Morris Contractors Limited (in receivership) v Matai Mining Limited HC Christchurch CIV 2010-409-000724
[2011] NZHC 967
•7 September 2011
| IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY |
| CIV 2010-409-000724 |
| IN THE MATTER OF the Companies Act 1993 |
| BETWEEN MORRIS CONTRACTORS LIMITED (in receivership) |
| AND MATAI MINING LIMITED |
| Hearing: 7-8 December 2010 |
| Appearances: M Hardy-Jones for Plaintiff |
| Judgment: 7 September 2011 |
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
as to application for order under s 232(3) Companies Act 1993
Morris Contractors Limited (“Morris”) is a creditor of Matai Mining Limited (“Matai”) as a result of work Morris undertook for Matai at an area Matai was mining for gold near Kumara on the West Coast. In this proceeding the Court must determine whether Morris is bound by an arrangement which Matai put to its creditors as a compromise under Part 14 of the Companies Act 1993.
In a related proceeding (CIV 2010-409-716) Matai has made application for an order setting aside a statutory demand issued by Morris in relation to the debt. The parties have agreed that the present proceeding should be heard first as it is likely that the outcome in this proceeding will lead to a resolution of the statutory demand proceeding.
The pleadings
The pleadings in this case are commendably to the point. They indicate the issues for determination.
I set out the nine paragraphs of the statement of claim, annotated with the response in the defendant’s pleading.
As plaintiff Morris pleads:
1.The plaintiff is a duly incorporated company carrying on business as an earth moving contractor in New Zealand (admitted).
2.The defendant is a company carrying on business as a mine operator on the West Coast of the South Island of New Zealand (admitted).
3.The plaintiff is owed the sum of $162,416.33 by the defendant. That sum is not in dispute (denied – the defendant admits that the plaintiff is owed some $120,000.00).
4.The defendant has served upon the plaintiff documents purporting to be pursuant to sections 227, 228 and 229 of the Companies Act 1993 (“the Act”) to effect a compromise of the defendant’s debts. (The defendant admits service of the documents but denies that those purport to be pursuant to the listed sections of the Companies Act 1993 and says that the documents comply with the listed sections of the Companies Act 1993).
5.The documentation containing the notice to creditors of the meeting at which the compromise was to be put was forwarded by the defendant to the plaintiff by letter dated 23 March 2010. The creditors’ meeting at which the compromise was to be voted on was set for 31st March 2010 at 12 noon. The meeting was to be at the offices of Mairehau Law Centre being Unit 7, 422 Innes Road, Christchurch (admitted).
6.The plaintiff was represented at the meeting and voted against the compromise. The plaintiff therefore meets the criteria of a claimant pursuant to section 232(3) of the Act. (admitted)
7.The plaintiff claims there are irregularities within the process of the meeting (pursuant to section 232(3) (a) and (b)) (denied) and in particular:
a.The proponent is not a person within the requirements of the legislation in that he is not:
i.The Board of Directors of the defendant (the defendant says that the proponent was the Board of Directors of the defendant).
ii. The liquidator of the defendant; or
iii. Appointed by Court Order.
b.The compromise documentation does not fully disclose the creditors of the company in that $696,210.50 is said to be represented by “sundry creditors”. Those creditors are not identified and the amounts owing individually are not expressed as required by section 229(2)(c) (the defendant says the creditors of the defendant were fully disclosed).
c.The scheme is not a compromise within the Act, it is a transfer of debt (denied – the defendant says the scheme is a compromise within the meaning required by the Act).
8.The plaintiff is a creditor who voted against the compromise who was unfairly prejudiced by the compromise, pursuant to section 232(3)(c).
a.The documentation does not set out the assets of the defendant. It is impossible for a creditor to understand the true financial circumstances of the defendant and to be able to judge whether the compromise is in that creditor’s best interests (denied – the defendant says that its financial accounts were available to all creditors at the creditors’ meeting and the defendant’s accountant spoke to those financial accounts at that meeting. Further, the defendant says that no issue was raised by the plaintiff’s representative or by any other creditor at the creditors’ meeting that the alleged prejudice was caused, or that there was any deficiency in the extent of financial information).
b.The defendant maintains the defendant’s creditors are owed the sum of $4,865,030.29. The majority is owed to companies related to the defendant in that the creditor companies have common shareholders and directors. The documentation gives no evidence on which it can be determined whether the related company debts are legitimate or not. There are no particulars as to when the debts were incurred or how they were incurred (denied – the defendant says that the debts of all creditors referred to are legitimate debts and those creditors were duly entitled to vote on the compromise).
c.The compromise is said to be the sale of the total indebtedness of the company to a related entity for 5 cents in the dollar. That is not one of the purposes for which a compromise is available pursuant to the Act. The defendant still owes the money but to a different creditor (denied – the defendant says the compromise is not a simple sale of debt. The intent of the compromise, as understood by those attending the creditors’ meeting was that the debts of the creditors would be paid as to 5 cents in the dollar by Magnas Beta Limited).
d.The proposal is not in the best interests of the legitimate creditors of the plaintiff. The only entities to benefit from the compromise will be the defendant and related companies. The voting of the compromise is able to be manipulated by individuals associated with the defendant irrespective of the views of legitimate creditors (denied).
e.The compromise will have the effect of preventing legitimate creditors exercising their rights to recover against the defendant’s directors in respect of those directors allowing the defendant company to trade whilst insolvent (denied).
9.The plaintiff has on 29 March 2010 filed a statutory demand at the registered offices of the defendant (admitted).
Morris’s complaints as to the compromise can be conveniently placed in three categories –
·Irregularities of process (para 7 a-b statement of claim);
·The scheme operating as a transfer of debt rather than a compromise (para 7 c);
·The scheme causing unfair prejudice to Morris (para 8).
Lurking beneath these anodyne characterisations of Morris’s case is a proposition that Matai had entered into a series of accounting transactions which had the sole effect of defeating what would otherwise be legitimate claims of the small number of creditors who are unrelated to Matai. Morris suggests that a liquidation in the normal way would have seen a distribution of 15 cents in the dollar to creditors whereas the compromise proposed 5 cents in the dollar.
Compromises with creditors – the statutory regime
The procedure in relation to companies’ compromises with creditors is contained in Part 14 of the Companies Act 1993 (ss 227-234).
This proceeding comes before the Court on the application of Morris pursuant to s 232(3) of the Act. Morris seeks an order that it not be bound by the compromise.
Section 232(3) of the Act provides:
(3) If the Court is satisfied, on the application of a creditor of a company who was entitled to vote on a compromise that—
(a)Insufficient notice of the meeting or of the matter required to be notified under section 229 of this Act was given to that creditor; or
(b)There was some other material irregularity in obtaining approval of the compromise; or
(c)In the case of a creditor who voted against the compromise, the compromise is unfairly prejudicial to that creditor, or to the class of creditors to which that creditor belongs,—
the Court may order that the creditor is not bound by the compromise or make such other order as it thinks fit.
Morris does not invoke s 232(3)(a) (insufficient notice of a meeting).
Morris invokes s 232(3)(b) (material irregularity)
Morris also invokes s 232(3)(c) (unfair prejudice to a creditor who voted against the compromise). Matai accepts that Morris is a creditor who voted against the compromise but puts in issue the allegation of unfair prejudice.
Section 228(1) of the Act defines those who may be proponents of a compromise:
228 Compromise proposal
(1) Any of the following persons may propose a compromise under this Part of this Act if that person has reason to believe that a company is or will be unable to pay its debts within the meaning of section 287 of this Act—
(a)The board of directors of the company:
(b)A receiver appointed in relation to the whole or substantially the whole of the assets and undertaking of the company:
(c) A liquidator of the company:
(d)With the leave of the Court, any creditor or shareholder of the company.
In this case, Matai asserts that the Board of Directors of Matai was the proponent.
Section 229 prescribes the notice which must be given of a proposed compromise:
229 Notice of proposed compromise
(1) The proponent must compile, in relation to each class of creditors of the company, a list of creditors known to the proponent who would be affected by the proposed compromise, setting out—
(a) The amount owing or estimated to be owing to each of them; and
(b) The number of votes which each of them is entitled to cast on resolution approving the compromise.
(2) The proponent must give to each known creditor, the company, any receiver or liquidator, and deliver to the Registrar for registration —
(a) Notice in accordance with the Schedule 5 to this Act of the intention to hold a meeting of creditors, or any 2 or more classes of creditors, for the purpose of voting on the resolution; and
(b) A statement—
(i) Containing the name and address of the proponent and the capacity in which the proponent is acting; and
(ii) Containing the address and telephone number to which inquiries may be directed during normal business hours; and
(iii) Setting out the terms of the proposed compromise and the reasons for it; and
(iv) Setting out the reasonably foreseeable consequences for creditors of the company of the compromise being approved; and
(v) Setting out the extent of any interest of a director in the proposed compromise; and
(vi) Explaining that the proposed compromise and any amendment to it proposed at a meeting of creditors or any classes of creditors will be binding on all creditors, or on all creditors of that class, if approved in accordance with section 230 of this Act; and
(vii) Containing details of any procedure proposed as part of the proposed compromise for varying the compromise following its approval; and
(c) A copy of the list or lists of creditors referred to in subsection (1) of this section.
Morris asserts that there was a breach of s 229(1)(a) through a failure to list the creditors by name and amount owing and, in particular, through identifying in the notice a sum of $696,210.50 as owed to “sundry creditors”. Matai maintains that there was full disclosure of the creditors.
The compromise proposal and the procedure adopted
Introduction
It is convenient to identify events in their chronological sequence.
The evidence for Morris was given by John Morris, a shareholder and director of the plaintiff.
Matai called as witnesses Mark Meates, a director and shareholder of Matai; John Anthony Edmondson, Matai’s accountant; and Kevin Francis Meates, another director and shareholder of Matai, who is the father of Mark Meates.
Each of the witnesses was cross-examined.
Morris Contractors Limited
Morris is an earth-moving and contracting company. It has been involved in major earth-moving, roading and mining operations. It has the large equipment necessary for the conduct of open-cast mining which requires the digging, transportation and processing of huge tonnages.
Matai was incorporated (as Rowe & Co NZ Limited) in 1933 and went through a number of name changes before changing its name to Matai Mining Limited in April 2009.
The company’s register at March 2010 showed as the sole shareholders and directors Kevin Meates, his wife, Jean Meates, and his sons, Mark and Julian Meates. Mark Meates had been a director since September 1990. The other three directors each became directors in 2009.
Mark Meates’ evidence disclosed that when Kevin, Julian and he were discussing the prospect of gold mining they decided to apply for the name “Matai Mining Limited” but thereafter decided to use the established company (which had originally been Rowe & Co NZ Limited) as that company had tax losses which could be used. The name change from Rowe Computing Limited was registered on 5 May 2009.
Mark Meates refers to Matai as having “started mining about February 2009”.
Mark Meates refers to a number of issues which Matai had with its accounts. First, the accountant the Meates had been using had been struggling with the Matai (and other companies’ accounts), and was well behind with them. Mr Edmondson was brought in in 2008 to help with four of the accounts, including Matai. The task involved bringing accounts up to date from 2006. Secondly, Matai’s accounts had been cumbersome for some years because of the number of inter-company transactions. One of Mr Edmondson’s tasks was to begin offsetting and consolidating the various inter-company accounts.
Mr Edmondson identified April 2009 as the date at which he started doing some of the Meates’ accounts. He filed the 2008 return for Matai with the Inland Revenue Department on 1 September 2009. He believes that by then (September 2009) he had prepared drafts for the year ending 31 May 2009. He recalls that Julian Meates contacted him (in October or November 2009) explaining that someone from Komatsu Finance was going to ring wanting a set of accounts. In his evidence, Mr Edmondson placed the request by the Meates for consolidation of the accounts as having occurred in this (October or November) period –
Q.Just returning to the 31 May 2009 accounts, and the consolidation of the companies accounts as at that date, can you explain what, if anything, you were told by the directors about why that exercise would be useful?
A.Well, there is two reasons really, one was that Julian had contacted me mid-October wanting – explaining that somebody from Komatsu Finance was going to ring me wanting a set of accounts and two was that the fact that the accounts had become so cumbersome in their present form that to physically do the 15 or 16 sets of accounts as 200 – I think I’ve calculated 225 individual intercompany current accounts you’ve got to do, so if we can simplify, cut it back to about six or seven in each of the accounts, would make things a hang of a lot easier.
Mr Edmondson confirmed that a request had been received from Komatsu on 1 November (2010) requesting the Matai accounts.
Mark Meates, in his evidence, stated that they (the Meates) had a set of accounts for Matai to 31 May 2009 by the end of June 2009 (as they were looking around for an excavator and two trucks). He relates that period to having been “before my brother Julian had even met John Morris”.
To the extent there is a difference between Mr Edmondson (October or November) and Mark Meates (end of June) as to the date by which Mr Edmondson had draft accounts to 31 May 2009 ready, I prefer the evidence of Mr Edmondson for a number of reasons. First, it seems simply unrealistic when Mr Edmondson was catching up with accounts that were chronically behind to accept that Matai’s 31 May 2009 accounts might have been ready within one month. That simply defies the history and reality of Matai’s accounting.
Secondly, while Mark Meates’ June 2009 date was contained in his prepared brief of evidence, Mr Edmondson, in the course of his answers to both Mr Wallace (for Matai) and Mr Hardy-Jones (for Morris), was clear as to the events occurring later in the year – he first related the request for consolidated accounts for Komatsu Finance to a call from Julian Meates in mid-October, followed by a call from Komatsu on 1 November. He repeated the mid-October date in cross-examination.
I find Mark Meates to have been mistaken in his reference to an earlier date.
In the meantime, on 29 March 2009, Matai had entered into a contract with Tui Trust Mining Limited in relation to a (gold) mining permit in the Quinns Terrace/Three Mile Creek area. By the contract date of 29 March 2009, Matai agreed to pay tribute (at the rate of 10 percent) in return for Tui’s transfer of all rights associated with the mining permit. The Ministry of Economic Development gave its consent to the dealings between Tui and Matai by certificate dated 1 September 2009.
Matai had, in the meantime, been working on an adjoining licence also owned by Tui. Discussions took place between Matai and Morris. Morris agreed, initially orally, to undertake removal of overburden. This appears to have been around September, which would fit with the date of the consent.
Shortly thereafter, John Morris wrote to Julian Meates setting out terms and conditions for plant and hourly rates “as discussed with your team on site at Kumara”.
John Morris says that the oral contract was for fortnightly payments – this term was again stated in the letter of 14 September 2009.
John Morris says that the contract was to be relatively short in duration with work starting in September 2009 and terminating (he thinks) around mid-December 2009.
The first lot of work was completed in mid-September and payment made on 17 or 18 September.
By November 2009, Morris also began to undertake work in relation to the mining and washing (in addition to the removal of overburden).
Mr Morris says (and was not contradicted) that accounts were paid for the first month (that is September-October 2009) but that thereafter (in relation to invoices for 30 November 2009 to 16 December 2009) Matai did not keep up the payments. It is clear from emails sent by Julian Meates during this time that Matai was depending on the processing of gold and payments for the gold in order to pay Morris or later catch up with arrears. By December the undertaking of further unpaid work by Morris was unsustainable and Morris’s work at the site came to an end on or about 11 December 2009. By that time the amount owing upon rendered invoice was $162,416.33. Of a total of approximately $464,000.00 invoiced by Morris, Matai had paid approximately $300,000.00.
There is a dispute between the parties as to whether the correct amount outstanding is $162,416.33 as invoiced or should be approximately $120,000.00, as alleged by Matai. Given the state of the evidence before the Court, the discrepancy cannot and need not be resolved – Morris for the purposes of the subsequent meeting of creditors upon the compromise, provided a proof of debt for $162,416.33 which was accepted by the chairman and by the meeting for the purposes of the meeting, including the voting.
Insolvency and compromise
It is the evidence of Mark Meates that during November 2009 and December 2009, Matai incurred debts substantially in excess of its budget as a consequence of which it was unable to pay current debts as they fell due.
The accounts prepared to 31 May 2009 by Mr Edmondson (in draft form in or about November 2009) revealed an excess of liabilities over assets exceeding $3,000,000.00. The trading and profit and loss account to the year ended 31 May 2009 showed a net loss for that year of approximately $1,290,000.00.
In November 2009, the directors of Matai do not appear to have had current management accounts dealing with the six months trading from 31 May 2009. The directors were, however, clearly aware that they were unable to simply continue trading. They considered options of winding up the company or reaching a compromise of creditors. In the meantime, Matai through November and into December sought to negotiate with Morris further time for payment of outstanding accounts in return for some continuing services. Until mid-December Morris was receiving some catch-up payments as gold was processed. It is clear from correspondence through this November/December period from Julian Meates to John Morris that Matai’s position was that production was to continue through arrangements with contractors – there was no mention of a compromise of creditors or a winding up.
In relation to this period, Mark Meates said in his evidence –
16.Although the breach of insolvency provisions occurred in November or December 2009, the directors were advised that it would be open to any liquidator appointed by the Court in a winding up, to treat any payment made in the six month period prior, as a preference payment subject to clawback. We were therefore aware that all creditors who had received payments since say September 2009 could be asked to disgorge.
17.It was the opinion of the Board of Directors of Matai therefore that the company’s best course of action was to reach a compromise with its creditors.
Who gave this advice was not clarified in evidence. Equally, it was not explained why payments received by creditors such as Morris for current work would be subject to clawback in the event of a liquidation.
During December 2009, in the absence of any suggestion by Matai to Morris that a compromise of creditors might be proposed, terse exchanges occurred between Julian Meates and John Morris, as Matai sought to keep its operation going and Morris demanded payment.
Kevin Meates described the period thus:
In the difficult days of December 2009, Morris’s conduct was typical of a Jock Barnes or Toby Hill who was using our difficulties as a lever to take over the mining operation. Matai Mining Limited had spent a lot of money creating big hole and testing a number of other sites for mining which wouldn’t need much to produce cash flow.
In February 2010, pressure was brought to bear by Morris associates to have MCL paid in full and the devil take all other creditors. I refused that as a matter of principle.
Kevin Meates put the time at which Matai realised that it could no longer trade on because of insolvency as being in February (2010). Whether the insolvency position became clear to board members of Matai in November/December 2009, (as Mark Meates perceived) or February 2010 (in terms of Kevin Meates’ evidence), what is clear is that at a meeting of Matai in February 2010 the directors resolved to pursue a compromise of creditors.
This was the detail of Mark Meates’ evidence in relation to the February board meeting -
Q. But whose decision was it to put this proposal to creditors?
A.Ah, it was the board of – the board. We’d discussed it actually more fully in February, um, at the February meeting, um, we decided that we would have to try and – our best course of action was to try a compromise of some sort, um, we had been talking to the creditors along the way. Most of them were not necessarily happy but were working with us to get through it. The one that – the biggest one was Morris Contracting Limited, so we decided that Julian would approach Morris Contracting about trying to come to some arrangement with him because if we thought we could do that then we could probably do something with the rest of the other creditors who, you know, they were quite happy, if going forward if we could keep mining that they would like to be involved. So, um, Julian approached John Morris. I think page 24, the first paragraph, you know, we even offered him the licence and he said he wasn’t interested in the licence. Subsequently he spent, what sounds like lots of money mining it but, ah, when we offered it to him as part of a settlement arrangement he said he wasn’t interested. So, once he was not interested, um, we really didn’t have too many options, and so that’s why we followed down the path of a scheme of arrangement.
Following the Matai board meeting of February 2010, John Edmondson, in February/March 2010 prepared draft accounts for the eight month period to 31 January 2010.
In the meantime, Julian Meates had reported to Morris on 11 February 2010 as to a new work programme and had commented that Matai “did not have any money at the moment but were working hard to find a solution”.
It appears that the solution put to John Morris following the Matai February board meeting was some form of swap of interests whereby Morris would take over a licence. The next board meeting of Matai took place on 8 March 2010 when Julian Meates reported that his contact with John Morris had not resulted in any agreement as to dealing with the Matai debt to Morris. The Board resolved to call a meeting of creditors in an effort to enter into a compromise with them. The accounts prepared by John Edmondson to the end of January 2010 were to form the basis for a list of creditors to be notified to the meeting. The Board resolved that Mark Meates should prepare documents for the meeting and send them to creditors on behalf of the Board.
The minutes of the Matai board meeting do not record the content of any discussion of the detail to go into the compromise proposal.
Mark Meates then, with the assistance of Matai’s solicitor, Mr Shaun O’Neill, prepared the documents for a proposed scheme of arrangement under s 229 of the Act. Notice was to be given to creditors of a meeting to be convened on 19 March 2010.
Notice was sent to Morris on 9 March 2010.
The notice explained the business of the meeting as being –
To receive, discuss and vote on a proposal for a compromise by the company’s unsecured creditors as contained in the Resolution.
The Resolution to be put to the Vote at the meeting is:
That the unsecured creditors accept for themselves, the proposals tabled by the Directors of Matai Mining Limited, on behalf of Magnas Beta Limited, to purchase all unsecured debts of the company as at 31 January 2010, at a considered term of 5 cents in the $ in full and final settlement thereof.
John Morris found that the documentation did not make much sense to him and he referred it to his solicitors, Hardy-Jones Clark for advice. John Morris had some direct discussion with Julian Meates as to the reasons for the scheme and the way it would work.
John Morris queried Julian Meates as to the inclusion in Matai’s creditors of an item for “sundry creditors” in the sum of $696,210.50. Julian Meates replied that “sundry creditors” was actually Sports Management & Marketing at a Christchurch address.
In the meantime, Morris’s solicitor had had telephone discussions with Matai’s solicitor and on 18 March 2010 wrote to Mr O’Neill recording five specific issues with the proposal, indicating that the outcome of the meeting (scheduled for 19 March would be awaited) and that the outcome would then be challenged pursuant to s 232 of the Act. The issues raised included:
1.the mode of service upon Morris,
2.the proposal being in the nature of transfer of debt from one company to another rather than a compromise,
3.the failure to identify each creditor,
4.the large amount owing in respect of related entities,
5.prejudice to Morris and general creditors, with the only entity gaining by the proposal being Mark Meates and his other companies.
That afternoon (18 March 2010), Julian Meates emailed to John Morris amended scheme documents.
The amended notice made reference to provisions of s 229 of the Act and provided additional detail. The proponent of the compromised proposal was identified as Mark Meates, with the comment that “the proponent is acting at the direction of the Board of Matai Mining Limited”.
The terms of compromise were identified as being that –
An offer has been made by a person independent of the Company and its Directors to buy all unsecured debts of the Company as at 31 January 2010 for a consideration of 5 (five) cents in the $ (dollar).
“Sundry creditors” in the schedule of creditors was now identified as entirely Sports Marketing & Management Limited.
The notice indicated that the meeting of creditors was still to occur on 19 March 2010.
On 19 March 2010, John Morris had a company representative appear at the appointed place and time of the meeting but no-one else attended.
It transpired that the directors of Matai had decided to cancel the meeting to avoid issues over procedural requirements. A further amended notice was provided to Morris on 31 March 2010 as to a rescheduled meeting to be convened that day. Still further detail had been added to the earlier amended notice. The terms of compromise had been expanded to read:
An offer has been made by Magnas Beta Limited to buy all unsecured debts of the Company as at 31 January 2010 for a consideration of five (5) cents in the $ (dollar).
Magnas Beta was registered in 1976. It has a capital of $1,000 held by Kevin Francis Meates 999 and Jean Mary Meates 1. The shares are held as Trustees of the Maureen Brownlee Trust established in 1966 under which Kevin Meates is preluded by the terms of the trust from receiving any benefit, legal or equitable from it.
(The quoted misspellings appearing in the document).
There was no explanation offered in the document as to the difference between what was stated in the amended documents of 19 March that “an unrelated, unassociated party” had proposed to purchase all unsecured debts for 5 cents in the dollar, whereas the shareholders of the purchaser, Magnas Beta Limited, were now disclosed as being Kevin Meates and his wife.
Morris provided a proof of debt in the sum of $162,416.33 for the meeting on 31 March 2010 and appointed Desmond McKenzie to vote on behalf of Morris on any resolution proposed to the meeting.
The 31 March 2010 meeting
The meeting of the creditors of Matai took place at Christchurch on 31 March 2010. Mark Meates was appointed chairman and minute taker.
Mark Meates, Julian Meates, Rob Meates and Kevin Meates attended. John Edmondson was also in attendance as a creditor (for $1,462.50). Also in attendance were Chris McBreen who held proxies for Porter-Hire ($46,180.82), and Eagle Spares ($455.73) and Des McKenzie with the proxy for Morris.
Mark Meates, as chairman, explained that the original list of unsecured creditors of Matai had included some debts which were considered not properly to be debts of Matai. He referred to the debts as “subrogated” debts and suggested that they be removed from the list of creditors as having been incorrectly invoiced or under a separate obligation under the Matai/Tui tribute agreement. The list of creditors was amended to exclude those creditors and make some other adjustments which were discussed at the meeting.
Issues as to the amount of some creditors’ claims were mentioned, but it was resolved that the amounts in the proofs of debt would be used for the voting at the meeting.
An offer of Magnas Beta Limited to purchase the Matai debts, amended and signed by Kevin Meates and his wife, was tabled. The offer was 5 cents in the dollar. It was then moved that the meeting vote to accept the offer presented by Magnas Beta. The minutes of the meeting indicate that of the 22 creditors represented, 20 voted in favour and 2 against. The creditors in favour represented $4,656,244.11 (or 95.76 percent of the creditors voting) and the two creditors against represented $206,354.38. That figure indicates that the two votes against were from Morris and from Porter-Hire.
The chairman thereupon declared the resolution to accept the offer as carried.
Kevin Meates then moved that any procedural error which may have occurred during the meeting would be accepted by those that had attended the meeting, which motion is recorded as having been carried unanimously.
Mark Meates then discussed matters of “claw-back” and moved that any payments made by Matai in the previous six months be accepted by the meeting as being correctly, fairly and properly made, in favour of which 21 votes were cast, with Morris abstaining from the vote.
Finally, the chairman explained that there had been discussion of a challenge to the results of the meeting. He indicated that in the event of a creditor taking a challenge, the meeting could be adjourned, if necessary, for 30 days until the High Court declared its decision. The creditors could then meet again at short notice to discuss the decision.
The meeting was then closed.
Events after the meeting
On 29 March 2010, Morris served a statutory demand upon Matai for payment of $162,416.33.
Mark Meates completed the minutes of the meeting which were served on Morris on 1 April 2010.
On 7 April 2010, Matai served on Morris additional documents including the notice of results of voting required under the Companies Act.
Matai applied to this Court on 13 April 2011 for an order setting aside the statutory demand.
On 14 April 2010, Morris commenced this proceeding.
Attempts to find a Matai/Morris solution
Mr Kevin Meates, in his evidence, spoke of attempts by “the Morris lobby” until 29 March 2009 to secure a settlement whereby Morris would be paid in full, would receive the mining rights to the Tui mining area (Mining Permit 41.756) for the benefit of Morris, and would then not vote at the creditors’ meeting. Kevin Meates noted that he viewed that as a back-door way of preferring Morris Contracting Limited, which would have meant that Morris reaped all the benefit of the good work in progress.
In the event no agreement was reached before the 31 March 2009 meeting.
Kevin Meates said that there was then no production at the mine in April. He said that he was being pressed to do a deal “to shut Morris up” because the latter was “blotting the family escutcheon with his wild talk of fraud and sham dealing”. Kevin Meates says that he was then told that Morris had taken the law into his own hands and was recovering gold from MP 41.756 “to recover the debt which was before the Court”.
On 30 April 2010 Matai issued a proceeding against Morris in the Court (CIV 2010-409-1949) for conversion of gold recovered from MP 41.756, or alternatively for relief pursuant to a constructive trust.
