Public Trust v Silverfern Vineyards Limited [2014] NZHC 2341 (24 September 2014)

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UNDER	Part 18 of the High Court Rules, The Declaratory Judgments Act 1908, and The Companies Act 1993
BETWEEN	PUBLIC TRUST Plaintiff
AND	SILVERFERN VINEYARDS LIMITED Defendant

IN THE MATTER OF An application under s 232 of the Companies Act 1993 for order declaring creditor's compromise not binding on plaintiff

Hearing:	11 September 2014
Counsel:	J W A Johnson and M K Prendergast for Public Trust O Paulsen for Southland Building Society D Bullock for Silverfern Vineyards Limited
_Judgment:	_{24 September 2014}

PUBLIC TRUST v SILVERFERN VINEYARDS LIMITED [2014] NZHC 2341 [24 September 2014]

[1] On 28 February 2014 the defendant company (Silverfern) made a proposal to its creditors under pt 14 of the Companies Act 1993 (the Act). The plaintiffs, Public Trust and Southland Building Society (SBS), are creditors who voted against the proposal, which was approved by the requisite majorities (50 per cent in number and

75 per cent in value) of Silverfern’s creditors. Public Trust and SBS have issued proceedings challenging the approval of the compromise, and they now seek orders defining particular categories of documents which Silverfern must disclose in the discovery process.

[2] The proposal divided Silverfern’s creditors into two classes. Class 1 creditors were those holding personal guarantees given by Silverfern’s directors and shareholders, John and Rosemary O’Connor. There were six creditors listed in Class

[3] Public Trust and SBS were among the larger creditors in Class 1: Silverfern owed Public Trust $1,090,417.10, and it owed SBS $450,371.97. Three other Class

1 creditors were owed much smaller sums – Lee Salmon Long, Silverfern’s current solicitors, were owed $608.50, Silverfern’s former solicitors Morrison Kent were owed $6,000, and Silverfern’s chartered accountants KPMG were owed $621. Under the proposal, these five Class 1 creditors would each receive a dividend of

1.445 cents in the dollar, and on adoption of the proposal, they would be required to release Mr and Mrs O’Connor unconditionally from their obligations owed under (or in connection with) their personal guarantees.

[4] The only other Class 1 creditor was Crown Asset Management Ltd (CAML). The debt owed by Silverfern to CAML was said to be $6,873,450.70. Under the proposal, CAML was to receive nothing, and it also would be required to release Mr and Mrs O’Connor from their obligations under (or arising out of) their personal guarantees.

[5] Class 2 creditors were those who did not hold personal guarantees from Mr and Mrs O’Connor. There were only two Class 2 creditors, both being Trusts with which Mr and/or Mrs O’Connor had an association. The Oakbank Trust was owed

$3,285,286, and the Myoak Trust was owed $574,507. Mr O’Connor is a director of a company which is a trustee of the Myoak Trust. Under the proposal, these two trusts were to receive nothing. However, by arrangements made prior to the proposal being put to Silverfern’s creditors, the Myoak Trust agreed to take an assignment of the debt owed by the Class 1 creditor CAML, on the basis that it would pay to CAML over a period of time 1.445 cents in the dollar on the debt owed by Silverfern to CAML.

[6] The meeting of creditors was carried out by postal vote, in accordance with s 230(1) and Sch 5, cl 5(1)(c)(7) of the Act. Mr Hamish McDonald, a chartered accountant at KPMG, was authorised to receive and count the postal votes.

[7] By certificate dated 18 March 2014, Mr McDonald reported on the voting. Three Class 1 creditors, with debts valued at $6,880.071.50 (81.7 per cent of the total Class 1 debt) voted in favour of the proposal, while two creditors (Public Trust and SBS) voted against. There was one abstention. Both Class 2 creditors voted for the proposal.

[9] Under s 230(2)(a) of the Act, the result of the creditors’ approval of the compromise is that Public Trust and SBS are bound by its terms, unless the approval of the compromise is set aside by the Court or the Court makes an order under s

232(3) that Public Trust and SBS are not bound by the compromise. The effect of the compromise, if it stands, is that Public Trust will receive $15,865.57 out of its debt of $1,090,417, and SBS will receive $6,552.91 on its debt of $450,371.97. Both will lose their ability to claim against Mr and Mrs O’Connor under their personal guarantees.

