) debtor-in-possession model. Therefore, the procedure would be exclusively managed by the company’s directors, as happens in the US Chapter 11 reorganization procedure.

Is Australia’s class action regime available to non-resident shareholders?

Is Pt IVA of the Federal Court of Australia Act 1976 (Cth) (which contains Australia’s class action regime) not available to non-resident shareholders of a dual listed Australian company? This and some other interesting questions came up in BHP Group Limited v Impiombato [2021] FCAFC 93 (where leave was sought to appeal the decision in Impiombato v BHP Group Limited (No 2) [2020] FCA 1720). The court granted leave to appeal on this ground.

Middleton, Mckerracher and Lee JJ noted that ‘the real question is better expressed as: whether Pt IVA permits an applicant to define group membership as including claims of non-residents?’ [27]. In the ‘opt-out’ regime of the FCAA, the Cth made a choice to ‘include no provision excluding the possibility of non-resident group members’ [47]. The judges further agreed with the primary judge’s finding that there was nothing in Part IVA showing an intention to disallow claims for loss and damage by non-residents [63].

Leave to appeal has been granted on this issue of extraterritorial application of Part IVA of the FCAA because it involves ‘a point of some importance, which has not been directly considered by an intermediate court of appeal in Australia’.

That will be something to watch out for.

There is however, another interesting issue discussed in the judgement. It is titled ‘wrongful discretion contention’ in the judgement. My title for it is below.

Lack of certainty and finality

BHP’s alternative argument was that ‘even if claims were able to be made on behalf of non-resident group members, it was appropriate for the Court to exercise its discretion under ss 23 and/or 33ZF of the Act to exclude such persons from the class action’ [69]. The primary judge rejected this application. BHP then argued that ‘in deciding not to order the exclusion of non-resident group members, or to order that the proceeding on behalf of such group members be permanently stayed pending an amendment to the definition of “group member” (or even considering such a course),… the primary judge failed to take into account a material consideration which must be properly weighed in the exercise of the discretion: the interests of BHP in the proceeding and, more particularly, BHP’s interest in certainty and finality in respect of the proceeding’ [71]. They further argued that the retention of non-resident group members ‘who will retain their rights of action against BHP Plc regardless of any settlement, promotes significant uncertainty’ [75].

The primary judge seemed to agree that there is “some risk” of the issues being re-agitated in UK and South Africa [81], however, on balance, decided not to make an order under s 33ZF or s 23 [82].

Agreeing with the primary judge’s decision, Middleton, Mckerracher and Lee JJ held as follows [83]:

Australia has adopted a no provision model. If the operation of that model results in an unfairness in an individual case, Pt IVA has within it discretions to ensure that any prejudice can be ameliorated, but to do so in such a way as to not totally exclude a sub-class of group members who have claims that can be grouped. In any event, it is not as if by excluding non-residents the Court will not have to look at the question of purchases of BHP LSE Shares and/or BHP JSE Shares on foreign exchanges, because some Australian resident group members (who also purchased BHP ASX Shares) will remain group members.

However, the judges went on to acknowledge the problem of uncertainty affecting settlement efforts. Although this particular rejection of relief was not challenged by BHP, the judges went on to make some interesting comments [92, 95].

Without expressing any concluded view, in the particular circumstances of the present case, it might be argued that immediately prior to the hearing or in the context of a settlement proposal or mediation there may be some merit in an order requiring a non-resident class member to take a positive step to opt-in to the class action, although the class action is otherwise conducted on an opt-out basis.

…

As to any residual concerns as to power to make an order under s 33ZF, it is beyond the scope of this judgment to enter into extended debate about any form of “opt-in” or class closure orders and it is unnecessary to do so.

It will be interesting to see if this sort of thing comes up in future in Australia or in other “opt-out” jurisdictions.

Insolvency in air and space and the Cape Town Convention

The High Court of Australia is set to decide on an issue of interpretation of a clause applicable to secured transactions involving international transactions re aircraft. This will also have implications for transactions in the space sector.

