Trends Publishing International Ltd v Advicewise People Ltd

• Jurisdiction: New Zealand
• Judge: William Young,Glazebrook,O'Regan JJ,William Young J,Elias CJ,Ellen France J
• Judgment Date: 16 July 2018
• Neutral Citation: [2018] NZSC 62
• Docket Number: SC 103/2017
• Court: Supreme Court
• Date: 16 July 2018

Between

Trends Publishing International Limited

Appellant

and

Advicewise People Limited

First Respondent

Callaghan Innovation

Second Respondent

Mediaworks Radio Limited

Third Respondent

Webstar, A Division of Blue Star Group (New Zealand) Limited

Fourth Respondent

[2018] NZSC 62

Court:

Elias CJ, William Young, Glazebrook, O'Regan and Ellen France JJ

SC 103/2017

IN THE SUPREME COURT OF NEW ZEALAND

I TE KŌTI MANA NUI

Companies, Insolvency — Appeal against a Court of Appeal (“CA”) decision which set aside a creditors compromise — approach which should be taken to the classification of creditors where some are closely associated with the company so that their interests are not closely aligned with arm's-length creditors

Counsel:

A M Glenie and G A Barkle for Appellant

S M Bisley and O C Gascoigne for Respondents

• A The appeal is dismissed.

• B The appellant is to pay the respondents costs of $25,000 and usual disbursements.

JUDGMENT OF THE COURT

REASONS

	Para No.
William Young, Glazebrook and O'Regan JJ	[1]
Elias CJ and Ellen France J	[96]

William Young, Glazebrook AND O'Regan JJ

(Given by William Young J)

Table of Contents

	Para No.
The appeal	[1]
Overview of these reasons	[6]
The background facts	[7]
The statutory scheme	[29]
Part 14 of the Act	[29]
Part 15 of the Act	[34]
The background to the classification issue	[36]
General	[36]
The s 205 procedure	[39]
Sovereign Life Assurance Co v Dodd	[42]
The New Zealand cases	[45]
Cases from other jurisdictions	[48]
The legislative history of Part 14	[58]
Differences between s 205 and Part 14	[61]
Our approach to classification	[64]
A restated approach	[64]
Section 232(3)(b) and (c)	[70]
Whether the compromise ought to be set aside	[75]
The particular position of Callaghan	[75]
Was there material irregularity/unfair prejudice to the challenging creditors?	[77]
Other complaints	[89]
What, if any, orders should be made under s 232?	[91]
Disposition	[95]

The appeal

1 Part 14 of the Companies Act 1993 (the Act) provides a process by which compromises between a company (usually insolvent or near-insolvent) 1 and its creditors can be implemented even though not all of those affected agree. An approved

compromise is binding on the company and all creditors to whom notice of the proposal was given. 2 The underlying principle is that creditors representing a majority in number and 75 per cent in value of the debts (a qualified majority) can commit all creditors to a compromise. 3 As well, the legislative scheme incorporates, but does not define, a concept of classes of creditor. Where there is more than one class of creditors, a qualified majority of creditors within each class must vote in favour of the compromise. 4 Under s 232 of the Act, a creditor may apply to the court for a declaration that the compromise does not apply to a particular creditor or class of creditor or similar relief. The grounds for such an order include material irregularities in the obtaining of approval 5 and unfair prejudice to a creditor, or to the class of creditors to which that creditor belonged, who voted against the compromise. 6

2 This appeal turns primarily on the approach which should be taken to the classification of creditors where: (a) some are closely associated with the company (in the sense of being insiders) so that their interests are not closely aligned with those of the outside or arm's-length creditors; and (b) the returns offered on debts are not proportional to the amounts owed.

3 Trends Publishing International Ltd (Trends) provides printing, publishing marketing and advertising services. In May 2015, its directors proposed a compromise with all of the unsecured creditors which: (a) provided no direct return for those associated with the company; (b) favoured smaller over larger creditors; and (c) placed all of the creditors within one class for voting purposes. The proposal was considered at a meeting of creditors held on 22 May 2015 where the compromise was approved by a qualified majority.