[10] Public Trust and SBS issued these proceedings promptly after the approval of the proposal was notified to them. They challenge the validity of the provisions in the proposals which purport to release Mr and Mrs O’Connor from their guarantees, saying that a “compromise” as defined in s 227 of the Act, is a compromise between the company and its creditors. It cannot release third parties such as Mr and Mrs O’Connor, who are not the company and are not creditors. Public Trust also relies on the fact that it has obtained a judgment against Mr and Mrs O’Connor on their guarantees. It says that its rights against Mr and Mrs O’Connor under their guarantees have merged in that judgment, and the O’Connors’ liability under that judgment is not affected by the provisions in the proposal relating to their release from their guarantees.

[11] Public Trust and SBS also seek orders under s 232(3) of the Act that the proposal is not binding on them. They contend that there were material irregularities in obtaining approval of the compromise, including irregularities in the constitution of the classes of creditors and in the background material which was provided to creditors with the proposal. They say this background material was misleading in a number of respects, and that the compromise is unfairly prejudicial to them and other members of the Class 1 creditors’ group.

[12] The parties have agreed that tailored discovery under rr 8.8 and 8.9 of the High Court Rules is appropriate for the proceedings. They have also agreed on a number of the categories of documents which Silverfern is to disclose. However they have been unable to reach agreement on a number of categories which were proposed by Public Trust and SBS. Initially there were 13 such categories, but following the filing of amended statements of claim by Public Trust and SBS on

30 July 2014, a number of the disputed categories of documents have now been agreed. The number of disputed categories has now been reduced to seven.

the parties, the category is shown as “Accepted”. The seven items which are marked “Disputed” require direction from the court as to whether or not Silverfern is to provide discovery. In each case, there is an issue over whether the documents described in the disputed categories are relevant to issues in the litigation. In respect of disputed categories 9 and 10, there is also an issue as to whether it would be oppressive to Silverfern to order it to provide the documents requested.

1. Terms of engagement/trade of all Class 1 creditors with Silverfern	Disputed
2. Documents evidencing the debts said to be owed to each creditor by Silverfern including all invoices, statements and other such documents	Accepted
3. The guarantees provided to each Class 1 creditor by John O’Connor and Rosemary O’Connor	Accepted
4. The latest financial statements of Silverfern	Accepted
5. All documents relating to the compromise of the CAML debt and securities including proof of all payments made under the compromise	Accepted
6. The guarantee of Matariki Wines to CAML	Accepted
7. The trust deed of the Myoak Trust	Disputed
8. Voting papers of all creditors including evidence of the date they were received	Disputed
9. All trust deed and financial accounts of any trusts that the O’Connors have an interest in as settlor, appointor, trustees or beneficiary	Disputed

10. The latest financial statements of all companies that John and Rosemary O’Connor have any interest in as shareholders or directors	Disputed
11. All documents relating to the sale and transfer of shares in Silverfern from Mr O’Connor to Mrs O’Connor	Disputed
12. The cross-guarantee given by Silverfern to CAML	Accepted
13. Documents evidencing John and Rosemary O’Connors’ _{statements of assets and liabilities}	Disputed

[14] I have included in the above list the categories of documents on which the parties have recently reached agreement, as in some instances receipt by Public Trust and SBS of documents in an accepted category may affect their need for the documents in a related disputed category. (At the date of the hearing, Public Trust and SBS had not inspected the documents in the categories shown as “Accepted” in the above list).

Legal principles applicable to the claims by Public Trust and SBS for tailored discovery of the disputed categories

Discovery categories will reflect the issues and will only be ordered for the discovery of documents that are relevant to those issues. Except in exceptional circumstances, these issues will be discernible from a review of the pleadings. Discovery orders that are essentially of a “fishing” nature are not part of tailored discovery. Orders will not be granted where the categories do not relate to a pleaded relevant issue...

_{advancing a party’s case or damaging the case of its
adversary.}²_{However,
tailored}

discovery may be narrower or broader than the adverse documents test, and is specific to the particular case.