The Cape Town Convention (the Convention on International Interests in Mobile Equipment) is relevant for secured transactions re Aircraft, Spacecraft etc. Since airline insolvencies are unfortunately a reality in the aftermath of Covid, the Cape Town Convention has become more relevant than in the past. With corporate activity in space heating up, it is likely to become relevant in the space sector as well. The experience of the use of the Cape Town Convention in the airline industry will be instructive.

Aircraft protocol

The Cape Town Convention and the Protocol on Matters Specific to Aircraft Equipment (Aircraft Protocol) has been in the news thanks to the Virgin Australia insolvency. The Federal Court of Australia (FCA) in Wells Fargo Trust Company, National Association (trustee) v VB Leaseco Pty Ltd (administrators appointed) interpreted Article XI of the Protocol and the appeal is currently being heard in the High Court of Australia (HCA).

The Convention and Protocol establish an international legal system for security interests in aircraft equipment. In a forthcoming book chapter (Airline Insolvencies in India) Hitoishi Sarkar and I discussed Article 3(1) of the Convention which provides that the Convention is applicable if the debtor is situated in a state that is party to the Convention.

We explained Article XI of the Protocol as follows (references omitted; emphasis added):

The most central insolvency provision pertaining to aircraft is provided in Article XI of the Aircraft Protocol which provides contracting States with two alternative provisions. It then provides that contracting States may choose either alternative or choose to adopt neither of the alternatives. If a contracting State elects one of the alternative versions of article XI, then that version will apply when the contracting State is a debtor’s ‘‘primary insolvency jurisdiction.”

Under Alternative A to Article XI of the Aircraft Protocol, the debtor’s ‘‘insolvency administrator’’ or the debtor must give possession of the relevant aircraft object to the creditor holding an international interest in the object before the expiration of a stipulated waiting period. The alternative permits a Contracting State, in its declaration with respect to that article, to specify the applicable waiting period’ that will apply when the Contracting State is a debtor’s primary insolvency jurisdiction.

Under Alternative B, the insolvency administrator or debtor, on a creditor’s request, is merely required to give the creditor notice whether the administrator or debtor “will cure defaults and perform future obligations or permit the creditor to take possession of the aircraft object. This alternative does not provide a creditor with any right to obtain possession of an aircraft object in insolvency proceedings.

Since Australia has opted for Alternative A, “give possession” was being interpreted by the FCA. In the court’s view “give possession” does not include redelivery and so it is up to the creditor to “come and get it“. (There is an excellent article on this by Professor David Brown “Give” and “Take”: Virgin Australia, the Cape Town Convention and Aircraft Protocol (2021) 21(1&2) INSLB 21 where he endorses this interpretation and also discusses further about the “commercial sense” of the court’s interpretation.) This is currently being heard in the High Court of Australia (as Michael Murray reports over at his blog) so we will have to watch how this goes down.

Space protocol

The Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Space Assets (Space Protocol) which is not yet in force has a similarly worded provision.

Alternative A under Article XXI also states as follows (emphasis added):

Upon the occurrence of an insolvency-related event, the insolvency administrator or the debtor, as applicable, shall, subject to paragraph 8 and to Article XXVI(2) of this Protocol, give possession of or control over the space asset to the creditor no later than the earlier of:

(a) the end of the waiting period; and

(b) the date on which the creditor would be entitled to possession of or control over the space asset if this Article did not apply.

Thus, the interpretation of the HCA is likely to be relevant to insolvencies in the space sector as well.

Which is the fairest (class action) of them all?

How should a court respond to competing applications to stay one or more open class representative proceedings commenced in relation to the same controversy? (The controversy in question here is the fall in AMP’s share prices after its admissions in the Banking Royal Commission hearings regarding charging fees for no service and misleading ASIC about the extent of its misconduct.)

