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New Zealand

The company law reform package which came into force on July 1 1994 introduced a substantially simpler amalgamation procedure into New Zealand law. This has resulted in an increased number of corporate restructurings. The statutory procedure enables one or more companies to be absorbed into another existing company, or two or more companies to be joined so as to form a new company.

The recent Court of Appeal decision in Carter Holt Harvey v McKernan has, however, raised doubts as to the effectiveness of the amalgamation procedure. That case concerned personal guarantees given by the directors of Pioneer Buildings to John Edmond Ltd (JE). JE had subsequently been amalgamated into its parent company, Carter Holt Harvey (CHH). Following the amalgamation, Pioneer had become indebted to CHH and was later placed in liquidation.

The guarantors accepted liability for debts incurred by Pioneer to JE prior to the amalgamation but denied liability for debts incurred to CHH post-amalgamation. CHH applied for summary judgment on the guarantees in respect of the post-amalgamation debts; however, the application was dismissed both at first instance by the High Court and in the Court of Appeal.

Both courts held that the guarantee in question only applied to advances made by Pioneer to JE and did not extend to include the successors or assigns of JE. Further, on amalgamation, JE was deemed to be dissolved.

While, under the Companies Act 1955, CHH was deemed to 'succeed' to the property, rights, powers and privileges of JE, this only entitled CHH to enforce the existing rights of JE. The courts held that the legislation did not expressly or impliedly preserve the guarantees given in favour of JE for the benefit of CHH in respect of future advances to be made by CHH to Pioneer.

Following this decision, it would now appear necessary for a company which has amalgamated, or which is considering amalgamation, to obtain a new guarantee from each existing guarantor, unless the benefit of any such guarantee expressly extends to 'successors or assigns' of the company. Applying the High Court and Court of Appeal reasoning to the situation where a guarantor or a principal debtor amalgamates with another company also suggests that, in those situations, the guarantee will cease in respect of future transactions, unless the guarantee expressly extends to successors or assigns of the guarantor or principal debtor, as the case may be.

Most, if not all, bank guarantees are drafted in such a manner and so are unlikely to be affected by this decision. Rather, the decision is more likely to affect companies which take less extensive forms of guarantee as security for trade debts.

It remains to be seen whether the reasoning of the High Court and Court of Appeal will extend to employment contracts or other continuing contractual arrangements. Certainly, there is no indication in either of the two decisions that the reasoning should be limited to contracts of guarantee.

Denis Clifford and Chris Maher

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