[17] “Fishing” will not be condoned, but may be permissible if the categories of documents sought can be assumed to relate to a matter at issue. It becomes impermissible when what is sought is not relevant to any pleaded cause of action, but might reveal material that could be the basis of a new head of claim.³

Category 1: Terms of engagement/trade of all Class 1 creditors with Silverfern

[19] In its submissions, SBS submits that these documents are relevant to the issue of whether Class 1 creditors were properly categorised. The documents are said to be relevant to the allegations on that topic at paragraphs [25.6] and [25.7] of SBS’ second amended statement of claim. In a nutshell, SBS says that the rights and interests of the Class 1 creditors were so dissimilar as to make it impossible for them to consult together with a view to their common interests. Particulars of that allegation were supplied in respect of the various individual Class 1 creditors as follows:

25.6.1 CAML should not have been included as a Class 1 creditor. By virtue of various settlement and assignment agreements entered into between CAML, the O’Connors and the Myoak Trust (in respect of which Silverfern asserts confidentiality and has required confidentiality undertakings to be given) CAML had agreed to release the O’Connors’ guarantees and assign the indebtedness of Silverfern to CAML together with the securities held for payment of Silverfern’s indebtedness. By reason of the foregoing CAML had no or insufficient legitimate commercial interest in the compromise to be

³Intercity Group NZ Ltd v Nakedbus NZ Ltd [2013] NZHC 1054 at [34], citing AMP Society v

25.6.2 Lee Salmon Long and KPMG are professional advisers who assisted Silverfern with the compromise and owed fiduciary duties to Silverfern thereby placing them in a position of conflict of interest.

25.6.3 Lee Salmon Long and KPMG provide ongoing professional services to Silverfern and therefore, unlike the other Class 1 creditors, have a real interest in the continued relationship with Silverfern and the O’Connors.

25.6.5 The debts said to be owed by Silverfern to CAML was overstated and no or insufficient attempt was made by the proponent of the compromise to provide an accurate estimate of the amount owing by Silverfern to CAML

[20] At para [25.7], SBS alleges that, had the group of Class 1 creditors been properly constituted, the voting thresholds in s 230 and sch 5 of the Act for approving the compromise would not have been reached as to number and/or value.

[21] Public Trust also asserts that these documents are relevant to its allegation that the compromise contained improperly constituted classes, the rights and interests of the Class 1 creditors being so dissimilar that they should not have been included in the same class.

[22] It is not presently apparent to me how these documents might advance the plaintiffs’ cases. Silverfern has now agreed to provide discovery of all documents in categories two and three (documents evidencing the debts owed to all creditors, including invoices, statements and other documents, and the guarantees given by Mr and Mrs O’Connor to Class 1 creditors), and the plaintiffs will have the documents in category five (documents relating to the compromise of the CAML debt and securities, including proof of all payments made under the compromise).

[23] The proposal described CAML as the holder of a second mortgage over various pieces of land owned by Silverfern. Its second mortgage is said to have secured not only loans from CAML to Silverfern, but also a guarantee given by Silverfern of the indebtedness of a related company, Matariki Wines, to CAML.

[24] Public Trust and SBS will receive a copy of that guarantee: it is the “Accepted” category 6 document. It seems to me that the nature of the indebtedness to CAML should be clear enough from the documents which will be available to Public Trust and SBS. It was a lender to Silverfern and the related company Matariki. Mortgage and General Security Agreements held by CAML over Silverfern and its land should be searchable, and the documents to be disclosed in categories 2 and 5 should establish the quantum of the CAML debt. It is difficult in those circumstances to see how access to CAML’s terms or conditions of engagement/trade is likely to add anything on the question of whether CAML was properly included in the Class 1 creditors’ group.

[25] The questions of whether CAML had a personal guarantee from the O’Connors, and whether the debt said to be owed by Silverfern to CAML was overstated (SBS second amended statement of claim, paras [25.6.4] and [25.6.5]), should be answered when the plaintiffs inspect the category 2, 3, and 5 documents.

[26] As for the terms of engagement of the other Class 1 creditors, it is difficult to see what they might add on the issue of whether the Class 1 creditors’ group was improperly constituted. Their relationships with Silverfern are obvious enough from the professional nature of the three firms involved, and it is clear that two of those creditors have had recent (and in one case current) relationships with Silverfern.⁴

What access to the formal terms of engagement of the professional firms might add

on the issue of whether it was impossible for Public Trust and SBS to consult with them in their common interests is not at all clear.