4 The respondents (the challenging creditors) voted (or in one case unsuccessfully attempted to vote) against the proposal. They sought orders under

s 232 and were successful in the High Court. 7 Heath J concluded that the insider creditors should have been placed in a different class from the arm's-length creditors due to their disparate interests. 8 He saw the grouping of the insiders with the arm's-length creditors as designed to ensure that the proposal would be approved and amounted to manipulation. Such manipulation constituted unfair prejudice for the purposes of s 232. 9 The Judge therefore set aside the compromise. In doing so he rejected, or did not see as material, other complaints about the process which had been advanced by the challenging creditors. These included complaints as to the lack of information about the financial affairs of Trends which had been supplied to unsecured creditors. 10

5 The Court of Appeal upheld the judgment of Heath J albeit on slightly different grounds. 11 It was of the view that:

• (a) the insider and arm's-length creditors ought not to have been classed together; 12

• (b) Callaghan Innovation (Callaghan), one of the challenging creditors, should have been placed in a separate class or alternatively (and more realistically) should have been excluded from the compromise; 13

• (c) the information which had been supplied in support of the proposal was inadequate and that this was a material irregularity under s 232(3)(b); 14 and

• (d) setting aside the compromise was appropriate. 15

Overview of these reasons

6 We propose to address the case by reference to:

• (a) the background facts;

• (b) the statutory scheme;

• (c) the background to the classification issue;

• (d) our approach to classification; and

• (e) whether the compromise ought to be set aside.

The background facts

7 Trends is under the control of Mr David Johnson, who is now its sole director. Also under the control of Mr Johnson is its principal creditor, Thecircle.co.nz Ltd (Thecircle). For a number of years Trends has occupied business premises in Auckland which are owned by Thecircle.

8 Since the global financial crisis, Trends has been under financial pressure. From 2009 it has been behind in rent payments owed to Thecircle. It is at least arguable that Trends has been insolvent from around 2013. From early 2014 it was, on occasion, unable to pay staff on time.

9 On 2 April 2014, Trends obtained an “R & D Growth Grant” from Callaghan. The purpose of the grant was to fund “Eligible R & D Expenditure”, an expression which was closely defined in the associated funding agreement. The funding agreement provided that, in certain circumstances, Callaghan could suspend and terminate the agreement and require repayment of funding already provided.

10 Between May and October 2014 Callaghan paid a total of $382,911.97 to Trends pursuant to the agreement.

11 In early November 2014, Callaghan commissioned Deloitte to provide a report addressing: (a) whether the funding already provided had been applied to Eligible R & D Expenditure; and (b) as to the solvency of Trends. In an interim report of 10 December 2014, Deloitte said that it had “found indications that Trends may have intentionally set out to mislead Callaghan to obtain funds”. It also noted that based on a “restated statement of financial position” prepared by Deloitte, “[Trends'] financial ratios indicated poor liquidity and negative equity as at 30 September 2014”.

12 On 17 December 2014, Callaghan suspended the funding agreement with Trends. In doing so, it provided Trends with an executive summary of the 10 December report and gave it the opportunity to respond. As well, Callaghan issued a press release which announced the suspension and also stated that Callaghan had referred its suspicions to the Serious Fraud Office. There can be no doubt that this press release had an adverse impact on the ability of Trends to continue trading.

13 On 13 February 2015, Trends gave Thecircle security over all its present and after acquired property. The total indebtedness secured was around $3,500,000 most of which represented unpaid rent. 16 The associated directors' resolution recorded that the company was able to pay its debts and was “not engaged… in business for which its financial resources [we]re unreasonably small”.

14 On 30 March 2015, Trends' solicitors wrote to Callaghan threatening proceedings for damages associated with the instigation of the audit process conducted by Deloitte, referral to the Serious Fraud Office and the press release and associated negative publicity.

15 Deloitte issued its final report on 1 April 2015. It found that there were “potential breaches” of the funding agreement involving the use of funding for purposes other than Eligible R & D Expenditure and a “high risk” of insolvency.

16 On 21 April 2015 Callaghan terminated the grant. At the same time, it demanded repayment of all money previously paid to Trends and interest.

17 On 12 May 2015, the directors of Trends put forward a proposal to creditors of the company under Part 14 of the Act. 17 This was prepared with the assistance of Mr Steven Khov, an insolvency practitioner.

18 The proposal identified 62 unsecured creditors whose debts totalled $4,343,843.23. Of this:

• (a) $3,080,361.80 was owed to Thecircle for unpaid rent. Thecircle was classified as an unsecured creditor as it had waived its security in respect of this amount. As well, $120,030 was owed to Trends' general manager, Ms Louise Messer and $30,000 was owed to one of its then directors, Mr Paul Taylor. 18 Thecircle, Ms Messer and Mr Taylor are the insider creditors to whom we...