Advicewise People Ltd and Ors v Trends Publishing International Ltd

JurisdictionNew Zealand
JudgeHeath J
Judgment Date07 September 2016
Neutral Citation[2016] NZHC 2119
Docket NumberCIV 2015-404-1274
CourtHigh Court
Date07 September 2016
Between
Advicewise People Ltd and Ors
Plaintiffs
and
Trends Publishing International Ltd
Defendant

[2016] NZHC 2119

CIV 2015-404-1274

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

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.

Counsel:

S M Bisley and O Gascoigne for Plaintiffs

J S Langston and W D Buckham for Defendant

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 Singapore, as well as New Zealand. In this country, it carries on business as a provider of print and digital media solutions.

6

The proposal to compromise was put to 62 unsecured creditors, whose debts totalled $4,343,843.23 (the affected creditors). 12 Of that sum, a total of $3,230,391.80 was owed to an associated company, Thecircle.co.nz Ltd (Thecircle), Trends' General Manager, Ms Messer, and one of its directors, Mr Taylor, (the insider creditors). The debt owing to Thecircle ($3,080,361.80) represented unpaid rent. 13 The balance of the listed debts appear to have been incurred at arm's length and in the ordinary course of business.

7

The debts owed to Advicewise, Mediaworks and Webstar totalled $50,791.63, made up as follows:

  • (a) $19,285.50 to Advicewise: this debt represented unpaid fees for advice and other services rendered to Trends, to enable it to defend a personal grievance claim brought against it by an employee.

  • (b) $18,291.48 to Mediaworks: this debt arose out of a contract whereby Mediaworks was to play television advertising at Trends' instigation.

  • (c) $13,214.65 to Webstar: this debt was for printing services.

8

Trends owed $SGD272,103.17, to Times Printers. 14 This debt was incurred in 2014 and early 2015. Times Printers voted against the proposed compromise. It was represented at the meeting of creditors by a principal from the firm of solicitors who represent the challenging creditors.

9

Opposition to the compromise was (and remains) led by Callaghan. It is a Crown entity established under a special statute, the Callaghan Innovation Act 2012. Among other things, Callaghan provides financial grants for worthy scientific and technology based innovation research. Under an agreement dated 2 April 2014, Callaghan provided funding to Trends in April and June 2014, in the sum of $313,536.70.

10

As a result of investigations undertaken at its instigation in late 2014, 15 Callaghan formed the view that its advances had been induced by false representations as to Trends' financial position. Callaghan terminated its contract with Trends and demanded repayment of the moneys advanced.

11

Although Callaghan was listed as an affected creditor for the purposes of the compromise, its claim is disputed by Trends and is the subject of a counterclaim in this proceeding. The counterclaim, which alleges breach of contract and defamation in consequence of Callaghan's termination of the 2 April 2016 agreement, was ordered to be heard separately 16 and is set down for hearing, over 10 days, starting on 21 November 2016. The counterclaim is for an unliquidated sum: an inquiry into damages is sought.

12

Although reliance is placed on a number of other grounds, the core complaint of the challenging creditors is that the proponents of the compromise manipulated the voting procedures in order to manufacture statutory majorities to approve the

compromise. The challenging creditors claim that they were unfairly prejudiced, as a result. Their concerns revolve around the inclusion, for voting purposes only, of the insider creditors; particularly Thecircle, given the size of the debt owing to it
13

To exercise a vote in favour of the compromise, Thecircle waived a security that it held over Trends' undertaking, to the extent of $3,080,361.80. Waiver of the security interest was required in order for Thecircle to cast a vote as an unsecured creditor. Because the compromise was put on the basis that secured and preferential creditors would stand outside its scope, those creditors were not affected by the compromise. They each retained existing rights to enforce payout of their debts.

The compromise proposal
(a) Why was a compromise proposal made?
14

Mr Johnson deposed that he and Mr Paul Taylor, the two directors of Trends, sought advice from Mr Khov, an experienced insolvency practitioner and a principal of Waterstone Insolvency, about the options available to it. They came to discuss the possibility of Trends entering into an arrangement to compromise its debts. Those discussions took place in the aftermath of an inquiry undertaken, at the behest of Callaghan, by a firm of forensic accountants, Deloitte, into the financial...

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4 cases
  • Trends Publishing International Ltd v Advicewise People Ltd
    • New Zealand
    • Supreme Court
    • 16 d1 Julho d1 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 ......
  • Trends Publishing International Ltd v Advicewise People Ltd
    • New Zealand
    • Court of Appeal
    • 24 d4 Agosto d4 2017
    ...on a band A basis and usual disbursements. We certify for two counsel. 1 Advicewise People Ltd v Trends Publishing International Ltd [2016] NZHC 2119. 2 At 3 We note that the investigation is now concluded and the Serious Fraud Office has announced that it will be taking no further steps a......
  • Thecircle.co.nz Ltd v Trends Publishing International Ltd (in Liq)
    • New Zealand
    • Supreme Court
    • 2 d2 Novembro d2 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 d2 Novembro d2 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......

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