Trends Publishing International Ltd v Advicewise People Ltd

• Jurisdiction: New Zealand
• Judge: Asher J
• Judgment Date: 24 August 2017
• Neutral Citation: [2017] NZCA 365
• Docket Number: CA503/2016
• Court: Court of Appeal
• Date: 24 August 2017

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

[2017] NZCA 365

Court:

Cooper, Asher and Clifford JJ

CA503/2016

IN THE COURT OF APPEAL OF NEW ZEALAND

Company — Whether creditor's compromise should be set aside on basis some creditors economic interests were distinct

Counsel:

G P Curry and H D Enright for Appellant

S M Bisley and O C Gascoigne for Respondents

• A The application for leave to adduce further evidence is granted.

• B The appeal is dismissed.

• C The appellant must pay the respondents one set of costs for a standard appeal on a band A basis and usual disbursements. We certify for two counsel.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Asher J)

Table of Contents

	Para No
Introduction	[1]
Background	[4]
The High Court judgment	[16]
The arguments on appeal	[20]
A new regime	[24]
Case law on how classes are to be determined	[40]
Our view	[51]
Should the insider creditors have been in a separate class?	[56]
Failure to give adequate information	[68]
Other possible classes	[79]
Minor creditors	[79]
Callaghan	[80]
Was the compromise unfairly prejudicial to the creditors?	[89]
Conclusion	[91]
Result	[95]

Introduction

1 The appellant, Trends Publishing International Ltd (Trends), appeals against a decision of Heath J making an order that a creditors compromise be set aside. 1 The compromise was supported by the directors of Trends and their associated interests who directly or indirectly at the time of the meeting controlled more than 75 per cent of the creditors' vote by value. The respondents are four creditors who are not associated with the company. They claim that the vote in favour of the compromise was a deliberate and unfair manipulation of the voting processes.

2 Heath J found that although the legal rights of the creditors might have been the same, the creditors who were associated with the company should have been separated into their own class because their economic interests were distinct. The passing of the compromise without such a separation in his view amounted to unfair prejudice to the non-associated creditors in terms of s 232(3)(c) of the Companies Act 1993 (the Act).

3 Trends argues before us that Heath J erred by applying a broad approach to the classification of creditors based on legal rights and economic interests, when he should have applied a pure legal rights test. It submits that Heath J's approach was commercially impractical and unduly complex. It does not accept his finding of unfair prejudice.

Background

4 The facts are set out in considerable detail in the High Court judgment and we will provide a short summary. 2

5 Trends is part of a wide group of companies that trades internationally. In New Zealand it carries on business as a provider of print and digital media solutions. The co-founder and director of Trends, David Alan Johnson, in an affidavit filed in support of the compromise, explained how as a result of the global financial crisis in 2009 Trends suffered a severe downturn in its United States market. Decisions had to be made, and it decided not to seek a merger or acquisition. There was something of a change of direction which included the company seeking funding.

6 A grant was obtained from the Ministry of Science and Innovation in 2012. Then, on 2 April 2014, a research and development growth grant was awarded to Trends by Callaghan Innovation (Callaghan). Callaghan is a Crown entity established under the Callaghan Innovation Act 2012 that provides financial grants for scientific and technology-based innovation research. Between April and July 2014 Callaghan advanced $313,536.70 to Trends. A further $69,375.27 was advanced in October 2014.

7 By late-2014, on the basis of a report it had obtained from Deloitte, Callaghan had formed the view that its advances had been induced by false representations as to Trends' financial position. Callaghan made a complaint to the Serious Fraud Office. In late-2014 the Serious Fraud Office initiated an

investigation into Trends' financial affairs. 3 Mr Johnson deposed that the financial fallout of this announcement put Trends at risk of insolvency

8 In April 2015 Callaghan purported to terminate the grant and demanded repayment of the moneys advanced. Mr Johnson deposed that he consulted with a Mr Khov, an experienced insolvency practitioner. Under his guidance, on 12 May 2015, the directors of Trends put forward a proposal to creditors under pt 14 of the Act to compromise the company's debts. The proposal to compromise was put to 62 unsecured creditors, whose debts totalled $4,267,347.41 (the affected creditors). Of that sum, a total of $3,080,361.80 was owed to an associated company, Thecircle.co.nz Ltd (Thecircle). The debt owing to Thecircle was said to represent unpaid rent. Also, Trends' general manager, Ms Louise Messer was owed $120,030, and one of its directors, Mr Paul Taylor, $30,000. The balance of the debts apart from these three appear to have been incurred at arm's length and in the ordinary course of business.