[27] Having regard to those considerations I am not satisfied that Public Trust and

_{SBS have shown that inspection of the terms of engagement/trade
documents for the}

⁴Lee Salmon Long as Silverfern’s current solicitors, and KPMG (Mr McDonald of that firm having certified the results of the voting on the proposal). It is not known whether the Class 1 creditor who abstained from voting was one of these firms, or whether it was Morrison Kent.

Class 1 creditors will or may advance the interests of Public Trust and SBS in the proceedings. I think it is at best premature to direct discovery by Silverfern of the category one documents. Accordingly, I make no order in respect of those documents.

[28] SBS says that the trust deed of the Myoak Trust is relevant to the questions of whether the proposal amounts to a confiscation of its rights, the interest the O’Connors have in the Myoak Trust, and whether the representation that there would be a zero return to creditors if the proposal was not passed was correct. The “confiscation of rights” argument is specifically pleaded at para [24.2] of SBS’ second amended statement of claim, and paras [25.5] and [25.10] of that statement of claim plead that the background letter was misleading in stating that the alternative to accepting the proposal was the liquidation of Silverfern and the bankruptcy of the O’Connors which would “result in a zero return to creditors”. Paragraph [25.10] specifically alleges that the statement in the background letter was misleading in that it did not state the nature of the O’Connor’s interest in (inter alia) the Myoak Trust. At para [26.7] of its second amended statement of claim, SBS pleads that the O’Connors’ have extensive business interests, including as shareholders of registered companies and as beneficiaries of trusts, from which they may have access to pay SBS and the other Class 1 creditors.

[29] In its statement of defence to SBS’ second amended statement of claim, Silverfern denies the para [25.10] allegations, including the allegation that the “background statement” did not state the nature of the O’Connors’ interest in the Myoak Trust. Silverfern went on the plead affirmatively that the letter sent to creditors with the proposal stated “an arrangement to purchase the CAML debt has been made by the Myoak Trust associated with John”.

[30] Given the specific denial of the allegation by SBS at para [25.10] of its statement of claim that the background material was inaccurate and misleading in part because it did not state the nature of the O’Connors’ interest in the Myoak Trust, and the acknowledgement in the background material that Mr O’Connor has an

“association” with the Myoak Trust, I am satisfied that the Myoak Trust deed is relevant and should be included in Silverfern’s discovery in the SBS proceeding if Silverfern has a copy in its possession or power. I make an order accordingly.

[31] Public Trust did not in its submissions ask for disclosure of the Myoak Trust deed under category 5. It appears to have elected to seek discovery of the document under disputed category 9. Under those circumstances I make no order for discovery of the Myoak Trust deed, under this heading, in the Public Trust proceeding.

Category 8: voting papers of all creditors including evidence of the date they were received

[32] SBS says that the voting papers are relevant to confirm how creditors voted and whether the categorisation of classes was correct. It refers to its pleading at para [25.7] of its amended statement of claim that, had the Class 1 creditors been properly constituted, the voting thresholds in section 230 and sch 5 of the Act for approving the proposal would not have been reached as to number and/or value.

[33] A copy of the standard form of voting paper sent to creditors with the proposal was attached to an affidavit of Mr Abdinor, a solicitor employed by SBS’ solicitors. It is a simple form, with provision for an individual to state his or her name and the creditor he or she represents, and to tick either “Agree” or “Disagree” to the proposal, complete the date, and sign the voting paper. The voting paper

stated in bold that it was to be returned no later than 4pm on the 14^thof March 2014

[34] There is nothing in the evidence to show that the completed voting papers will or might contain anything relevant to the question of whether the group of Class

1 creditors was properly constituted. It is known exactly which creditors were treated as Class 1 creditors, and the amounts of the debts held by those creditors will presumably be substantiated when the plaintiffs have discovery of the documents in category two.

[35] It was suggested at the hearing that some of the creditors may have made handwritten or other additions to the voting papers which they returned, but it seems

to me that that is purely speculative. And if any such additions or enclosures were made or sent, and they are relevant to the issues in the case, Silverfern’s solicitors will be aware of their client’s ongoing obligations under r 18.18(2) of the High Court Rules. If it becomes aware of any document that it is not required by an order for tailored discovery to disclose, but which adversely affects Silverfern’s case, the document must be disclosed.