The majority decision in Wigmans v AMP Limited [2021] HCA 7 held (in the context of Pt 10 of the Civil Procedure Act 2005 (NSW)) that there was “no “one size fits all” approach” and that there was “no rule or presumption that the representative proceeding commenced first in time should prevail”. Significant for the litigation funding developments in Australia, they went on to hold as follows:

In matters involving competing open class representative proceedings with several firms of solicitors and different funding models, where the interests of the defendant are not differentially affected, it is necessary for the court to determine which proceeding going ahead would be in the best interests of group members. The factors that might be relevant cannot be exhaustively listed and will vary from case to case. (Emphasis mine.)

These factors (referred to as a multifactorial analysis by the lower court) are [60]:

[1] the competing funding proposals, costs estimates and net hypothetical return to members;
[2] the proposals for security;
[3] the nature and scope of the causes of action advanced (and relevant case theories); [4] … the size of the respective classes;
[5] the extent of any bookbuild;
[6] the experience of the legal practitioners (and funders, where applicable) and availability of resources;
[7] the state of progress of the proceedings; and,
[8] the conduct of the representative plaintiffs to date.

The majority decision justified the position as follows [84, 85]:

Unlike the United States and some Canadian provinces, which have adopted certification and carriage motion procedures to resolve multiplicity in class actions, Australian legislatures deliberately chose not to adopt such procedures. That choice reflected a view that the proposed class actions scheme was adequate to protect group members’ interests or, perhaps, competing class actions were not envisaged.

But the decision not to adopt the United States or Canadian procedures in Australia does not end, or dictate the outcome of, the process of identifying the relevant considerations for the Supreme Court in deciding which of the competing representative proceedings is to proceed. For as has been explained, the representative proceedings scheme in Pt 10 does not stand alone. It forms part of the CPA and it operates in conjunction with the CPA and the Supreme Court’s inherent powers. [Footnotes omitted.]

Interestingly, the minority interpreted the decision not to adopt the US or Canadian procedures differently. It held that since “the Parliament of New South Wales had before it the example of the legislative regime that operates in the United States to facilitate the determination by the courts of the competition between would-be sponsors of class actions, but did not adopt that example or any relevant aspect of it”, the multi-factorial test was not applicable [35]. Instead, the relevant principle to be applied was “the principle that it is prima facie vexatious to commence an action if an action is already pending in respect of the same controversy in which the same relief is available” [43].

This decision (both majority and minority opinions), is significant in light of the Report of the Parliamentary Joint Committee on Corporations and Financial Services on Litigation Funding and Regulation of the Class Action Industry wherein this issue was discussed (and the Wigmans case was referred to). The committee expressed the view that “the most appropriate approach would be a requirement for the Federal Court to select the class action which advances the claims and interests of class members in an efficient and cost-effective manner, with regard to the stated preferences of the class members” and also a desire to curb the race to the court mentality of plaintiff’s lawyers. Recommendations 2 and 3 of the report deal with this. I have extracted Recommendation 3 below:

Recommendation 3
7.76 The committee recommends the Federal Court of Australia’s Class Actions Practice Note be amended to include:
 a requirement that the Federal Court of Australia holds a selection hearing to determine which of the competing or multiple class actions should proceed, the Federal Court of Australia should select a class action which advances the claims and interests of class members in an efficient and cost-effective manner, with regard to the stated preferences of the class members; and
 a requirement that on the filing of a class action, the Federal Court of Australia orders a standstill in that proceeding for 90 days, so that any other competing or multiple class actions can be appropriately considered and filed, and that any book building that occurs during the standstill period should be given no weight by the Federal Court of Australia.

So, while the majority decision seems to be taking the direction of the committee’s recommendations, the minority decision is more convincing based on the current law. In any case, reforms on the issue need to be introduced at the earliest to provide certainty.

Who knew that the Australian insolvent trading regime was so attractive?

I’m late to blog about this case but if you are interested in corporate insolvency, Debut Homes (in Liq) v Cooper a New Zealand Supreme Court judgement should not go unnoticed. In deciding the case, the court seems to have incidentally restated the law relating to directors’ duties in the zone of insolvency in a way that makes it veer dangerously close to the Australian s 588G regime (prior to the introduction of the safe harbour).

After stating that a company remaining solvent is in the interest of the company, shareholders, and other stakeholders (no surprises there), the court went on to apply some of the principles underpinning formal insolvency regimes to the directors’ duties in the zone of insolvency regime. It provides the following summary [49]:

Solvency is a key value in the Act. Where a company becomes insolvent, there are statutory priorities for the distribution of funds to creditors and mechanisms to ensure these are not circumvented. There are also a number of formal mechanisms in the Act, apart from liquidation, for companies experiencing financial difficulties. All of the formal mechanisms have carefully worked out processes for decision-making and involve either an independent person or consultation with all affected creditors. None of these formal regimes involve continued unfettered decision-making by directors. Directors can choose to employ informal mechanisms but these must align with formal mechanisms. At all times, including where a company is insolvent, directors must comply with their duties under the Act.

For emphasis, I will restate the one particularly thorny sentence in the above:

Directors can choose to employ informal mechanisms but these must align with formal mechanisms.

What does this imply? The previous paragraph [48] of the judgement says:

[Informal mechanisms] must also align with the available formal mechanisms. This would suggest the need to ensure the agreement of all creditors, including those who would be involved in and affected by the period of continued trading. If all such creditors are not consulted, any informal scheme would have to ensure that those creditors who were not consulted would be paid in full. This also follows from the directors’ duties in ss 135 and 136 …. [Footnotes omitted]

It seems to be a novel idea that informal mechanisms must align with formal mechanism. Nothing in ss 135 or 136 (the law relating to duties of directors in the shadow of insolvency) suggest this. New Zealand determines solvency by a consideration of both the cash flow and the balance sheet tests (s 4) and case law interpreting the insolvent trading duties up until now have allowed directors room to assess the financial condition of the company, investigate potential income streams, etc. before having to enter the company into a formal insolvency procedure. There is no suggestion in these earlier cases that all creditors need to be consulted while making these assessments.

It is therefore surprising to see the court interpret s 135 as follows:

The duty under s 135 must also be assessed in light of the scheme of the Act and in particular Part 15A, which is the formal mechanism specifically designed to be used in an insolvency situation for increasing returns to creditors. Under Part 15A, all creditors are consulted and voting is by value and class.The same applies to compromises under Part 14.90 In this case Inland Revenue was not consulted, even though Mr Cooper’s intention when he decided to continue trading was that it would bear all the loss. [Footnotes omitted.]

I quote a small section (page 108) of an excellent comment by Peter Watts’ here (but highly recommend the entire article [2020] Company and Securities Law Bulletin 107). He rightly says that “the presence of scheme provisions [do not] signal that, before their invocation, directors in running a company, even an insolvent one, are required to give equal weight to the interests of every single unsecured creditor…”. He adds that consultation with all creditors has never been a requirement. He further adds that “all formal insolvency mechanisms start from a premise of pari passu treatment, but that is not the case before those mechanisms are triggered”.

Having drifted away from established precedent, the position now set out by the court would require directors of a company in troubled financial waters to either enter the company into a formal insolvency regime or to consult with all creditors of the company about continuing to trade. It is highly likely that at least one of the creditors would object to the directors’ efforts to steady the ship (if that is possible). The court’s statements in Debut Homes may also encourage more litigation under s 135 which would in turn make directors wary of any informal restructuring efforts. This is not that different from the Australian position under s 588G and before the introduction of the safe harbour. As I say in a previous article (at page 46), prior to the introduction of the safe harbour, “Australian directors, especially in large companies, have been so spooked by the possibility of personal liability that they have tended to put the company into the insolvency -resolution process (known as voluntary administration in Australia) at the slightest possibility of insolvency.” The dicta in Debut Homes is likely to have a similar impact in New Zealand. Hopefully the court has an opportunity to correct itself soon.