THE COMMISSIONER OF INLAND REVENUE V ATLAS FOOD AND BEVERAGE LIMITED AND ORS HC CHCH CIV-2009-409-001342

THE COMMISSIONER OF INLAND REVENUE V ATLAS FOOD AND BEVERAGE LIMITED AND ORS HC CHCH CIV-2009-409-001342 24 February 2010IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY CIV-2009-409-001342UNDER the Companies Act 1993 BETWEEN THE COMMISSIONER OF INLAND REVENUE Plaintiff AND ATLAS FOOD AND BEVERAGE LIMITED DefendantCIV-2009-409-001696AND CHAR CHAR LIMITED DefendantCIV-2009-409-001697AND YELLOW CROSS BREWING COMPANY LIMITED DefendantCIV-2009-409-001698EDWARD J SCHWARTZ INC LIMITED DefendantHearing: 30 November 2009 Counsel: K L Clark QC and P H Courtney for Plaintiff A J Forbes QC for Defendants Judgment: 24 February 2010JUDGMENT OF PANCKHURST JTable of ContentsPara NoIntroduction [1]The background [5]The compromise proposals [9]The 2 October creditors' meeting [14]Section 232 application: were the approvals affected by material irregularities? [17]Was there a majority of secured creditors in support of the Atlas proposal? [18]Should the Commissioner have been in a separate "preferred creditor" class? [24]Was the secured debt of Secured Finance Limited/Secured Lending Limited appropriately valued? [31]Should the votes of related parties in favour of the compromises be recognised? [48]Are the compromises unfairly prejudicial to the Commissioner? [54]Should this Court approve the four compromises pursuant to s236?The required approach [58]The revised compromise proposals [63]Have the statutory provisions been complied with and are the views of creditors known? [67]Might an intelligent and honest businessman reasonably approve the compromises? [75]Would an intelligent businessman view the payment of monthly contributions as secure? [80]Are the compromise proposals fair and equitable? [89]Conclusion [97]Introduction[1] The Commissioner has instituted liquidation proceedings against the four companies. It is not disputed that the companies are presently unable to pay their debts. Accordingly, in an endeavour to defend the liquidation proceedings each company promoted a compromise proposal pursuant to Part 14 of the Companies Act 1993. [2] A meeting of the creditors of all four companies was held on 2 October 2009. The compromise proposals made by Atlas Food and Beverage Limited (Atlas) and Edward J Schwartz Inc Limited (Schwartz) were approved by the creditors entitled to vote upon the proposals. However, the Commissioner challenges this outcome upon two grounds: (a) that there were material irregularities in relation to the approval of the compromises, and (b) that in any event the compromise is unfairly prejudicial to the Commissioner. If either ground is established the Court may order that the Commissioner is not bound by the compromise or make such other order as it thinks fit: s232(3). The application made by the Commissioner pursuant to s232 is the first aspect to be considered in this judgment. [3] The second aspect is an application made by all four companies for approval of compromises under Part 15 of the Act. Section 236 enables the Court to order that a compromise shall be binding on creditors, even where the compromise was not approved at a meeting of creditors convened for that purpose. In relation to Char Char Limited (Char Char) and Yellow Cross Brewing Company Limited (Yellow Cross) the s236 application seeking approval is made following non-approval of the proposal on 2 October. In relation to Atlas and Schwartz the s236 application is precautionary, in the sense that it provides a backstop if the Commissioner's s232 application is successful (on account of material irregularities or because the compromise is found to be unfairly prejudicial to the Commissioner).[4] It is convenient, therefore, to consider the s232 and the s236 applications sequentially. As will become apparent a number of aspects which require consideration in the former context are also relevant to determining whether the Court should approve one or more of the compromises pursuant to s236.The background[5] The sole current director of each of the companies is Mr David Henderson. The four are part of a group known as the Atlas Group, which includes two other companies not involved in this proceeding. Yellow Cross and Char Char are wholly owned subsidiaries of Atlas. Atlas holds 90% of the shares in Schwartz. [6] Schwartz Entertainment, Yellow Cross and Char Char operate restaurants and bars situated in the area known as SOL Square in Christchurch, while Atlas is a holding company. [7] At various dates in June – July the Commissioner filed the four liquidation proceedings. The amounts then owing to the Commissioner were: Atlas $110,799.62 Schwartz Entertainment $51,683.62 Yellow Cross $106,579.32 Char Char $25,532.28 These amounts have increased somewhat on account of penalties, use of money interest and court costs. In relation to Atlas the core debt is a GST liability, while in relation to the other companies the debt is mainly GST related but includes a component for PAYE and other employee deductions. [8] Statements of defence were filed by the companies, save for Atlas which was forced to seek an extension of time to file its statement of defence. That issue has not been finally resolved. In any event, the statements of defence acknowledged the inability of the companies to pay their debts, but claimed that liquidation orders should not be made until compromise proposals had been put to creditors for their approval. The liquidation proceedings therefore await determination of the present applications.The compromise proposals[9] The compromise proposal for Atlas recorded that the proponent was the board of directors of the company, being Mr Henderson to whom any inquiries concerning the proposal should be directed. The terms of the proposed compromise were as follows:3. a. Subject to paragraphs c and d below, each Class 1 (unsecured) creditor will receive the full amount of their debt by way of consecutive monthly payments on the last Friday of each month, commencing on Friday 30 October 2009; such payments to be paid out of a pool of $1,600 per month paid by the Company for this purpose and paid to the Class 1 creditors on a pro-rata basis. b. The Commissioner of Inland Revenue, one of the Class 2 creditors, will receive the full amount of its debt by way of consecutive monthly payments of $3,600.00 on the last Friday of each month commencing on Friday 30 October 2009. c. Parties related to the Company, as listed in paragraph 8 below, excluding Anthem Holdings Limited (in rec) and Montecristo Construction Company Limited (in liq), have agreed not to participate in any payments to creditors under this proposal. d. Brenton Hunt has agreed not to participate in any payment to creditors under this proposal. e. No interest shall be payable on any of the Class 1 debts or the debt to the CIR as listed. f. The other Class 2 (secured/preferred) creditors will not participate in the proposed payments but will otherwise retain their rights under their securities. g. Upon completion of the payments in paragraph b above, those monthly payments will then be paid to the pool for payments under paragraph a. 4. The Company is presently unable to pay its debts. The director of the Company believes there is no prospect of any return to Class 1 (unsecured) creditors in the event of the liquidation of the Company and there will be a substantially reduced return to secured creditors, because of the loss of goodwill of the Company's subsidiaries, in the event of its liquidation. 5. The funds to satisfy the compromise proposal are to come from the trading activities of the Company and its subsidiaries. 6. The proposal is conditional on the approval of all other classes of creditors. 7. If the compromise is approved each Class 1 creditor other than those excluded as per 3c and 3d above, and the CIR will receive all of the debt that they are owed and will not be able to take any other action against the Company.8. The director of the Company has an interest in the following creditors on the attached list: Anthem Wine Company Limited, Anthem Holdings Limited (in rec), Livingspace Properties Limited, Montecristo Construction Company Limited (in liq), Property Ventures Limited, RFD Investments Limited, and SOL Management Limited.Two further terms of the proposal recorded that, subject to the approval of each class of creditors, the compromise would be binding on all creditors pursuant to s230 of the Act and that the compromise may subsequently be varied pursuant to Part 14 of the Act. [10] I note with reference to para 3(b) of the proposal that the Class 2 group of creditors, being secured or preferred creditors, comprised the Commissioner and Secured Finance Limited/Secured Lending Limited in relation to a debt of $3.6m. I shall return to the significance of this debt shortly. It is a contingent debt, where the benefit of the security has not been waived. Hence, para 3(b) identified the Commissioner as the only Class 2 creditor to whom monthly payments were required. [11] The Schwartz proposal was broadly similar to the Atlas one. The payment proposals in para 3 were:a. Subject to paragraph c below, each Class 1 (unsecured) creditor will receive the full amount of their debt by way of consecutive monthly payments on the last Friday of each month, commencing on Friday 30 October 2009; such payments to be paid out of a pool of $1,200.00 per month paid by the Company for this purpose and paid to the Class 1 creditors on a pro-rata basis. b. Each Class 2 (secured/preferred) creditor, excluding DB Breweries Limited, Secured Finance Limited and Secured Lending Limited, will receive the full amount of their debt by way of consecutive monthly payments on the last Friday of each month, commencing Friday 30 October 2009, such payments to be paid out of a pool of $2,000.00 per month paid by the Company for this purpose and paid to those Class 2 creditors on a pro-rata basis.[12] There were five secured creditors listed in Class 2. Those to receive payment in terms of para 3(b) of the proposal were the Commissioner, Equipment Finance Limited and Southern Ice Distributors Limited in relation to a total debt of almost$100,000. DB Breweries Limited and Secured Finance Limited/Secured Lending Limited were shown to be owed $1.11m and $3.6m, respectively. [13] In an affidavit dated 25 November sworn in anticipation of this hearing, Mr Henderson deposed that the compromise proposals contemplated payment of all creditors, secured and unsecured. With regard to secured creditors his intention as the proponent was that their rights under their security would remain intact. Mr Henderson said "if that has not previously been made clear, then I do so now, on behalf of the four applicant companies".The 2 October creditors' meeting[14] Clause 5(2) of schedule 5 to the Act prescribes in relation to voting upon a compromise proposal that a resolution is adopted if a majority in number representing 75% in value of the class of creditors vote in favour of the resolution. Votes may be cast in person or by proxy. [15] The votes of individual creditors were assessed on a dollar basis, that is if creditor A's debt was $100, his vote registered as 100. [16] The voting results were as follows: Atlas Class 1 – unsecured: Number of creditors 21 Total amount of the debts $983,950 Number in favour 18 (85%) Value in favour $904,744 (92%) Class 2 – secured: Number of creditors 2 Total amount of the debts $3,698,999 Number in favour 1 (50%) *Value in favour $3.6m (97%) Schwartz Class 1 – unsecuredNumber of creditors 22 Total amount of the debts $1,310,405 Number in favour 16 (72%) Value in favour $1,229,434 (95%) Class 2 – secured Number of creditors 3 Total amount of the debts $3,651,704 Number in favour 2 (66%) Value in favour $3,606,023 (98%)* There is a dispute concerning the number of secured creditors of Atlas who voted in favour of the proposal. I shall return to this issue shortly. The percentage results have been rounded down – which in the event makes no difference to the effective outcomes.Section 232 application: were the approvals affected by material irregularities?[17] Broadly speaking the irregularities asserted by the Commissioner are of two kinds. First Mrs Clark QC argued that the Atlas compromise was not approved by the requisite majority of secured creditors, in that, properly analysed, there was one vote for the compromise and one against. Hence, there was no "majority in number" in relation to the secured class. The second kind of alleged irregularity concerns the classification of creditors into the two groups – secured and unsecured. The complaints are: (a) that the Commissioner as a preferred creditor should not have been placed with secured creditors but in a separate class, (b) that a contingent creditor (Secured Finance Limited/Secured Lending Limited) should have been placed in a separate class (not the secured class); or at the very least the value of the debt should have been corrected and/or discounted in light of the contingencies, with the result that a $3.6m vote skewed the relevant percentages, and (c) that related parties who were not to receive anything under the compromise nonetheless voted in the unsecured creditors class when they should have been separately classified or should at least have had their votes discounted.Was there a majority of secured creditors in support of the Atlas proposal?[18] To recap the secured class in relation to the Atlas proposal comprised the Commissioner with a debt of $110,799 and Secured Finance Limited/Secured Lending Limited with a debt of $3.6m. Mrs Clark submitted that the vote was one in favour, one against, and therefore there was no majority. Mr Forbes QC argued that Secured Lending and Secured Finance were separate companies and separate lenders and had two votes, albeit the value of their votes was a single debt of $3.6m. [19] In an affidavit sworn by Mr Henderson on 25 November he deposed that clause 5(2) of the Fifth Schedule refers to the number of creditors (not the number of debts) and that in his opinion Secured Lending Limited was at all times acting as agent for Secured Finance Limited. On this basis each company was said to enjoy a vote. [20] In a written submission filed in reply the Commissioner made the point that Mr Henderson's opinion as to the number of votes was of little worth, regardless that he chaired the 2 October creditors' meetings. Instead, two circumstances were advanced as determinative. These were that the loan documents referred to Secured Finance Limited and Secured Lending Limited as "the debtor" and that only one voting paper was submitted by Secured Lending Limited at the creditors' meeting. [21] The commercial loan facility agreement between Secured Finance Limited/Secured Lending Limited and Te Anau Ventures Limited, as borrower, is an exhibit to Mr Henderson's affidavit dated 25 November. So too are various interlocking all-obligations guarantee and indemnity agreements whereby Mr Henderson and a raft of companies (including the four Atlas companies) guarantee the indebtedness of Te Anau Ventures Limited as a principal debtor of the lender. To my mind the important point for present purposes is that the loan agreement itself provides at the outset: "SECURED FINANCE LIMITED and SECURED LENDING LIMITED at Christchurch (together both at Christchurch 'the Lender')". [22] Consistent with this description of a lender, singular, a single vote was cast by Secured Lending Limited in relation to the total contingent debt. DespiteMr Henderson's affidavit assertion that Secured Lending Limited was acting as agent for Secured Finance Limited, and that these companies enjoyed a separate vote, I do not accept this. I consider that the argument for the Commissioner is correct. [23] Paradoxically, this conclusion may be affected by the Commissioner's next argument, namely that he should have been placed in a separate preferred creditor class and not viewed as a secured creditor. If this argument is sustained, the secured class in relation to the Atlas proposal comprised only Secured Finance/Secured Lending and their single vote would still have carried the day.Should the Commissioner have been in a separate "preferred creditor" class?[24] The argument for the Commissioner was that he is an unsecured preferential creditor of the four companies. His preferential status is conferred by statute for public interest reasons, with the result that he is an involuntary creditor. As I understood it the distinction sought to be drawn was that unlike general unsecured creditors, who took the commercial risk inherent in granting credit, the Commissioner had no choice in the matter, indeed his essential duty was to collect over time the highest net revenue practicable within the law. Further, counsel submitted that the rights which the Commissioner obtained and forewent under the compromises were different to those of secured creditors. [25] Mr Forbes contested this analysis. By reference to Schedule 7 of the Act he argued that in relation to preferred core debt the Commissioner was effectively in the same position as a first ranking secured creditor in relation to the companies' accounts receivable and inventory. Hence, it was said, the rights of secured creditors and the rights of the Commissioner were not so different as to mean they could not consult meaningfully with a view to their common interest. A submission was also made to the effect that were the Commissioner placed in a separate class, as a preferential creditor for core tax debts, this would give in effect a power of veto in relation to any compromise proposal.[26] The relevant principles to be applied in assessing whether classes of creditors have been appropriately fixed were not in dispute. In Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 (CA) Bowen LJ said at 583:The word "class" is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the Court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term "class" as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.Earlier the Judge noted that each class of creditor needed to be defined with care, otherwise the power of the majority to exercise formidable compulsion upon a would be dissentient was considerable. If not appropriately constructed, the majority of a class could override the legitimate interests of others possessing different rights. Therefore, to the extent possible, a class should be bound by a community of interest. [27] In UDL Argos Engineering & Heavy Industries Limited v Oi Lin (2001) 3 HKLRD 634 Lord Millett reviewed the approaches to this question throughout the common law world and noted that there was a notable degree of consistency. After reference to various cases he derived a number of principles, including at 647:The test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interests not derived from such legal rights. The fact that individuals may hold divergent views based on their private interests not derived from their legal rights against the company is not a ground for calling separate meetings.[28] Lord Millett further identified the need to ensure that a vote at a creditors' meeting fairly reflected the views of the creditors concerned. He continued at 648:To this end it [the Court] may discount or disregard altogether the votes of those who, although entitled to vote at a meeting as a member of the class concerned, have such personal or special interests in supporting the proposals that their views cannot be regarded as fairly representative of the class in question.To my mind the approach in New Zealand is no different: see In re C M Banks Limited [1944] NZLR 248 (SC) and Wilder Transport Limited v Commissioner of Inland Revenue (1999) 19 NZTC 15,120 (HC).[29] The priority of preferential claims in the event of a liquidation are defined in Schedule 7 of the Act. In broad terms clause 1 provides that the priority is expenses of the liquidation; unpaid wages or salary of employees, including amounts deducted by the company but not applied to satisfy the employees' obligations (child support, student loan payments etc); claims of buyers under the Layby Sales Act 1971; compromise costs not met by the company; and, finally, unpaid GST, PAYE and withholding tax retained or deducted by the company and not paid to the Revenue. Clause 2(1)(b) provides that in so far as the assets of the company available for payment of the preferential claims are insufficient to meet them such claims have priority over the security interest of other claimants to the company's accounts receivable and its inventory. [30] I find it difficult to assess the value of a prior position in relation to the receivables and inventories of these companies. Atlas, as the holding company, was unlikely to have significant stock or receivables; and I would have expected the three bar/restaurant companies to operate on a cash basis. Their stock, liquor in particular, would ordinarily be subject to tight ownership provisions in favour of the supplier. This indicates that the Commissioner's prior claim was of limited significance or value. This in turn suggests that he lacked any community of interest sufficient to be grouped with secured creditors. If placed alone in a preferential class the Commissioner would have recorded a no vote. I am at least tentatively of the view that the submission for the Commissioner is right – but as will become apparent there was material irregularity in other respects in any event.Was the secured debt of Secured Finance Limited/Secured Lending Limited appropriately valued?[31] This irregularity argument had two aspects. The first was that because of the contingent nature of the debt the lender should have been in a separate class and not treated as an ordinary secured creditor. Secondly, the Commissioner contended that the debt was overstated at $3.6m (as the correct amount due was $1,585,488) and that in any event the debt should have been discounted to reflect the various contingencies. I shall first refer to the evidence relevant to this aspect.[32] In relation to both the Atlas and the Schwartz proposals the Secured Finance/Secured Lending secured debt was shown as $3.6m, an amount which dominated the secured creditor class in terms of value. Inclusion of the debt at this value meant that the Secured Finance/Secured Lending vote would inevitably be decisive. [33] In anticipation of the creditors' meeting the Commissioner wrote to Mr Henderson on 28 September 2009 stating that in a number of respects he considered creditors had been misclassified. With reference to the secured creditor class the Commissioner first objected to his classification as a secured creditor and further stated that he had "doubts as to the validity of the secured status" of the Secured Finance/Secured Lending debt. [34] Earlier, following receipt of the compromise proposals, the Commissioner invoked his power to require the provision of information and documents. Secured Lending/Secured Finance was required to provide information pertaining to the $3.6m debt. [35] In due course, under cover of a letter dated 7 October 2009 Secured Lending/Secured Finance supplied certain information in relation to the indebtedness of the four Atlas companies. The letter included this:I have asked our solicitors to dig out the various security documents relating to the above entities [the four companies] which guarantee the loan obligations of Te Anau Ventures Limited (in liq) and RFD Finance Limited. These documents are attached. I attach copies of loan statements relating to Te Anau Ventures Limited (in liq) and RFD Finance Limited. ... Please note that, whilst we see no downside from Secured's perspective in the compromise proposals (hence our vote in favour), we have queried Cousins Associates and the Companies as to the figure of $3.6m and await a conclusive response, although we are now aware the meeting proceeded on the basis of the $3.6m (we could not attend the meeting). The amount set out in the attached statements are the amounts owing from our perspective but the other obligations covered possibly account for the difference and we will confirm as soon as possible.[36] The attached loan statements showed that Te Anau Ventures Limited owed $1,585,428 as at September 2009. The statement detailed the makeup of this figure commencing from inception of the loan. A second statement showed that RFD Finance Limited owed $159,189 as at September 2009. Hence the total indebtedness was about $1.745m. [37] The receipt of this information prompted a further demand from the Commissioner for clarification of the position. On 13 October 2009 the solicitors for the four companies (Cousins & Associates) were required to explain the secured creditor amount of $3.6m used in relation to the compromise proposals. Similar demands for information were made to each of the four companies. [38] On 5 November Mr Henderson swore an affidavit in which he deposed at para 33 with reference to the $3.6m contingent liability:I now accept that this sum was in error in that it included the amount of approximately $1.8m being a sum owed by Elgin Investments Limited to RFD Investments Limited (both companies associated with myself), over which Secured Finance Limited and Secured Lending Limited had taken security by way of an assignment of the debt but which was not, in fact, an additional debt owed to Secured Finance Limited and Secured Lending Limited. The correct amount, excluding this debt, was $1,744,618. However, if this amount had been used, it would not have altered the outcome of the Schwartz and Atlas creditors' meetings ...[39] Mr Henderson added that the indebtedness to Secured Finance/Secured Lending should have included a loan to Kapiti Ventures Limited of $6m and fees owed by the Taurus Group Limited of $231,912. The assertion was that the Atlas Group companies were also contingently liable for these further sums by virtue of a deed of indemnity concluded in November 2008. [40] This development prompted a further affidavit from Mr Fraser Hawkins, who was responsible for the earlier demands for information on behalf of the Commissioner. He deposed that he had considered the November 2008 deed of indemnity, and associated documentation but could discern no basis upon which the Atlas companies guaranteed the indebtedness of Kapiti Ventures Limited and of the Taurus Group Limited to Secured Finance/Secured Lending.[41] On 25 November Mr Henderson swore a further affidavit to which were annexed additional security documents. On the basis of these Mr Henderson said that he was advised that through a chain of inter-company guarantees the net "practical effect" was that Atlas, Schwartz, Yellow Cross and Char Char were guarantors of indebtedness of Kapiti Ventures Limited and the Taurus Group Limited. Mr Henderson also said that "if anything" the contingent liability of the four companies to Secured Finance/Secured Lending was significantly understated at the figure of $3.6m used in the compromise proposals. [42] In my view the state of the evidence is unsatisfactory. When the Commissioner challenged the contingent liability figure of $3.6m, a back-down resulted. A corrected figure of $1.745m was supplied by Secured Finance/Secured Lending. Then, it was suggested that the four companies also guaranteed the indebtedness of Kapiti Ventures Limited and the Taurus Group Limited to the same lender. This assertion was supported by the production of a number of inter- company deeds of indemnity or all obligations guarantees which are said to require the Atlas companies to guarantee or indemnify Secured Finance/Secured Lending for any indebtedness of Kapiti Ventures Limited and the Taurus Group Limited. Mr Henderson deposes that he has been "advised" that this is the end effect of the inter-company security arrangements. The source and content of this advice is not disclosed. [43] I consider there are two further problems. There is no explanation why the indebtedness of Kapiti Ventures Limited and the Taurus Group Limited was not brought to account earlier. