Powell v Forest Export Management

[2015] NZHC 682

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

CIV-2014-441-131 [2015] NZHC 682

UNDER	The Companies Act 1993
BETWEEN	JIM DEAN POWELL Plaintiff
AND	FOREST EXPORT MANAGEMENT Defendant

On the papers

Judgment:                13 April 2015

JUDGMENT OF ASSOCIATE JUDGE SMITH

[1]      This is an application by Mr Powell for costs on a liquidation claim made by him against the defendant (Forest).

[2]      The  liquidation  claim  was  based  on  Forest’s  failure  to  comply  with  a statutory    demand    for    the    sum    of    $36,055.19,    served    on    Forest    on

15 September 2014.        Mr Powell    commenced    the    liquidation    claim    on

14 November 2014.

[3]      After it was served with the liquidation claim, Forest put a compromise proposal to its creditors under pt 14 of the Companies Act 1993 (the Act).  Under the compromise proposal, unsecured creditors would receive one third of the amounts owing to them on their debts in full and final settlement. Payment would be made by equal  monthly  instalments  over  a  period  of  two  years,  with  the  first  monthly payment on 31 March 2015.

[4]      The compromise was approved at a meeting of Forest’s creditors held on

25 February 2015.  Although Mr Powell voted against the compromise proposal, he

JIM DEAN POWELL v FOREST EXPORT MANAGEMENT [2015] NZHC 682 [13 April 2015]

accepts that the compromise is binding on him as a creditor who received notice of the proposal.1

[5]      The  creditors’  resolution  passed  at  the  creditors’  meeting  included  a

resolution:

To approve, confirm and ratify the taking by [Forest] and its directors and officers of all actions it or they consider necessary or desirable to give effect to [the resolution to approve the compromise in the form circulated to creditors with the notice of the meeting].

[6]      After the compromise was approved, Mr Powell confirmed that he would withdraw his liquidation claim.  He asked Forest to pay $1,600 towards his costs. Forest offered to add these costs to the amount of Mr Powell’s unsecured debt, under the part of the resolution quoted above.   On that basis, Mr Powell would have received only one third of his costs payable over a two year period.   Mr Powell refused, contending that his costs should not form part of the compromise, and should be paid in full immediately.

[7]      Mr Powell’s liquidation claim was dismissed by consent on 12 March 2015. While Mr Powell accepts that his liquidation claim was appropriately dismissed, he maintains that he should still be entitled to costs on it.  He claims costs of $2,380 on a 2B basis, and disbursements of $1,190.75.

[8]      The parties have been unable to agree on Mr Powell’s claim for costs.  They have now filed memoranda.

The parties’ submissions

Mr Powell

[9]      Mr Powell submits that he should be awarded full scale 2B costs on his liquidation claim notwithstanding that those costs were not included in the amount of the debt owing to him that was the subject of voting at the creditors’ meeting.  He points to the fact that, at the time the compromise proposal was approved by the

creditors,  no  award  of  costs  had  been  made  in  his  favour  in  the  liquidation

1      Companies Act 1993, s 230(2)(a).

proceeding.  He therefore submits that his claim for costs did not qualify as a “debt” that was capable of being included in the compromise.  He also submits that the liquidation proceeding was effectively brought on behalf of all of Forest’s creditors; he contrasts his position with that of a successful plaintiff in a liquidation claim, who is entitled to costs in preference to other creditors in the liquidation.2

[10]     Mr Powell relies on the decision of Lang J in Thomson v Totem Auckland Ltd.3   That was a case in which the defendant’s creditors approved a compromise proposal put by the defendant after a liquidation proceeding had been commenced against the defendant. Lang J concluded that Ms Thomson had been entitled to bring the liquidation proceeding, although there was some issue as to whether or not she was  actually a  creditor  of  the  defendant.4      His  Honour  made  a  costs  order  in Ms Thomson’s favour, reduced to reflect the doubt over her status as a creditor.  It appears to have been an important factor in the Judge’s consideration of the case that the defendant company had continued to trade while insolvent, and that the liquidation claim had the effect of bringing that situation to an end.5   There does not appear to have been any argument that Ms Thomson should not be entitled to costs because she was bound by a pt 14 compromise which was approved by a majority in number and 75 per cent in value of creditors voting at the creditors’ meeting, on the basis that the debt owing to her did not then include a component for costs in her liquidation proceeding.

Forest

[11]     Forest does not oppose a costs award, but says that any costs awarded should be treated as being subject to the compromise, that is, only one third of the amount awarded would be payable by Forest, and that would be paid by monthly instalments over a period of two years.   Forest submits that that result must follow because

Mr Powell’s costs of his liquidation claim was a contingent debt at the time of the

2      Companies Act 1993, sch 7, cl 1(1)(c).

3      Thomson v Totem Auckland Ltd HC Auckland CIV-2004-404-815, 15 July 2004.

4      At [8]-[9].

5      At [11]-[13].

creditors’ meeting, and the definition of “creditor” for the purposes of pt 14 of the

Act includes those with contingent claims against the company.6

[12]     Forest refers to Bank of Tokyo-Mitsubishi UFJ, Ltd v Solid Energy Ltd & Ors, in which Winkelmann J confirmed that a creditors’ compromise can include contingent debts. Winkelmann J said:7

[163]   …There are many different types of contingent creditors.  Some creditors’  claims  against  a  company  may  be  contingent  upon  events occurring which are unlikely, or the likelihood of which cannot be predicted or  is  very  difficult  to  predict.    It  may  be  simple  in  the  case  of  some contingent creditors to assess what the quantum of the claim will be if the contingency crystallises, whilst in the case of other contingent creditors, quantification may be difficult if not impossible…

…

[166]   The Act  provides  a  model  for  valuation  of  contingent  creditors’

claims.  For the purposes of Part 14, s 227 defines creditors to include:

A person who, in liquidation, would be entitled to claim in accordance with section 303 of this Act that a debt is owing to that person by the company…

[167]    Section 303 states that contingent debts may be admitted as a claim against the company in liquidation. Section 307 provides

“(1)      if a claim is subject to a contingency, or is for damages, or, if for some other reason, the amount of the claim is not certain, the liquidator may –

(i)  Make an estimate of the amount of the claim; or

(ii) Refer the matter to the Court for a decision on the amount of the claim.

