In 2017, Trends Publishing International Limited (‘Trends’) appealed to the Supreme Court against the Court of Appeal’s decision in Trends Publishing v Advicewise. The Court of Appeal had upheld the High Court’s decision to set aside Trends’ proposed creditors’ compromise. Parties associated with Trends controlled more than 75% of the creditors’ vote by value (the ‘Insider Creditors’), which was the majority required to approve the compromise. Advicewise, Callaghan Innovation, MediaWorks and Webstar (‘Challenging Creditors’) all challenged the compromise. This week, the Supreme Court (by a 3-2 majority decision) dismissed Trends’ appeal, agreeing with the lower courts that the compromise should be set aside. The Court held that the Insider Creditors and those that were at ‘arm’s-length’ from Trends should not have been placed in the same class of creditors for the purpose of voting on the compromise under Part 14 of the Companies Act 1993.
Trends carried on business in the print and digital media industry and experienced significant revenue downturn and financial difficulty following the GFC. In 2015, Trends put a Part 14 compromise proposal to 62 unsecured creditors whose debts totalled approximately $4.27 million. The unsecured creditors included the Insider Creditors who were owed $3.23 million (or 75.7% of the total unsecured debt). The proposal left all major creditors with a substantial shortfall. The Insider Creditors were not to receive any payments under the compromise, but were allowed to vote on it. The compromise was ultimately approved by the requisite majorities and bound all affected creditors regardless of their vote.
In the High Court, Heath J held that Trends had manipulated the voting process by including the Insider Creditors in the same class as other creditors, resulting in prejudice to the Challenging Creditors. The Court of Appeal upheld this decision.
Supreme Court decision
The Supreme Court said that Part 14’s purpose is to give effect to compromises which reflect a fair business assessment by creditors. Accordingly, such an assessment should reflect the common interest of all those bound by a compromise. Creditors should be placed into voting classes based on shared ‘rights and interests…in relation to the [debtor] company.’
The Insider Creditors’ interests in the debtor company meant that they were not closely aligned with the arm’s-length creditors. The arm’s-length creditors’ purpose in entering into the compromise was to receive some payment for their debts. The Insider Creditors’ aim was to procure some payment to the arm’s-length creditors so that Trends could continue to trade. The Insider Creditors were on both the creditors’ and Trends’ side of the transaction. There was no sufficient common interest to justify the two groups being classed together.
Similarly, creditors with materially the same rights and interests before the compromise were treated differently under it. The compromise preferred smaller creditors. It offered all creditors full payment of the first $1,000 of debt. Accordingly, those creditors whose debts were around $1,000 received almost all of what they were owed. Some larger creditors only received 11-18 cents in the dollar. The Court believed that these creditors should have been placed into separate classes, and failing to do so made the compromise substantially unfair.
It was for these two reasons that the Supreme Court found that there was a material irregularity in the compromise’s process, and unfair prejudice to the arm's-length creditors. Accordingly, the compromise was set aside as it was ‘fundamentally misconceived.’
Interestingly, although the two dissenting judges (Elias CJ and Ellen France J) found that there was unfair prejudice and material irregularity, they would not have set aside the compromise. Instead, they would have ruled that only the Challenging Creditors were not bound by the compromise.
Kensington Swan’s take
Companies should be careful to ensure correct process is followed if proposing a compromise to creditors. The Trends litigation emphasises the need to consider both legal rights and commercial interests of creditors when separating creditors into different classes for voting purposes. Consideration of legal rights alone is not enough. Taking the time to ensure classes of creditors are established up-front (where necessary) will be crucial in balancing a company’s desire to enter a compromise swiftly against a Court’s ability to take such action as it thinks fit (including setting aside a compromise).
Our thanks to Christian Smith, solicitor, for his assistance with this article.
 Trends Publishing International Ltd v Advicewise People Ltd  NZCA 365.
 Advicewise People Ltd v Trends Publishing International Ltd  NZHC 2119.
 Trends Publishing International Limited v Advicewise People Limited  NZSC 62 at .
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