There was without prejudice correspondence in an endeavour to find a commercial solution to the issues between Matai and Morris. The without prejudice communication is privileged: see s 57(1) Evidence Act 2006. Although it was included in the bundle of documents provided to the Court it was not with any express waiver of privilege and I therefore refrain from considering it.
In his evidence, Mr Morris referred to Tui as having been very disappointed at Matai’s debt to him and that Tui offered Morris the opportunity in times of very tight financial needs to mine ground adjoining that where Matai was.
Mr Morris was cross-examined at some length by Mr Wallace as to the arrangements which Morris entered into with Tui. In particular, Mr Wallace took Mr Morris to an exchange of emails involving John Morris, Darcy Lucas and Jack Meates (Kevin Meates’ brother) of Tui and Mark Meates of Matai on 30 and 31 March 2010. The arrangement being discussed was one whereby all mining by Matai on the “current adjoining area” would cease from 31 March 2010 and that area would be made available to Morris. It appears from another email, dated 30 March 2010, that Mark Meates was copying Kevin Meates into this correspondence. In a 30 March 2010 email, Mark Meates refers to a letter “cancelling the Tribute Agreement” which Darcy Lucas had apparently sent to Matai.
It appears that these were the exchanges to which Kevin Meates referred in his evidence when he said that exchanges had occurred up to 29 March 2009.
Mr Hardy-Jones also cross-examined John Morris in relation to a hand-written note apparently sent to Mark Meates of Matai by Jack Meates of Tui, bearing the notation “sent on 30th March 2010” (the day before the creditors’ meeting on the scheme of arrangement). The eighth point of the note states –
Should the agreement be acceptable by midnight, Morris will abstain from voting tomorrow.
The earlier points of the note propose that Tui would take over the Morris debt of approximately $140,000.00. Other matters are proposed such as that Kevin Meates resigns forthwith from Tui Trust Mining Limited and transfers his shares to the remaining shareholders, that Matai obtains an agreement to mine MP 41.756 and that any claim over MP 41.952 be relinquished by Kevin (Meates). It is also stated that “Morris is agreeable to these arrangements provided he gets $60,000.00 immediately”. When one reads the email sent by Mark Meates to Darcy Lucas at 1.05pm on 30 March 2010, it appears clearly to be a response to this handwritten document. Mark Meates’ email begins with the comment –
“It is difficult to see how this will work.”
Towards the end, Mark Meates records –
Having come this far, we can’t do anything now that will upset any Scheme of Arrangement ... I just can’t agree to this at this point of time.
Mr Wallace sought to establish by cross-examination of John Morris that an agreement had been reached by the parties that John Morris’ debt of approximately $140,000.00 would be taken over by Tui.
John Morris rejected in cross-examination the suggestion that an agreement involving the handwritten points was reached on 30 March 2010. He said that he subsequently entered into an agreement with Tui “weeks later”.
Over and above John Morris’ own evidence, it is clear from the email sent by Mark Meates on 30 March 2010 that Matai, for its part, had rejected the proposal that day.
John Morris, himself, late that evening (11.53pm, 30 March 2010), sent an email to Darcy Lucas with some further suggestions for resolution but, again, there is no evidence that these matters were picked up, let alone agreed to by Matai. Matai instead proceeded with the creditors meeting the next day.
Morris arrangements with Tui
John Morris’s evidence, in cross-examination (notes of evidence, page 31 lines 22-35) was that some weeks after 30 March 2010 he entered into a contract with Tui Mining Limited and obtained a concession from Whyte Gold in relation to MP 41.756. Pursuant to those arrangements, Morris conducted a mining operation from 8 June 2010 to 2 December 2010.
Mr Wallace cross-examined John Morris at some length in relation to the value of gold extracted during that period and the arrangements in relation to that gold. John Morris’s evidence was (notes of evidence pages 36-37) that he reached an agreement with Tui whereby he would withdraw from this litigation (challenging the compromise with creditors) if he was able to mine $1,400,000.00 worth of gold. His evidence is that he was not. The only evidence as to recovery is that he was able in the first five weeks to retrieve some $132,000.00 worth of gold.
In re-examination, John Morris made it clear (notes of evidence page 40, lines 25-33) that the arrangements he entered into were contractual arrangements with Tui alone and that it was no part of the arrangement with Tui that there would be offset against the Matai debt of the value Morris recovered.
Matai itself adduced no evidence from Tui or any other witnesses as to different terms of the arrangements between Tui and Morris.
I am satisfied on Mr Morris’s evidence, reinforced by the documentary evidence, that no contractual arrangement exists either between Matai or Morris in relation to post-March 2010 recovery, nor is there in existence any contractual arrangement between other parties such as Tui and Morris which is (in terms of s 4 Contracts Privity Act 1982) enforceable at the suit of Matai.
I make these findings on the evidence. If the evidence on this issue had in any sense come close to being in the balance, I would have found that I should not make a ruling on these factual matters. When Mr Wallace’s cross-examination in these areas began, Mr Hardy-Jones objected on the basis of irrelevance. I provisionally allowed the questioning. Mr Wallace (notes of evidence page 25, lines 17-18) sought to justify the questioning as relating to the conduct of Morris Contractors Limited. Mr Wallace accepted that there was no pleading as to particular conduct of Morris, let alone any indication in the pleading that relief should arise as a result of Morris’ conduct. Mr Wallace submitted that if Morris was recouping through arrangements with Tui losses which it was getting repaid through the compromise at the rate of 5 cents in the dollar, then Morris would be gaining an advantage which should be taken into account when it is part of Morris’s case that it is through the compromise suffering unfair prejudice.
As I have said, on the evidence there is nothing to lead to the conclusion which Mr Wallace was trying to establish through cross-examination. Also in terms of the pleadings, there was no allegation by Matai that Morris was receiving or had received payments which should be taken into account in the assessment of prejudice. Nothing in the pleadings alerted Morris or its solicitors to the possibility that evidence in relation to the Tui arrangements from April 2010 onwards would be relevant at the hearing.
Kevin Meates concluded his brief of evidence with a statement in relation to Morris that –
His mining of the Licence would have recouped the amount owing and more.
That, of course, is not a pleading. It was bereft of detail and, given the lack of an associated pleading, it was unsurprising that Morris had not prepared for the trial upon the basis of the issues pursued by Mr Wallace in cross-examination.
The procedural issues
The proponent
The pleading of Morris in this regard is that:
The proponent is not a person within the requirements of the legislation in that he is not:
1.The Board of Directors of the defendant;
2.The liquidator of the defendants; or
3.Appointed by Court order.
These requirements arise from s 228(1) of the Act.
Mr Hardy-Jones referred to the amended proposal (above [64) which described Mark Meates as the proponent of the compromised proposal and stated that –
The proponent is acting at the direction of the Board of Matai Mining Limited.
Mr Hardy-Jones referred also to the minutes of the Matai board meeting of 8 March 2010 in which it resolved:
That Mark Meates should prepare documents for the meeting and send them to creditors on behalf of the Board.
Mr Hardy-Jones submitted that the board minutes involved Matai simply assigning a task of a secretarial or administrative nature to Mark Meates. He submitted that the Board was not appointing Mr Meates as the proponent.
I find no merit in this point. The substance of what the board of Matai was doing is clear – it was putting a proposal to creditors and it asked Mark Meates to undertake the process. The form of words used, which might in a technical, semantic sense suggest that Mark Meates himself was the proponent, cannot obscure the reality that Matai was the proponent. The Board’s direction to Mark Meates that he should prepare the documents and send the documents to creditors indicates quite simply that he was to be the board’s conduit of proposal.
The evidence of both Mark Meates and Kevin Meates was to like effect.
I find that Matai complied with s 228(1)(a) of the Act by having its Board of Directors propose a compromise.
I do not find an issue with what form of words the proposal adopted. Had I found any issue with its form, this is a case where the substance (which is clear) should be permitted to prevail over the form.
Disclosure of creditors
The pleading of Morris in this regard is that:
The compromise documentation does not fully disclose the creditors of the company in that $696,210.50 is said to be represented by “sundry creditors”. Those creditors are not identified and the amounts owing individually are not expressed as required by s 229(2)(c).
The requirement for identification of creditors arises from the two-fold obligation upon a proponent to first (under s 229(1) of the Act) compile a list of creditors setting out the amount owing to each and secondly (under s 229(2)(c)) to provide that list to all creditors.
Matai’s initial proposal had attached as Schedule One a list of creditors. The relevant item complained of read –
Sundry Creditors $696,210.50
In the discussion which John Morris had with Julian Meates immediately upon receiving the initial notice (above [60]), the lack of identification of a particular creditor or creditors was raised by John Morris. Julian Meates explained that the item referred to Sports Management & Marketing Limited at a Christchurch address. In the amended notice provided on 31 March 2010, Schedule One still had the same entry namely –
Sundry Creditors $696,210.50,
but in Schedule Two, in which the creditors’ addresses were provided, the following entry appeared –
Sundry Creditors Entirely SMML Sports Marketing & Management Ltd, PO Box 815 Christchurch
The continued use of the expression “sundry creditors” in Schedule One represented in my judgment, at worst, sloppy drafting. When Schedule One (amounts of debt) and Schedule Two (addresses) are read together the amended proposal clearly identified Sports Management & Marketing Limited as a creditor for $696,210.50. The amended proposal addressed the deficiency in the initial proposal. The identification of Sports Management & Marketing Limited was sufficiently clear to meet the requirements of s 229 of the Act.
Classes of creditors
In his written submissions (although not in the Morris pleading) Mr Hardy-Jones advanced this proposition –
Section 229(2)(1) requires the proponent to compile, in relation to each class of creditors of the company, a list of creditors known to the proponent.
Submit:
(a) There is no evidence here that the proponent has determined any particular class of creditor. In this case there are quite clearly two readily identifiable classes. They are those that are of related companies and those that are unrelated. The unrelated creditor class should have had the opportunity of meeting together to discuss the compromise.
Mr Hardy-Jones in his submissions invoked the requirement under s 229 of the Act for lists to relate to “each class of creditors of the company”. He did not refer me to any authority for the proposition that within a particular class (for instance unsecured creditors) there needed in this case to be a further distinction between creditors according to whether they are related or unrelated to the debtor company. When Matai drafted its proposal in this case it did so by dividing its creditors into gold mining trade creditors and others. I have doubt that the two groups of creditors so divided in fact formed separate classes within the meaning of s 229(1) of the Act. As submissions were not addressed to that point I refrain from expressing any final conclusion.
I do not find any basis upon which to conclude in this case that companies or individuals related to Matai, who were unsecured creditors of Matai, should have been treated as being in a different class to other unsecured creditors.
There was in this regard no breach of the requirements under s 229 of the Act.
Relevance of stale debts – a separate class?
In the course of the hearing Mr Hardy-Jones focussed some attention on the proposition that at least some of the debts listed by Matai were stale in the sense that they were over six years old at the time of the compromise. The issue was not raised by Morris in its pleadings nor was it signalled in Morris’ opening submissions. What Mr Hardy-Jones did was to indicate towards the very end of his closing submissions that he was raising this issue in a general way because he was uncertain whether there should be in relation to a compromise a class of creditors who held stale debts. Implicitly he referred to the authority of cases such as those referred to by Tipping J in DFC New Zealand Ltd v McKenzie [1993] 2 NZLR 576 for the proposition that a simple debt repayable upon demand may be subject to a Limitation Act defence after six years. Mr Hardy-Jones acknowledged that the availability of a Limitation Act defence does not as such extinguish the debt. His suggestion was, without authority, that it might nevertheless be necessary for a company, which faces some stale debt, to classify such debts in a separate class.
I am not prepared to grant leave to Morris to amend its claim in this regard. While the stale debt issue was explored to some extent in the course of cross-examination, Matai was not put properly on notice either by pleading or even in opening submissions that the age of debts would be an issue. Matai, if on notice, might well have adduced evidence as to the exact circumstances and date of each debt and might have wished to explore the existence or otherwise of any acknowledgements of debt in supervening years. That in itself in my judgment is fatal to the implicit request for amendment of Morris’s pleading. That situation is exacerbated by the fact that Mr Hardy-Jones provided the Court with no authority in support of his legal proposition as to the appropriateness of a separate class based on the age of the debts.
In these circumstances, it is not appropriate for the Court to further explore the age of the various creditors’ debts.
Has Morris been unfairly prejudiced by the compromise?
Jurisdiction
The Court’s jurisdiction to order that a creditor is not bound by a compromise (or make such other order as it thinks fit) arises under s 232(3) of the Act (above [10]). It arises where the compromise is unfairly prejudicial to that creditor or to the class of creditors to which that creditor belongs.
Only a creditor who has voted against the compromise may apply for orders under s 232(3)(c). Morris was entitled to apply as it voted against the compromise.
What Morris must therefore prove is that the compromise was unfairly prejudicial to it or to the class of creditors to which it belongs.
The burden of proof under s 229(3)(c) lies on the plaintiff: see re National Dairy Association of NZ Ltd [1987] 2 NZLR 607, per Smellie J at 611.
Morris’s pleaded grounds of unfair prejudice
Morris’s pleaded grounds of unfair prejudice were contained in para 8 of its statement of claim (above [5]). It is appropriate to examine those in order.
Documentation not setting out Matai’s assets
Morris pleaded that the proposal documentation did not set out the assets of Matai and that it was impossible for a creditor to understand the true financial circumstances of Matai and to be able to judge whether the compromise was in that creditor’s best interests.
By the time of the hearing, Mr Hardy-Jones appeared to place little or no emphasis upon this particular assertion, instead stating that the overriding thrust of his argument was that Matai had entered into a series of accounting transactions which had the sole effect of defeating what would otherwise be legitimate claims from a small number of creditors who were unrelated to Matai. In his submissions, Mr Hardy-Jones invited the Court to focus on the creditors’ list – he did not develop submissions in relation to what was on the assets side of the Matai ledger. Rather, in his closing submissions he submitted that it went to issues of prejudice that not every bit of financial information was available to creditors at the meeting.
Morris did not call any accounting evidence as to conclusions which should be drawn as to Matai’s asset position. Mr Hardy-Jones for his part did not offer any particular analysis in relation to Matai’s assets.
Under s 232(3)(c) of the Act the Court is concerned with the substance of the compromise and, in particular, with whether the applicant creditor has been unfairly prejudiced by the compromise. It is not sufficient that a creditor comes forward and says that it did not understand the financial background to the compromise.
Matai put forward its compromise upon the basis of its insolvency upon a cash-flow basis, in that it explained in its notice to creditors that the reason for the compromise was that it had, during November and December 2009, incurred debts substantially in excess of budget, as a consequence of which it was unable to pay current debts as they fell due. It did not put the compromise upon the basis that its debts exceeded its assets. There is under s 229 of the Act no requirement that a proponent provide its up-to-date financial statements or even a summary of its financial position. The scheme of Part 14 means that it becomes a matter for the creditors, at their meeting, to determine what further information relating to the company they require before voting.
As it happened, Mr Edmondson (who was both Matai’s accountant and also a modest creditor), took with him to the creditors’ meeting two sets of the draft accounts for the eight month period to 31 January 2010 which he had been asked to prepare following the February 2010 Matai board meeting (above [52]). Whether Mr Edmondson presented those draft accounts at the creditors meeting is not clear – in his examination in chief he said that he did not recall being asked for them whereas in his cross-examination he stated that they were presented at the meeting. The minutes of the meeting do not clearly indicate whether the accounts were provided at the meeting. They record that –
Mr Kevin Meates asked John Edmondson who had prepared the Accounts to 31 January 2010 to speak as to the accuracy of the accounts.
Mr John Edmondson confirmed that the amounts listed in the Creditors’ list agreed with the accounts as prepared...
He confirmed that the accounts as prepared reconciled with the company’s GST records. He also confirmed that the intercompany debts were correct, that they had been built up over several years and related to advances made and services provided...
Following an adjustment made to the list of creditors to incorporate matters mentioned by Mr Edmondson, the minutes record that there was no further discussion. In the absence of any further case developed by Morris as to the asset position of Matai, no issue arises in terms of s 232(3)(c) as to the way in which Matai presented details as to its assets.
Unreliability of information as to creditors (particularly those related)
As its second particular of unfair prejudice, the plaintiff referred to Matai’s representation to creditors that it had creditors totalling $4,865,030.29. Morris noted that the majority of debts was owed to companies related to Matai in that those creditor companies share common shareholders and directors with Matai. Morris says that Matai’s documentation gives no evidence on which it can be determined whether the related company debts were legitimate or not. There were no particulars as to when the debts were incurred or how they were incurred.
Matai has pleaded that the debts of all creditors referred to in its documents were legitimate debts and those creditors were duly entitled to vote on the compromise.
It is to be noted that Morris’s complaint in this regard is not as to the classification of creditors but as to the very recognition of related companies as creditors. Mr Hardy-Jones for Morris did not seek to develop any detailed submission in support of this particular of complaint. He did not take the Court to the list of creditors and seek to demonstrate in relation to any particular creditor that it was not a creditor of Matai at the time of the meeting. Morris had had discovery of Matai’s records. The emphasis in Mr Hardy-Jones’ submissions was upon the classification of creditors and a proposition that the way in which Mr Edmondson had carried out the journal entries (or “accounting transactions”) had had the sole effect of defeating what would otherwise have been legitimate claims from a small number of creditors unrelated to Matai.
On the other hand, Mr Laurensen gave evidence (in addition to that of Mark Meates) as to the rationale for the consolidation of Matai’s accounts which began as early as April 2009 (above [28]). He produced his analysis of journal entries which led to Matai’s financial statements for the years ending 31 May 2008 and 31 May 2009, as submitted to the Commissioner of Inland Revenue, and the journal for the period ending 31 January 2010 which was prepared in the context of the compromise. The journals appear to make sense. Nothing arising from the examination or cross-examination of Mr Edmondson pointed to any accounting error in the way he had completed his work.
I find in relation to the manner in which Matai’s accounts were consolidated that Morris has not established that any particular creditor was listed in the proposal which was not genuinely an existing creditor of Matai.
Was the proposal a compromise or a transfer of debt?
Morris’s statement of claim asserted that the scheme was not a compromise within the Act but was rather a transfer of debt. This was included under a heading which indicated that Morris regarded the point as an irregularity of process of the meeting. I view it rather as a complaint as to the substance rather than the process of the proposal, but accept that nothing would appear to turn on that distinction.
In the course of his submissions Mr Hardy-Jones formally abandoned this ground of relief. Mr Wallace had identified the decision of this Court in Te Runanga O Ngai Tahu v Glenharrow Holdings Ltd HC Christchurch CIV 2005-409-000015 12 August 2005 High Court Christchurch as authority against the plaintiff’s pleaded assertion. The scheme of arrangement in the Glenharrow case involved Glenharrow creditors selling by assignment their debts for five cents in the dollar. Chisholm J found that the arrangement was in substance a compromise which met the requirements of s 227 of the Act.
In my view, the election of Mr Hardy-Jones not to pursue this particular ground of complaint was appropriate.
Was the proposal in the best interests of the legitimate creditors of the plaintiff?
Morris’s fourth particular of unfair prejudice as pleaded was that the proposal had not been in the best interests of the legitimate creditors of the plaintiff. Morris asserted that the only entities to benefit from the compromise would be Matai and its related companies. It further pleaded that the voting of the compromise was manipulated by individuals associated with Matai irrespective of the views of legitimate creditors.
This pleading assumed that Morris would have already succeeded on one or more of its previous particulars which suggested that Matai had illegitimately obtained votes in favour of the proposal from related entities. I have found against that proposition.
Against that background, it was for all creditors (including related entities) to vote according to their perception of their interest. Some arms-length creditors voted in favour. Their perception must have been that the Magnas Beta proposal, which would secure a payment of five cents in the dollar, was in their interest. Section 232(3) of the Act does not give this Court some form of charter to reassess for the creditors what is in their best interest.
Morris cannot succeed on this ground.
Prevention of exercise of creditors’ rights
The fifth particular of the Morris’ pleadings of unfair prejudice was that the compromise will have the effect of preventing legitimate creditors from exercising their rights to recover against the directors of the defendant, given that those directors had allowed the defendant company to trade while insolvent.
It is in the nature of all compromises under Part 14 of the Act that no creditor covered by the compromise is permitted to pursue rights of recovery that previously existed. That is common to all creditors and there is no unfair prejudice to a particular creditor in that.
Mr Hardy-Jones did not develop a submission that the Court should intervene under s 232(3) of the Act by reason of any effect which the compromise might have in relation to the Matai directors’ conduct of the company prior to the compromise.
One creditor had been struck off the Companies Register
Sports Management & Marketing Limited (“SMML”) (the company which had initially been inappropriately listed as “sundry creditors”) had been struck off the Companies’ Register in October 2008. Although this had not been identified by Morris as an issue in its pleadings, the issue was raised in Morris’s submissions.
SMML had been a Meates’ company, in the sense that its shares were owned by Kevin Meates and family members. Unsurprisingly, therefore, its address was given in the list of creditors as the same for other related creditors.
Mr Hardy-Jones developed two submissions in relation to SMML. First, he noted that SMML had voted for the proposal through a proxy which its directors must have provided. Mr Hardy-Jones noted that it was the Crown and not the directors which should have been served and was the person with authority to decide how SMML voted. Mr Hardy-Jones submitted that in these circumstances, SMML had not been served with notice as required under s 229 of the Act and SMML’s vote must be regarded as invalid by reason of how its vote had come about.
Mr Wallace, for Matai, noted the absence of a pleading on this issue but was content to deal with it in submissions. His simple submission was that any irregularity in relation to SMML was immaterial when one considered the value of its claim as a creditor.
SMML was, at the creditors’ meeting, one of twenty creditors which voted in favour of the proposal (compared with two who voted against). A switch of SMML’s vote from one category to the other would not have altered the outcome in terms of numbers.
Mr Wallace submitted that the majority would also have remained greatly in excess of the 75% in value required to approve the compromise. He referred to the actual voting which was recorded as –
·For - $4,656,244.11 - 95.76%
·Against - $206,354.38 – 4.24%
Mr Wallace noted that if SMML’s debt were removed altogether and other votes remained unchanged then the result would have been:
·For - $3,960,033.61 – 95.05%
·Against - $206,354.38 – 4.95%
I have considered, in addition, whether SMML’s debt should be treated for the purposes of this consideration as having voted against the proposal. Mr Hardy-Jones did not develop a specific submission in this regard. That may have been because Morris adduced no evidence to suggest that the Crown might have exercised its voting rights in relation to SMML to vote against the proposal. On the evidence I am not in a position to find the irregularity in relation to SMML material.
Matai’s treatment of “subrogated debts”
In its notice to creditors, Matai provided the following explanation of the debt owed to six particular creditors –
The claims of a number of suppliers (e.g. Allied Petroleum, Crofts, Hamilton Electric, WCRC, Portacom and DOC) would have a preference because the order for goods was made in the name of, or with the consent of, or the guarantee of or covenant by Matai Industries Limited. Alternatively because Matai Industries Limited which may become liable for them by virtue of the Tribute Agreement covering MP 41.756, will pay them in full and Matai Industries Limited will stand subrogated for the debt as an ordinary unsecured creditor.
As with the issue relating to Sports Management & Marketing Limited, this issue as to “subrogated debts” had not been the subject of a pleading by Morris. Mr Hardy-Jones raised the issue in his submissions.
Mr Hardy-Jones submitted that there was nothing in the Tribute requiring Matai Industries to pay the debts in question. He submitted that through the debts being paid in full by Matai Industries, the amount owed by Matai (Mining) to Matai Industry was thereby increased and in that way Matai Industries was given a preference over those settled creditors.
The way in which Matai had presented the “subrogated debts” in its proposal was undoubtedly confusing. Matai’s assertion in its proposal that the six creditors in question would have a “preference” was potentially misleading, in that it appeared to suggest that they were preferential creditors. The proposal itself did not seek to put them in a separate class. Rather, it indicated that because of other arrangements another company (Matai Industries) would be required to pay the debts in full (even if Matai Mining could not). Hence the subsequent reference to the concept of subrogation “as an ordinary unsecured creditor”. Not clarified in evidence was whether Matai Industries had in fact paid the debts with a right of subrogation therefore arising.
Mr Hardy-Jones’ cross-examination of Mr Edmondson, Matai’s accountant, clearly revealed that even Matai’s accountant had little or no understanding of what was involved with the “subrogated debts”. Mr Edmondson commented that –
Well quite frankly, the sort of name doesn’t ring a bell with me really.
The position was potentially rendered even more confusing by explanations which were then given by the Meates family at the creditors’ meeting. The minutes record under the heading “subrogated debts” this discussion –
The Chairman explained that the list of unsecured creditors of Matai Mining Limited included some debts that were not considered to properly be debts of Matai Mining Limited. Mr Kevin Meates explained that they had either been wrongly invoiced or were the subject of a separate obligation under the Matai Mining Limited (MML)/Tui Trust Mining Limited (TTML) Tribute agreement.
Moved:
That the “subrogated debts” should be removed from the list of Creditors as they were either incorrectly invoiced or under a separate obligation under the MML/TTML Tribute agreement.
The Chairman Carried Unanimously
Accordingly, although it appears that the Meates family initially intended that Matai would by right of subrogation exercise the voting rights attaching to the six “subrogated debts”, no vote was in fact exercised in relation to those debts.
If it were to transpire (and the evidence is unclear) that Matai Mining Limited had not fully paid the six creditors involved, then there might be an argument (not advanced by Mr Hardy-Jones) that the six creditors in question should have been separately served and enabled to vote. Mr Wallace met this unarticulated argument by noting the amounts of the “subrogated debts” which were:
Allied Petroleum $5,221.18
DOC $3,937.50
Hamish Hamilton Electrical $270.00
Crofts $859.50
Portacom $3,031.05
WCRC $593.16
Total $13,912.39
Because no votes were made in relation to the six “subrogated debts”, those debts did not serve to increase the majority in favour of the proposal. Had the six voted against the proposal it would have served to increase those against by approximately one percent to something still less than six percent.
None of the six creditors in question has come forward with any objection to the proposal.
While the information provided by Matai in relation to the “subrogated debts” was unclear, in the way the voting developed I do not find on the evidence that there was any material irregularity.
Outcome
The sense of grievance of John Morris is understandable. When Matai decided to commence active gold mining operations, Morris provided over a short time valuable equipment and services which made gold recovery possible, only to end up as an unsecured creditor for much of the value of its services. It had transpired that the Matai directors had not secured for Matai the cash flow commitments that would have enabled it to meet a substantial shortfall of income which might accrue at least in the early stages of a highly speculative operation. In the event, however, Matai did become clearly insolvent in the cash flow sense. Part 14 of the Companies Act provides a regime whereby a company may present a compromise upon which all its creditors are entitled to vote. The intention of the powers given to the Court under s 232 of the Act are not intended to amount to a second-guessing of the wisdom or sense of fairness of creditors in voting by the required majorities in favour of a proposal. Rather, where an aggrieved creditor applies to the Court for relief under s 232(3) of the Act, the Court has power only if there have been prescribed flaws or prejudice in the compromise or the procedure adopted to order that a creditor not be bound by a compromise.
In this case Morris has not satisfied the Court that any of the situations identified in s232(3) of the Act applies. Accordingly the Court’s jurisdiction to order that Morris be not bound by the compromise (or to make another appropriate order) does not arise.
Costs must follow the events. Costs on a 2B basis are appropriate.
Order
I order –
1.The plaintiff’s application for an order that it not be bound by Matai Mining Limited’s compromise with creditors approved on 31 March 2010 is dismissed; and
2.The plaintiff is to pay the defendant’s costs on a 2B basis together with disbursements to be fixed by the Registrar.
____________________
Associate Judge Osborne
Solicitors:
Hardy-Jones Clark, PO Box 646, Blenheim
The Mairehau Law Centre, PO Box 36-790, Merivale, Christchurch
Counsel: M J Wallace, PO Box 13254, Christchurch 8141
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