[13]     Forest refers to the fact that, on 20 February 2015, its counsel sent an email to Mr Powell’s solicitor advising that Forest would be willing to include Mr Powell’s legal fees as part of Mr Powell’s debt, “to assist [Mr Powell] to make a decision”.

[14]     Forest  submits  that  its  financial  forecasts  included  in  the  compromise documents show that it is unlikely that Forest would be able to pay Mr Powell costs

6      Under section 227 of the Act, a “creditor” includes a person who would be entitled to claim in accordance with s 303 of the Act that a debt is owing to that person by the company.  Under s 303, a contingent debt or liability of a company may be admitted as a claim against the company in liquidation.

7      Bank of Tokyo-Mitsubishi UFJ, Ltd v Solid Energy Ltd & Ors [2013] NZHC 3458.

in  full  now,  as  well  as  make  the  required  monthly payments  to  all  unsecured creditors under the compromise.  In its submission, it would be unfair to unsecured creditors if Mr Powell were awarded costs outside of the compromise.  He did not raise costs as an issue during the compromise process, notwithstanding the email correspondence which alerted him to the fact that Forest regarded costs in the liquidation proceeding as an item to be covered by the compromise if approved. Forest relies on the wording of the compromise, under which the monthly payments were to constitute “full and final settlement”.

[15]    Forest submits that the Court can give directions, or waive a procedural requirement, under s 232(1)(a) of the Act, if the Court is satisfied that it would be just to do so.

Discussion and conclusions

[16]     I do not see any basis on which I could award scale 2B costs as Mr Powell requests, and direct that they be paid by Forest in full now standing outside of, and separate from, the compromise approved by the creditors on 25 February 2015. Indeed, I do not see any basis on which I can award costs to Mr Powell at all: the liquidation claim he commenced has not resulted in the liquidation order he asked for, because Forest’s creditors (at a properly convened meeting) decided that Forest’s financial difficulties should be deal with in a different way.

[17]     Forest is not in liquidation, and the preference which is given to a petitioning creditor under the schedule to the Act applies only to companies in liquidation.8  Nor am I concerned in this application with costs incurred in organising and conducting the meeting of creditors for the purpose of voting on the compromise (costs of that sort, if incurred by somebody other than the company itself, are also entitled to a degree of preference, under s 234 of the Act).

[18]     In the absence of any statutory preference for the costs which Mr Powell now claims, Mr Powell’s costs claim was no different from any other contingent claim

against Forest as at the date of the creditors’ meeting.

8      Companies Act 1993, s 312, and sch 7, cl 1(1)(c).

[19]     I accept Forest’s submission that contingent claims are sufficient to qualify as “debts” for voting purposes at creditors’ meetings convened under s 229 of the Act. In those circumstances, it was for Mr Powell to ensure that the full amount of his claim, including his estimate of costs to date in the liquidation proceeding, was before the meeting of creditors on 25 February 2015.   Given that costs awards in company liquidation proceedings are normally awarded according to the 2B scale in the High Court Rules, it would not have been a difficult matter for Mr Powell to have put a value on the contingent aspect of his claim and ensure that the voting proceeded on the basis of a more accurate estimate of the value of his debt.

[20]    It appears that he did not do that.  Nor does it appear that he moved any amendment to the proposal to provide that his costs in the liquidation claim should be accorded priority over other unsecured debts.  If he had done that, he may well have attracted some support from other creditors, on the basis that the filing of the liquidation proceeding had been a valuable “trigger”, forcing Forest to sensibly address its financial difficulties for the benefit of all creditors.

[21]     Under  s 232(3)  of  the  Act,  a  creditor  who  was  entitled  to  vote  on  a compromise may apply to the Court for an order that the creditor is not bound by the compromise if there has been some material irregularity in obtaining approval of the compromise, or if the creditor (being a creditor who voted against the compromise)

is unfairly prejudiced by the operation of the compromise.9   Any application under

s 232(3) must be made within 10 working days after the date on which notice of the result of the voting was given to the creditor.10    Mr Powell has not made any application under s 232(3) within that period, and the result is that he can no longer apply for relief on the basis that he will be unfairly prejudiced by the operation of the compromise.

[22]     I did not derive any assistance from the decision of Lang J in Thomson, as the point does not appear to have been argued in that case.

9      Companies Act 1993, ss 232(3)(b) and (c).

10     Section 232(4)

[23]     In  the end, the position is that Mr Powell’s  claim  that  Forest’s  financial difficulties  should  be  met  by  the  making  of  a  liquidation  order  has  not  been successful – the creditors have decided otherwise.  Mr Powell had the opportunity to ask the creditors to address his contingent claim for the costs of the liquidation proceeding, but he appears not to have done so.  He has not sought to challenge the compromise within the period available to him to do so, and he is accordingly bound by the compromise.  In those circumstances, there is no jurisdiction for the Court to award the costs which Mr Powell seeks. His application is dismissed accordingly.

Associate Judge Smith

Solicitors: