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Accident Compensation Cases

Accident Compensation Corporation v Trends Publishing International Ltd (HC, 18/12/15)

Judgment Text

Associate Judge J P Doogue
Introduction and background 
Callaghan Innovation (which I will describe in this judgment as “Callaghan”) is a public body which was set up by the Government with the object that it should function as an agency that stimulated research and development within New Zealand in areas that could potentially be “commercialised”
Callaghan is charged with making grants of public money to organisations that are carrying out, or intend to carry out, research and development in areas that are recognised by the protocols and guidelines to which Callaghan is subject. The object of the scheme is to inject funding into those organisations to stimulate their research and development activities. A party who is successful in attracting a grant must execute a moderately complex funding agreement which sets out the metes and bounds of, amongst other things, what the grantee is entitled to use the money for. The funding agreements also make provision for Callaghan to review the activities of the grantee and, if necessary, to terminate the grant arrangement. 
The defendant, Trends Publishing International Limited (“Trends”), which has operated for some years as a magazine publisher, turned its attention to digitising its products and looked to capitalise on its success in that area by moving into the digital milieu. It had what appeared to be novel ideas about how to provide information to consumers about products. It entered into a funding agreement with Callaghan in April 2014. Callaghan agreed to provide 20 per cent of the costs of Trends' research and development programme for a minimum of three years, subject to the provisions of the agreement. In accordance with the agreement, Callaghan paid Trends the following amounts: 
On or about 8 May 2014 
On or about 11 July 2014 
On or about 22 October 2014 
$ 69,375.27 
$382,911.97 ”
Callaghan apparently began to have concerns about whether the funding was being properly applied and, in October 2014, Callaghan advised that it would be instituting an audit of the funding that had been passed to the defendant. Deloitte was the accounting firm who would carry out the investigation. 
Deloitte carried out a number of investigations, including interviewing staff at Trends and reviewing accounting material. The report that was eventually issued was adverse to Trends, with Deloitte reporting that there had been breaches of the arrangement. Deloitte claimed that Trends had provided Callaghan with inaccurate or misleading information about application of the research and development funding. Inadequate or unsatisfactory project documentation was another failing that Deloitte claimed it had identified. Because of a perceived lack of adequate documentation, in some cases Deloitte was unable to tell whether or not money that had been spent came within the guidelines of the funding agreement. 
Deloitte further stated that it had affirmatively identified areas where there had been breaches of the agreement, with an example being payment of life insurance premiums for the director's life cover. Deloitte also concluded that Trends was “under significant pressure” and there were indications that Trends was at high risk of becoming insolvent. 
Before the report was finalised, and before further comment had been received from Trends on the provisional conclusions, Callaghan decided to act. In December 2014 it gave Trends notice that it would be suspending its “growth grant” because of the matters identified in the draft audit report. Further, Callaghan proposed to issue a press release, a draft of which was provided to the defendant. 
The final version of the report was produced around March or April of 2015. Contained in the report were some other damaging assertions including that Deloitte considered that staff it had attempted to interview had been suborned by the defendant and had been instructed to provide false information. 
The defendant denies the assertions contained in the report. Specifically it denies that: 
The funding was applied for unauthorised purposes not contemplated by the terms of the grant; 
Its accounting and reporting systems are deficient; and 
That it directed staff to provide false information to the Deloittes personnel. 
On 12 May 2015, Trends circulated the compromise proposal that is the subject of this claim to a list of its unsecured creditors, including the five plaintiffs. The compromise was adopted at a creditors' meeting on 22 May 2015, against the wishes of the plaintiffs (and some other creditors who are not parties to this litigation). The plaintiffs considered that there were material irregularities in the adoption of the compromise, and that the compromise was unfairly prejudicial to them. Accordingly, they commenced this claim under s 232(3) of the Act on 8 June 2015. Callaghan seeks to set aside the compromise. 
In its defence, Trends has argued that Callaghan is not a creditor. It takes this position notwithstanding that the compromise recognised that it was indebted to Callaghan. 
The second matter that the proceeding concerns is Trends' counterclaim against Callaghan, which does not concern the creditors' compromise or any of the four other plaintiffs, but instead alleges breach of contract and defamation in connection with an agreement for research and development funding between Callaghan and Trends dated 2 April 2014. The counterclaim, which Trends has brought against Callaghan only and which does not concern the other four plaintiffs, alleges that various aspects of Callaghan's conduct in connection with the Deloitte review, the suspension and the termination of the funding agreement amounted to breach of contract and defamation. Callaghan denies each of the five separate causes of action pleaded in the counterclaim. 
Obviously, the hope of the defendant is that if it obtains a hearing of its counterclaims before the application to set aside the compromise is dealt with, it has the chance of obtaining a substantial award of damages which it would then set off against any debt that might be owed to Callaghan. Callaghan would then lose its status as a creditor of the defendant and would not be able to attack the compromise. 
Present application 
The plaintiffs seek an order under High Court Rule 10.4, separating the hearing of the claim under s 232(3) from the hearing of the counterclaim. 
Trends does not oppose separation but argues that the counterclaim ought to be determined before the claim. It submits that the interests of justice and the expedient and efficient resolution of this proceeding clearly require that the counterclaim be heard first. 
Mr Samuel Bisley's principal argument for Callaghan was that important policy and practical considerations require the claim to be heard before the counterclaim. 
First, there is a strong public interest in preventing companies from trading while insolvent.1
| X |Footnote: 1
See paragraph [30] below. 
Deloitte had serious doubts about Trends' solvency at the time of its review, and Trends admitted at the creditors' meeting that it has been unable to pay its rent for six years. The Part 14 compromise has enabled Trends to avoid its debts and keep trading. The status of the compromise must be resolved urgently and it would not be in the public interest to allow Trends to pursue its counterclaim — which could, realistically, take as long as 18 months — before the claim is determined. 
Second, the outcome of the claim will affect the conduct of the counterclaim, and may even result in its discontinuance, because the creditors' compromise contains a moratorium on proceedings to recover debts owed by Trends, which Callaghan argues includes a bar on exercising any rights of set-off or counterclaim. If the Court upholds the compromise as valid and binding in respect of Callaghan, the parties will need to resolve the status and effect of Clause 4 of the compromise in the counterclaim proceeding. If the Court finds the compromise is not binding on Callaghan, Callaghan says it will plead its own claim against Trends for recovery of the debt it is owed. 
Further, hearing the claim first would allow its prompt and expedient resolution: a decision on the claim would release the first, second, fourth and fifth plaintiffs from the litigation altogether, as they are not parties to the counterclaim and have no role to play in any trial of the counterclaim. 
Callaghan argues that it has good grounds for setting aside the compromise because of material irregularity in the process leading to the adoption of the compromise in that there was insufficient provision of financial information and the incorrect classification of the class of creditors). 
For Trends, Mr Kalev Crossland submitted that the counterclaim seeks to challenge that the debt claimed by Callaghan is owed. It seeks damages from Callaghan for breach of contract and defamation. 
The counterclaim will canvass the financial information provided to Callaghan during the audit. It will assess Deloitte's conclusions surrounding Trends' solvency. This is relevant to the plaintiffs' allegations that Trends failed to provide adequate financial information; and that the plaintiffs would be better off if Trends is liquidated. Both the claim and counterclaim will also address whether Callaghan is a creditor. Now that Callaghan has challenged the Creditors Compromise, and a claim has been brought questioning whether the debt is in fact owed, the Court is entitled to examine the substance of the debt claimed. 
The matters being heard close together will enable the Court to assess whether Callaghan has been materially prejudiced (including whether Clause 4 of the Creditors Compromise should apply to Callaghan). 
An important point concerns what will happen to the counterclaim if the compromise remains in place. There will be no obstacle to the defendant proceeding with the counterclaim even though the compromise is in effect. The compromise, in other words, shields the defendant from claims by its creditors but does not constitute a reciprocal bar to the defendant bringing proceedings itself. 
The defendant has through counsel advised that it is prepared to agree (in effect to waive) its right to prevent the plaintiff from bringing a claim as part of its response to the counterclaim which the defendant wishes to bring. The plaintiff contends that it is not open to the defendant to unilaterally vary the terms of the compromise agreement which has a statutory effect unless and until it has been set aside pursuant to s 232. 
While there are quite a number of authorities on the question of whether there should be a split trial, there has been less explicit comment on the issue that arises in this case, which concerns the principles that the Court should conform to in deciding the order in which matters which, by agreement, are to be split off, should be dealt with. 
Rule 1.2 of the High Court Rules provides as follows: 
The objective of these rules is to secure the just, speedy, and inexpensive determination of any proceeding or interlocutory application. ”
As can be imagined, depending on the facts of particular cases, the individual subsidiary factors listed in the Rule may point in different directions. 
In addition to the matters just mentioned, clearly any aspects of the timing of the hearing that bear upon the individual interests of the parties, as well as any public interest factors, need to be taken into account when making the decision as to the sequence in which the two parts of the case should be heard. The decision of the Court must be a just one. 
I agree with Mr Bisley that there is a presumption that disposition of proceedings relating to an insolvent company ought to be accorded priority. That was adverted to in Commissioner of Inland Revenue v Chester Trustee Services in which decision Tipping J said:2
| X |Footnote: 2
Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA)Has Litigation History which is not known to be negative[Blue]  at [3]. 
“That said, I agree with Baragwanath J that the general policy of the Act that insolvent companies should be put into liquidation, if a creditor seeks such an order, should not be departed from lightly. To justify such departure there must be some other factor, be it policy, principle or simply the justice of the particular case, which outweighs the prima facie entitlement of the creditor to an order putting the insolvent company into liquidation. If the focus is on the justice of the particular case the discretion must always be exercised on a principled basis and not on some ad hoc perception of what individual justice might require. All cases involving s 290(4)(c) must in the end come down to a judgment by the Court as to whether the creditor's prima facie entitlement is outweighed by some factor or factors making it plainly unjust for liquidation to ensue. The ground advanced by the insolvent company must be sufficiently compelling to overcome the general policy of the Act with regard to insolvent companies. ”
There are persuasive indications in this case that Trends is insolvent. The fact that it put forward a compromise pursuant to Part 15 of the Companies Act 1993 says as much. 
Mr Crossland for Trends, though, says that it is because of the actions of Callaghan in discontinuing the grant allegedly in breach of its contractual obligations, and the publicity which Callaghan gave to the withdrawal of the grant which caused the solvency problem for Trends. He described the press release as having the effect of an “atomic bomb” in that it stated that Callaghan had made a complaint about Trends to the Serious Fraud Office. In his submission Callaghan ought not to be able to rely upon Trends' insolvency without the Court first hearing the counterclaim which Trends has brought based upon the events just described. 
The evidence is not all one way though. Callaghan notes that in the draft report it prepared towards the end of 2014, Deloitte raised concerns about the company's solvency. It may be that further analysis of the dates when the other creditors' debts, that is beside the Callaghan debt, came into existence, will prove probative. An enquiry of that kind may show that the defendant was showing symptoms of illiquidity before Callaghan first withheld funding under the agreement. Solvency issues may also have surfaced before the explosive effect of the press release occurred. 
For present purposes, though, in my assessment there is potential validity to the case Trends puts forward about the cause of the insolvency. That is to say, if Callaghan was culpable in the sense that it was in breach of its contractual obligations or defamed the defendant in putting out a press release concerning the referral to the SFO, then that could be viewed as a circumstance which the Court should take into account. The question is whether the Court can take it into account at this stage, or whether it is a matter to be taken into account only if a liquidation proceeding were to be brought against Trends in the future. 
A possible application for appointment of liquidators is uncertain and is remote in time from the present. A number of legal steps would have to be taken before that point could be reached. That is to say, the way would only be clear for a liquidation proceeding to be commenced by any of the plaintiffs if they were successful in setting aside the compromise pursuant to s 232(3) of the Companies Act 1993. 
There is little doubt that if a liquidation proceeding were brought at that stage, close consideration would be given to the counterclaim which the defendant has brought against the plaintiffs. There is no doubt that the Court will not permit a creditor to proceed on a liquidation proceeding where it savours of unfairness or undue pressure. The paradigm case where that will be so is where there is a genuine and substantial dispute about the present existence of a debt: Exchange Finance Company Limited v Lemmington Holdings.3
| X |Footnote: 3
Exchange Finance Co Ltd v Lemmington Holdings (in liq) [1984] 2 NZLR 242Has Cases Citing which are not known to be negative[Green]  at 245. 
What will qualify as a set-off giving rise to a defence was discussed in the statement of the Court of Appeal in Covington Railways Limited v Uni Accommodation Limited:4
| X |Footnote: 4
Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272Has partially negative history or cases citing, but has not been reversed or overruled[Yellow]  at 274. 
“[The debtor] must be able to point to evidence before the court showing it has a real basis for the claimed set-off and that accordingly, the applicant's claim to be a creditor is, to the extent of the set-off, seriously in doubt. In the words of Buckley LJ in Brian Stone Finance Limited v De Vries (No. 2) [1976] CH 63,78, it must show that there are ‘clear and persuasive grounds’ for the set-off claim. ”
While that remark was made in the context of a statutory demand, there is no doubt that because a plaintiff seeking a liquidation order must establish that it is a “creditor”, the establishment of a serious basis for a set-off will be sufficient for a stay to be granted in the liquidation proceeding. Further, if the liquidation matter went to a substantive hearing, the claim for a liquidation order could be defeated with the defence being that the plaintiff is not a creditor who is entitled to an order. 
The circumstances of what will amount to an equitable set-off were discussed in the well known judgment of Grant & Anor v NZMC.5
| X |Footnote: 5
Grant v New Zealand Motor Corporation Ltd [1989] 1 NZLR 8Has partially negative history or cases citing, but has not been reversed or overruled[Yellow] 
The effect of these considerations is that it would not in fact prejudice Trends' position even if the application to set aside the compromise were to be scheduled some months in advance of the date for the hearing of the counterclaim. Assuming that the plaintiffs managed to negotiate the stage of obtaining an order setting aside the compromise thereafter, one or more of the plaintiffs would still need to institute liquidation proceedings. If those proceedings threatened to be heard before the counterclaim was in order for hearing, it would be open to the defendant to seek a stay or to defend the proceedings on the ground that there was an equitable set-off available. Of course, based upon the material before the Court at the present time, it is impossible to predict whether the Court would be likely to accede to a submission that there were substantial and convincing grounds for believing that there was an equitable set-off available to the defendant which would pro tanto extinguish the plaintiffs' claim, leaving it in a position where it had not established that it was a creditor of the defendant. 
Having regard to these considerations, there is no basis at this point for the Court to intervene to prevent the plaintiffs from proceeding with that part of the split trial that the parties have agreed to which relates to the application under s 232. There is no justification for an order which would require the plaintiffs to stand still, as it were, for perhaps a lengthy period while the defendant formulates its case for the counterclaim, before the application to set aside the compromise could be dealt with. 
Mr Crossland submitted that in fact the plaintiffs would not be materially delayed by the Court directing immediately consecutive hearings of the s 232 application and the counterclaim. He said that enquiries he had made with the schedulers indicated that a fixture for the hearing of the combined case, that is the application for orders setting aside the compromise and the counterclaim, could be made available as at September next year. The thrust of his submissions was that the hearing of the counterclaim would not be more distant in the future than the first available date for the hearing of the application under s 232. 
I do not accept those submissions. The application which the plaintiffs make is an originating application to be dealt with on affidavit evidence. It is procedurally a straightforward type of claim. A fixture for the application to set aside the compromise could be allocated as early as the first quarter next year, assuming a hearing duration of three days maximum. 
As to the estimate of hearing for September 2016 for the counterclaim, in my experience that is not a practical likelihood. Even if the case had progressed so far through the interlocutory path that the Court could be satisfied under r 7.6 that the proceeding “can be readied for hearing or trial”, then a fixture would still not be available before September 2016. But having regard to the fact that the counterclaim is not yet ready to be allocated a trial, there is real doubt that it will be heard before the end of 2016. 
These factors on their own show that the plaintiffs ought not to be delayed in progressing their application pursuant to s 232. 
However, there is an additional factor which is highly persuasive which supports my earlier conclusion. The application under s 232 is brought not just by Callaghan but by the other plaintiffs. They are not counterclaim defendants. The arguments which were mounted based on the counterclaim that Trends brings against Callaghan do not apply to the other plaintiffs. At the very least, they should be free to have their application under s 232 heard promptly. 
As well, it is not relevant to the present application to have regard to the fact that the defendant is not performing its obligations under the compromise. A decision was apparently taken to that effect by the administrator. Mr Crossland says that this is not a problem because any arrears, once paid if they have to be paid, can carry interest. I do not agree. It is likely that the creditors who supported the compromise took into account not just the fact that they might receive payment under the compromise that they might not otherwise get, but also that payments under the compromise represented a predictable flow of cash from the defendant. It is this latter advantage that they have lost because of suspension of the operation of the compromise. No attempt has been made to vary the compromise. It would appear that the defendant therefore is taking advantage of the compromise without, at the same time, discharging the burdens that were the price that it agreed to pay in return for the creditors accepting the compromise. 
There is no justification for delaying the claim under s 232. 
If the compromise is set aside and Callaghan proceeds with a liquidation application, it will be open to the defendant to seek a stay of that proceeding or, if the counterclaim is ready, to seek directions that the counterclaim be heard at the same time as the liquidation proceeding. The merits of Trends' position would then be ascertainable and the Court could, possibly, conclude that Trends has an equitable set-off which extinguishes the debt owed to Callaghan. That would then have the result of defeating any liquidation proceeding that Callaghan brought. 
Even if the Court were ultimately to permit a liquidation to proceed and an order were to be made, it would still be open to the liquidator to pursue the claims which are the subject of the counterclaim if it was perceived that there was merit in that course being adopted. 
In the case of the other plaintiffs, apart from Callaghan, there is still less reason why an order should be made deferring the hearing of the application which they have brought. 
By consent there is an order pursuant to r 10.4 separating the claim under s 232 and the counterclaim. I decline to make any additional order for immediately consecutive hearing of the s 232 application and the counterclaim. 
The plaintiffs, being the successful party in this proceeding, are entitled to costs on a 2B basis in accordance with r 14.2(a) of the High Court Rules. 
Leave is reserved to the parties to apply for further directions incidental to the orders made in this judgment. 
The parties should confer on the case management steps that are required to ready the two separate cases for hearing. They should file memoranda within 15 working days of the date of this judgment advising the Court on what matters have been resolved and, what if any, have not. I will then give consideration to further directions being made and the possible scheduling of a case management conference. 

See paragraph [30] below. 
Exchange Finance Co Ltd v Lemmington Holdings (in liq) [1984] 2 NZLR 242Has Cases Citing which are not known to be negative[Green]  at 245. 
Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272Has partially negative history or cases citing, but has not been reversed or overruled[Yellow]  at 274. 
Grant v New Zealand Motor Corporation Ltd [1989] 1 NZLR 8Has partially negative history or cases citing, but has not been reversed or overruled[Yellow] 

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