Advicewise People Ltd and Ors v Trends Publishing International Ltd

JurisdictionNew Zealand
CourtHigh Court
JudgeHeath J
Judgment Date07 September 2016
Neutral Citation[2016] NZHC 2119
Docket NumberCIV 2015-404-1274
Date07 September 2016

[2016] NZHC 2119

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

CIV 2015-404-1274

Between
Advicewise People Ltd and Ors
Plaintiffs
and
Trends Publishing International Ltd
Defendant
Counsel:

S M Bisley and O Gascoigne for Plaintiffs

J S Langston and W D Buckham for Defendant

Application for orders that the adoption of a proposal under Part 14 Companies Act 1993 (compromises with creditors) was not valid and the resulting compromise was not binding on the affected creditors — alternatively, an order was sought that the compromise was not binding on any of the challenging creditors — the directors of the respondent company had proposed the compromise which was approved by a majority in number and 75 percent in value — a large amount of outstanding debt was owed to an associated company and its director (“insider creditors”) which had waived its right to a security interest in order to vote as an unsecured creditor — the plaintiffs claimed that the proponents of the compromise manipulated the voting procedures in order to manufacture statutory majorities to approve the compromise and they were unfairly prejudiced as a result — whether the insider creditors should have been put into a different class for voting purposes — whether the compromise was unfairly prejudicial to (one or more of) the challenging creditors — if yes, what relief should be granted.

Held: Under s229 CA (notice of proposed compromise), the notice of proposed compromise must state the nature of the business to be transacted at the meeting in sufficient detail to enable a creditor to form a reasoned judgment in relation to it. There was also a requirement for good faith. Another aspect of material disclosure was the need to identify all affected creditors, and the “class” into which their respective debts fell. “Classes” of creditors were determined on similarity of legal rights or similarity of interests. Although the New Zealand authorities had not analysed which of those approaches should be preferred, they tended to favour a “liberal” interpretation of the word “classes”; one which would “err on the side of calling separate meetings”. If those rights or interests were so diverse, separate class meetings should be convened.

Prejudice could arise either through creditors with different legal rights or economic interests being required to vote within the same class. The insider creditors ought to have been put into a separate class for the purpose of voting on the compromise. Their interests were not such that they could properly consult with other creditors for a common purpose. Nothing credible had been put to affected creditors to explain why the insider creditors should vote, even though they were not participating in the compromise distribution. It did not matter whether minor creditors were or were not in the same class as the challenging creditors because, without the insider creditors, a 75 percent majority in value of affected creditors could not have been achieved. As a result of the failure of the proponent to allow for at least two classes of unsecured creditors (the insider creditors and remaining affected creditors respectively), the challenging creditors were prejudiced. If separate classes had been created, the requisite majorities would not have been achieved. There had been no good commercial reason for including the insider creditors within the group of affected creditors who were to vote on the proposed compromise. The meeting of creditors had been structured deliberately to ensure that the statutory majority in value was attained by allowing the insider creditors to vote. Such a manipulation was the type of abuse of process which s232(3)(c) CA (powers of Court — may order that the creditor was not bound by the compromise if prejudicial) was aimed.

The proponents' failure to provide more information had not materially prejudiced a creditor, in a way that would have affected decision making at the meeting of creditors. There was no causal nexus between the absence of the financial information sought and the way in which voting was undertaken.

In some cases, it may be necessary for minor creditors to be placed in a different class from others. Their removal from the general body of creditors and the absence of their votes could not have affected the outcome if the insider creditors had been permitted to vote alongside others. That meant there was no causal link between any error in identifying a separate class and in the approval of the compromise that resulted from the vote. It could not be said confidently that a better outcome would have been available to creditors if the compromise had not been approved.

Section 232(3) CA provided that relief must be tailored to the particular breach that gave rise to the material irregularity or unjust prejudice. The appropriate relief was to set aside the compromise, and to restore the status quo. That meant the creditors could pursue a liquidation, if satisfactory settlement arrangements could not be made. As the compromise would be set aside, the waiver of security for the purpose of voting could no longer be binding on Thecircle.

As a result of a deliberate manipulation of the voting system, a fundamental error was made in failing to provide for a separate class for insider creditors. A good faith compromise proposal was never advanced. There was no clear evidence that the proposed Compromise Managers had control of the funds to be paid under the compromise. No payments had been made from the “Initial Pool” in the manner intended.

The compromise was set aside.

JUDGMENT OF Heath J

CONTENTS

The application

[1]

Background

[5]

The compromise proposal

(a) Why was a compromise proposal made?

[14]

(b) Evidential issues

[18]

(c) The compromise proposal documents

[23]

The meeting of creditors

[30]

Approval of the compromise procedure

[39]

Competing contentions

[41]

Analysis

(a) My approach

[47]

(b) Part 14 of the Act: scheme and purpose

[48]

(c) Part 14 of the Act: procedural requirements

[55]

(d) Unfair prejudice: classes of creditors

(i) The test

[67]

(ii) The s 205 model: “Legal rights” or “interests”?

[76]

(iii) The Part 14 procedure: “Legal rights” or “interests”?

[86]

(iv) Was there unfair prejudice?

[92]

(e) The remaining grounds of complaint

(i) Adequacy of financial information

[103]

(ii) Did the minor creditors represent a different class?

[107]

(iii) Should Callaghan have been put in a separate class?

[112]

(iv) Would liquidation have produced a better result for creditors?

[115]

(f) The relief issue

(i) The nature of the discretion to grant relief

[119]

(ii) The options

[123]

(iii) Analysis

[128]

Result

[137]

The application
1

On 12 May 2015, the directors of Trends Publishing International Ltd (Trends) made a proposal, under Part 14 of the Companies Act 1993 (the Act), 1 to compromise the company's debts. The compromise was approved, by a majority in number and 75 percent in value, 2 at a meeting of affected creditors 3 held on 22 May 2016. Although the Part 14 procedure is primarily contractual in nature, a proposal approved by those majorities binds all affected creditors to whom notice is given. 4

The harshness of that rule may be ameliorated if this Court exercises a residual discretion to grant relief on an application by an affected creditor. 5
2

Unlike its predecessors and other statutory schemes dealing with corporate business rehabilitation, a compromise of debt entered into under Part 14 of the Act does not require the sanction of the Court before it becomes operative. 6 Under Part 14, the Court's role is limited. It may, on the application of the proponent or the company, give directions in relation to any procedural requirement imposed; 7 order that proceedings be stayed or that a creditor refrain from taking action against the company; 8 and grant relief in favour of an individual creditor, in specified circumstances. 9 While the Court's discretion to grant relief, if either a qualifying procedural irregularity or unfair prejudice to a creditor were established, is broad, the primary focus of the inquiry is into whether the applicant creditor should be bound by the compromise. 10

3

In this case, four of the creditors that voted against the proposal, Advicewise People Ltd (Advicewise), Callaghan Innovation (Callaghan), Mediaworks Radio Ltd (Mediaworks) and Blue Star Group (New Zealand) Ltd (Webstar) 11 (the challenging creditors), apply for orders that the adoption of the proposal was not valid and the resulting compromise is not binding on the affected creditors. Alternatively, an order is sought that the compromise is not binding on any of the challenging creditors. As a fall-back position, the challenging creditors seek “such other orders as the Court thinks fit”. Another creditor, Times Printers Pte Ltd (Times Printers), a Singaporean company, supports the application but has not joined in it as a party. Trends opposes the application.

4

In broad terms, the issues in this proceeding are:

  • (a) Has the Part 14 procedure miscarried in a material respect?

  • (b) Is the compromise that was approved by the requisite majorities at the meeting of creditors, unfairly prejudicial to (one or more of) the challenging creditors?

  • (c) If either of those grounds were established, what (if any) relief should be granted to (one or more of) the challenging creditors?

Background
5

Trends is part of a wider group of companies that trades in Australia, the United States of America, Hong Kong and...

To continue reading

Request your trial
3 cases
  • Trends Publishing International Ltd v Advicewise People Ltd
    • New Zealand
    • Supreme Court
    • 16 July 2018
    ...favour of it. 4 Section 230(3). 5 Section 232(3)(b). 6 Section 232(3)(c). 7 Advicewise People Ltd v Trends Publishing International Ltd [2016] NZHC 2119 (Heath J) [ Trends 8 At [94]. 9 At [102]. 10 At [103]–[106]. 11 Trends Publishing International Ltd v Advicewise People Ltd [2017] NZCA ......
  • Thecircle.co.nz Ltd v Trends Publishing International Ltd (in Liq)
    • New Zealand
    • Supreme Court
    • 2 November 2021
    ...were for Trends’ corporate benefit and 3 4 5 6 7 8 9 10 11 12 13 14 Advicewise People Ltd v Trends Publishing International Ltd [2016] NZHC 2119 (Heath Trends Publishing International Ltd v Advicewise People Ltd [2017] NZCA 365, [2018] NZCCLR 7 (Cooper, Asher and Clifford JJ). Trends Publis......
  • Thecircle.co.nz Ltd v Trends Publishing International Ltd (in Liq)
    • New Zealand
    • Supreme Court
    • 2 November 2021
    ...were for Trends’ corporate benefit and 3 4 5 6 7 8 9 10 11 12 13 14 Advicewise People Ltd v Trends Publishing International Ltd [2016] NZHC 2119 (Heath Trends Publishing International Ltd v Advicewise People Ltd [2017] NZCA 365, [2018] NZCCLR 7 (Cooper, Asher and Clifford JJ). Trends Publis......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT