Vol 11 (2014) - Issue 5

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The Solid Energy Decision and Debt for Equity Swaps in New Zealand

Introduction
New Zealand has had its share of substantial corporate restructuring over the past five years. The statutory techniques available for restructuring have many similarities with other jurisdictions, including voluntary administration (modelled on the Australian Corporations Act 2001 (Cth)), schemes of arrangement and creditor compromises. However, the recent substantial restructuring cases have not required the use of these formal processes, and have been conducted using mortgagee or receiver powers of sale to deliver equity and debt to the secured creditors. These have also been achieved without the involvement of the New Zealand courts.
The New Zealand experience can be contrasted with its closest neighbour, Australia, which has used court approved schemes of arrangement to obtain sufficient support for restructuring. However, in 2013, the restructure of Solid Energy New Zealand Limited ('Solid Energy'), a state-owned coal producer, was achieved both using a statutory technique and involved the courts to consider challenges to the restructure.
The restructure of Solid Energy concerned bilateral unsecured bank debt held by a group of five banks, and one holder (of many) of medium term notes. The creditor group agreed a restructure plan which involved exchanging redeemable preference shares for part of the debt and extending the repayment date on the balance.
One of the banks in the group, Bank of Tokyo- Mitsubishi UFJ Ltd ('Bank of Tokyo') would not agree to the plan. Solid Energy proposed a creditors’ compromise, which was approved by the requisite 75% in value of a majority of creditors. Bank of Tokyo applied to Court to have the compromises set aside.
On 18 December 2013, the High Court handed down its judgment in the matter of Bank of Tokyo-Mitsubishi UFJ Ltd v Solid Energy New Zealand Limited [2013] NZHC 3458 dismissing on all grounds the application by Bank of Tokyo for relief pursuant to Part 14 of the Act in respect of the two compromises.
The issues for the Court’s consideration were:

(a) whether the compromises were invalid and unenforceable because they were entered into without the prior written approval of Bank of Tokyo (which Bank of Tokyo considered was required pursuant to the terms of a standstill deed entered into with Solid Energy and the other banks);
(b) whether the compromises were invalid and unenforceable on the basis that the compromises were not within the permissible scope of Part 14 (being more appropriate for court-approved schemes of arrangement);
(c) whether the Court ought to exercise its power under s 232(3)(b) to release Bank of Tokyo from the compromises because of alleged material irregularities in the way in which the compromises were approved by creditors, in particular the determination of classes for voting purposes and inclusion of contingent debts at full value for voting; and
(d) whether the compromises were unfairly prejudicial to Bank of Tokyo in terms of s 232(3)(c) because of, inter alia, an inconsistency of treatment and outcomes for creditors, and consequently whether Bank of Tokyo should be released from the compromises.

The judgment therefore involved a review of the purpose and operation of compromises with creditors, and comparison with schemes of arrangement. Due to the comprehensive analysis of Winkelmann J and the infrequency with which creditor compromises are before the courts, Solid Energy must be considered the leading decision on creditor compromises in New Zealand, but also a leading judgment on class composition and voting issues. The appeal period has now expired.