[36] As for evidence of the dates on which the voting papers were received, there is presently no allegation in the pleadings that any votes were not submitted by 4pm on 14 March 2014 as required by the proposal. Mr McDonald has provided a certificate stating that the results of the counts required by sch 5, cl 7(5)(b) were as set out in his certificate, and there is presently no basis to think that his certificate may have been inaccurate. In the absence of any pleading of inaccuracy of that certificate, it seems to me that the request for these documents is a request for material that the plaintiffs hope will provide them with a new head of claim, and is thus in the “fishing” category referred to in Intercity New Zealand Ltd v Nakedbus

New Zealand Ltd.⁵I decline to direct Silverfern to include documents in this

Categories 9 and 10: All trust deeds and financial accounts of any trusts that the O’Connors have an interest in as settlor, appointor, trustees or beneficiary, and the latest financial statements of all companies that John and Rosemary O’Connor have any interest in as shareholders or directors

[38] Public Trust says that the background statements supplied with the proposal did not correctly state the interests of Mr and Mrs O’Connor in the compromise, as required by s 229(2)(b)(V) of the Act. In particular, the statement did not contain information regarding Mr and Mrs O’Connors’ interests in either the Oakbank Trust or the Myoak Trust and Myoak Holdings Ltd, who it was intended would take an assignment of any debt and securities held by CAML. The relevant pleading is at para [33] of Public Trust’s amended statement of claim.

[39] SBS refers to its pleading that the purported compromise amounts to a confiscation of its rights against the O’Connors (second amended statement of claim, para [24.2]), and that the background letter sent with the proposal was misleading in that it incorrectly stated that the alternative to accepting the proposal was the liquidation of Silverfern and the bankruptcy of the O’Connors’ which “will result in a zero return to creditors”. SBS also alleged failure to comply with s 229(2)(b)(V) of the Act, in that Silverfern failed to state the nature of the O’Connors’ interest in Oakbank Trust, the Myoak Trust, and Myoak Holdings Limited. SBS also relies on its pleading that the O’Connors have extensive business interests as shareholders of companies and/or beneficiaries of trusts from which they may have access to funds to pay SBS and other Class 1 creditors.

[40] Silverfern accepts that the plaintiffs have put in issue whether or not Mr and Mrs O’Connor can satisfy the personal guarantees they have given. It further accepts that it is arguable that that issue is relevant to the court’s discretion on the plaintiffs’ applications. What it does not accept, is that these documents are relevant to that issue.

[41] Silverfern says that, in terms of trusts associated with Mr and Mrs O’Connor, it is only fixed entitlements to payment under a trust that could be relevant to the allegation. Thus any role as appointor, settlor, trustee or discretionary beneficiary of a trust would not, in Silverfern’s submission, be relevant to any claim against them personally, and could not shed any light on the assets that would be held by Mr and Mrs O’Connor if they were adjudicated bankrupt.

[42] Silverfern makes the same submission in respect of the financial statements of any companies in which Mr or Mrs O’Connor may have an interest as director.

[43] It seems to me that the circumstances of this case, involving as it does the exoneration of Mr and Mrs O’Connor from any personal liability under their guarantees, calls for broad disclosure of all of their assets. And in my view both plaintiffs have sufficiently placed in issue in their pleadings the extent of the assets held by Mr and Mrs O’Connor.⁶

[44] I am not prepared to limit the disclosure to assets which would be available to the Official Assignee if Mr and Mrs O’Connor were to be bankrupted. If for example, the O’Connors were discretionary beneficiaries of a trust, perhaps with a reasonable expectation that funds would be made available to them from the trust for family or other reasons, I think it is arguable that the creditors’ views on the proposal might have been affected by knowledge of that discretionary trust. I accordingly direct that Silverfern’s tailored discovery is to include disclosure of all trust deeds and financial accounts of any trusts in which Mr or Mrs O’Connor has an interest as beneficiary (including as a discretionary beneficiary), which Silverfern may have in its possession or power. Disclosure is also to be made of the trust deed and latest financial statements for any trust in which Mr or Mrs O’Connor has any power of appointment of beneficiaries (again to the extent that such documents may be in Silverfern’s possession or power).

[45] I am not satisfied that a trust in which Mr or Mrs O’Connor has no ability to influence the distribution of assets from the trust should be disclosed, and accordingly I make no order in respect of any trusts which may fall within that description. Similarly, I see no basis for any order that disclosure should be made of the financial statements of companies in which Mr or Mrs O’Connor might be a director, without any shareholding. However, if and to the extent that Mr and Mrs O’Connor hold any shares in companies, Silverfern is to include in its discovery the latest financial statements for those companies which may be in its possession or power.

[46] In its statement of defence, Silverfern pleads that Mrs O’Connor resigned as a director of Silverfern on 7 February 2014. It says that a transfer of her shares to Mr O’Connor has been executed, and that the transfer is in the process of registration at the Companies Office.

[47] SBS says that the terms of the sale, and whether there may be funds for the payment of creditors, are relevant to the issues in the case. In particular, the issue of

whether the representation that there would be a zero return to creditors if the compromise was not passed was correct. Public Trust says that these documents are fundamental to advancing its case in respect of the compromise being void, and in particular on the question of whether there was any real alternative to the compromise to the creditors.

[48] Silverfern points out that it did not plead that there was a “sale” of the shares in question. It also says that, to the extent that the allegation was an affirmative allegation, in terms of the rules it is deemed to be admitted.⁷Silverfern also says that documents evidencing shareholdings and directorships are a matter of public record.

[49] The individual financial positions of Mr and Mrs O’Connor at the time of the proposal appear to be relevant to issues in the proceeding, and I propose to make the order sought in respect of disputed category number 13 (any documents in the possession or power of Silverfern evidencing Mr and Mrs O’Connors’ statements of assets and liabilities). If there were any proceeds of sale of Mrs O’Connor’s shares following the February 2014 transaction, those proceeds should be included within Mrs O’Connor’s assets in the category 13 discovery documents. (Even if Mrs O’Connor only received some promise of future benefit in exchange for the transfer of her shares, that promise would presumably have a value, and thus be an asset in her hands.)

[50] However it must still be the position that any documents Silverfern may have in its possession or power relating to the transfer of shares from Mrs O’Connor to Mr O’Connor will be relevant to the extent that they may show the value of any consideration received by Mrs O’Connor and/or the value of the shares transferred.

_{To that extent the documents in this category should be disclosed by
Silverfern.}

[51] It seems to me that the full extent of Mr and Mrs O’Connors’ assets must be relevant. An important element of the proposal was the proposition that creditors would receive nothing (or at least not as much as they would receive under the proposal) if the proposal did not meet with their approval and they proceeded to liquidate Silverfern and bankrupt Mr and Mrs O’Connor. The plaintiffs have sufficiently put in issue the extent of the O’Connors’ assets.

[52] Silverfern submits that the asserted relevance of this category derives from the statement in the background letter that Mr and Mrs O’Connor “have both provided statutory declarations showing little by way of assets”. It says that the plaintiffs have not specifically pleaded an allegation that the statutory declarations were false, and that as the statutory declarations have not specifically been put in issue, the documents evidencing those statements are not relevant. In the alternative, it submits that, if the court is minded to order discovery in respect of this category, the order should be limited to documents evidencing the personal financial position of Mr or Mrs O’Connor.

[53] I do not accept Silverfern’s submissions on this category. The accuracy or otherwise of what was said in the proposal about Mr and Mrs O’Connors’ ability to honour their guarantees is fundamental to the issues in the case. I accordingly direct that Silverfern is to include in its discovery all documents in this category which may be in its possession or power.

[54] The purport of the limitation proposed by Silverfern under this heading (the order should be limited to documents evidencing the personal financial positions of Mr and Mrs O’Connor) is not clear to me. Silverfern may apply by memorandum, to be filed and served within fourteen days, if any further directions are required in respect of documents in this category.

[55] SBS has sought indemnity costs under r 14(3)(b)(ii) and (iii). It contends that Silverfern has added to SBS’ costs by unnecessarily and without justification opposing the discovery orders SBS has sought.

[56] This is not an appropriate case for an order for increased or indemnity costs. The plaintiffs have only been partially successful in their arguments, and Silverfern was perfectly entitled to make submissions based on the parties’ pleadings and the

High Court of New Zealand Decisions

Public Trust v Silverfern Vineyards Limited [2014] NZHC 2341 (24 September 2014)