Cross-border insolvency has ventured into new territory as a judgment is released from the first contemporaneous sitting of the Federal Court of Australia and the High Court of New Zealand.
Liquidators originally sought separate directions from each Court regarding the distribution of funds from the insolvency of Halifax New Zealand Ltd (Halifax NZ) and Halifax Investment Services Pty Ltd (Halifax Australia). However, the Courts were forced to undertake a joint sitting when comingling of funds between the Australian and New Zealand entities led to complex, cross-border distributions to creditors.
Halifax NZ and Halifax Australia were in the business of providing trade platforms on regulated stock exchanges or OTC financial products not listed on a regulated stock exchange. Clients had the option of using the trade platforms on their own accord, or Halifax NZ and Halifax Australia also held financial licences enabling them to trade on clients’ behalf.
To enable the operation of international trade platforms, Halifax Australia and Halifax NZ maintained a practice of transferring client funds between entities. At the time of going into liquidation, the entities jointly had an aggregate value of $211.6million and total assets of $192.6million. Ultimately, there was a shortfall of approximately $19million owing to investors.
The businesses were so entwined that when Halifax Australia fell into liquidation in March 2019, holding 70% of the shares of Halifax NZ, it took just two days for Halifax NZ to follow suit.
Central to the directions sought of the Courts was the difficulty being faced by investors seeking a claim in the shares in the deficiency. Halifax operated through central accounts whereby it pooled client funds before using those funds for the investments on trade platforms. Funds were comingled, mixed, and not allocated to specific investors.
For the liquidators, this generated difficulty in determining the origin of the funds used to purchase particular client investments. Ultimately, this matter turned on whether investors could establish that their funds were severable from the general pool of assets to be distributed.
The liquidators determined it would be most suitable to divide the investors into nine categories. Firstly, investors whereby their entitlement would be higher after the realisation of all extant investments at the date of administration. Secondly, investors whereby their entitlement would be lower after the realisation of all extant investments at the date of administration. Thirdly, investors that held shares that were yet to be traded, followed by a category of investors that could not trace their investments.
Categorisations were also made for those investors that provided funds prior to 1 January 2016. Categories six and seven were investors with unique arguments on the severability of their funds. Finally, categories eight and nine were investors that ultimately withdrew or let their arguments lie.
The Courts faced an uphill challenge of dividing one “single deficient mixed fund”, with “insufficient funds for all clients to be made whole”. This came with the added complexity of differing jurisdictions and varying circumstances across the client base.
Category 1 clients argued that they benefited financially from their decision to invest and hold shares rather than close out following the administration of the entities. They sought to rely on this decision as argument that they were entitled to a greater entitlement of the assets. Essentially, that their good decision-making should entitle them to retain the benefit of that decision. The Court commented “the principal difficulty with the argument for Category 1 clients is that it fails to take account of the fact that the shares held by them were purchased through a deficient mixed fund from funds provided by other clients“.
Category 2 clients, making up 91.4% of the client base, did not take issue with the in specie distribution of assets. Rather they sought the date for fixing of the proportionate entitlement to be as at the date of administration, with clients sharing equally in the gains or losses in open investments following that date. This is further complicated by there being two dates of administration across the entities. The Court determined that the later date of administration, ultimately the date of administration for the New Zealand entity, was appropriate. This accounted for any activity on the account between the administration of the entities (i.e. between 23 and 27 November).
Investors in this category took the stance that their funds had not passed via the tainted mixed fund by virtue of their shares being transferred directly through a stockbroker. As the shares had yet to realise their value (not having been sold), the Court was agreeable to the argument that their funds were severable from the general pool. It was key in these circumstances that the shares had not be bought through funds from the tainted pool; rather, the shares had already been acquired.
The Court gave little weight to the consideration of Category 4 investors as they were the only category to actively argue for the division of the funds in specie, with all parties sharing in the deficiency.
Category 5 investors, with investments prior to 1 July 2013, were able to demonstrate that their funds did not pass through the tainted pool. These investors were able to establish that their investments were purchased prior to the creation of the comingled funds. Together Category 3 and Category 5 investors were the only parties able to sever their funds from the tainted pool and ultimately be entitled to a greater proportion.
The High Court of New Zealand took a preliminary look at the arguments of those parties with unique, individualised circumstances. For Category 6 investors, argument was made regarding whether funds were held on behalf of the investors for their sole benefit. In particular, the clients argued that by giving specific instructions for the use of their funds, that their funds were severable from the general pool. Justice Venning quickly took the view that the distribution to these investors should derive from the shared pool of assets and were not severable as the funds “passed through a tainted pool of funds“.
Categories 7, 8, and 9 were not considered in depth within this judgment.
Ultimately, the High Court of New Zealand took the view that all investors, except for categories 3 and 5, must share pari passu in distributions by virtue of their investment into a singular deficient mixed fund. The proportion of entitlements in the case of each category was determinable on the severability or traceability of the clients’ funds through the comingled trust accounts.
Although the subject matter of this case is worthy of consideration, this case holds greater importance for its very existence. This case is testament to a shift in the operation and modernisation of law. It shows a companiable bond between New Zealand and Australian Courts and holds incredible power to alter the operation of international business and disputes. Should we expect more matters to be heard jointly across the nations? Yes, we expect so.
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Guy Edgecombe, Partner
Taylor Green, Solicitor