9 Of the three creditors who had a close association with Trends, Ms Messer had worked for Mr Johnson for over 30 years. Mr Taylor was a director of Trends until his resignation on the day the compromise was adopted. Most importantly, through his various interests, Mr Johnson appears to be the controlling shareholder and sole director of Thecircle. Two months before the compromise was proposed Trends had given Thecircle a personal property securities interest over all its present and after acquired property. However for the proposal it waived a security it held over Trends' undertaking (to the extent of $3,080,361) so that it could vote as an unsecured creditor. These three creditors had a significant association with the company, and the events leading to its financial problems. Like Heath J, we will refer to them as the insider creditors.

10 The proposal documents attributed Trends' financial difficulties to the revocation of the Callaghan funding grant. It was stated that if the proposal was not accepted, the company was likely to go into liquidation or voluntary administration. If the compromise was adopted the company could continue trading, and an

unnamed third party would introduce fresh capital into the company. No further details about this fresh capital were given

11 A sum of $50,000 was to be made available for the purposes of the compromise. It was called the “initial pool”. All “entitled creditors” would get one hundred cents on the dollar for the first $1,000 (which would use up most of the $50,000). 4 Further payments would come from a “subsequent pool” of funds, to be deposited presumably from the cash flow of Trends. The compromise would impose a moratorium on creditors' recovery proceedings, which would include applying for the liquidation of Trends. It would leave all major creditors with a substantial shortfall.

12 Thecircle, Ms Messer and Mr Taylor chose not to receive payments that were to be made under the compromise. Mr Johnson deposed that he was concerned that if Thecircle were included in the payments, his interests would receive most of the benefit of the compromise. He considered that the exclusion of Thecircle and the other two insider creditors associated with the company from the compromise distribution would demonstrate Trends' good faith to the remaining creditors. Importantly, however, the three insider creditors were listed and would vote on the proposal, giving the insider creditors the necessary majority to successfully vote for approval of the compromise. We say more about the commercial features of this later in the judgment.

13 The initial proposal was made on 12 May 2015. The proponents were stated to be Mr Johnson and Mr Taylor. There was then correspondence between the proposal managers and Buddle Findlay, solicitors on behalf of Callaghan. Callaghan questioned whether sufficient information had been provided to the creditors to enable them to make a reasoned decision. It made inquiries into the position of the insider creditors who intended to vote. It expressed the view that the compromise was not in the best interests of creditors and should not be approved.

14 The creditors met for the purposes of a vote on 22 May 2015. 48 creditors were present and entitled to vote. Many of the creditors claimed sums of $10,000 or less. Callaghan was a listed creditor as were the other respondents, Advicewise People Ltd, Mediaworks Radio Ltd, and Webstar Ltd. Ultimately 39 creditors, including the insider creditors, voted in favour, representing 81.25 per cent of the total number of affected creditors. In summary:

• (a) Among those voting in favour was Thecircle, who represented 72.21 per cent of the total value of affected creditors.

• (b) Thecircle's vote, along with votes in favour by other insider creditors, represented 75.73 per cent, so on the basis of these votes, the 75 per cent in value requirement to adopt the compromise was met. 5

• (c) Other votes in favour by non-insider creditors represented 6.82 per cent of the total value.

• (d) The respondents voted against the proposal. We will refer to them, like Heath J, as the challenging creditors.

15 Because the compromise had been adopted in accordance with cl 5 of sch 5 of the Act, s 230(2) meant that it bound all affected creditors with notice of the compromise, regardless of whether the creditor voted against the proposal.

The High Court judgment

16 Heath J considered that the fundamental issue was whether Trends had manipulated the voting process in order to...