In Advicewise People Ltd v Trends Publishing International Ltd, four creditors of Trends Publishing International Ltd (Trends) successfully challenged a compromise approved under Part 14 of the Companies Act 1993.
Heath J set aside the compromise after finding that the challenging creditors, who had voted against the compromise, had been unfairly prejudiced by the decision to call only one meeting of creditors. That decision had allowed three insider creditors, including a director of Trends and a company controlled by another director of Trends, who together controlled more than 75% by value of the unsecured debt (one of the statutory thresholds for passing the compromise), to vote on the compromise, even though they had waived the right to a distribution under the compromise.
In Heath J's view, the insider creditors should have been put into a different class for voting purposes because their economic interests were not such that they could properly consult with the other unsecured creditors for a common purpose.
The judge also found that the decision to include the insider creditors in the one class was a deliberate manipulation of the process in order to manufacture the statutory majorities and ensure the compromise was passed. As that manipulation was a fundamental misuse of the compromise procedure, the consequent prejudice suffered by the challenging creditors was unfair.
Ultimately, Heath J considered it appropriate to set aside the whole compromise rather than just excluding the challenging creditors from the compromise because of, among other factors:
- The fundamental error caused by the deliberate manipulation of the voting
- The fact that no good-faith proposal had ever been put forward
- The fact that no creditors had been paid pursuant to the compromise.
Heath J also considered it relevant that there was no clear evidence that the proposed compromise managers had control of the funds to be paid out under the compromise. He was also critical of the fact that the compromise manager, Mr Khov, was not called to give evidence at the hearing.
Buddle Findlay represented the applicant creditors in this matter.
See Court decision here.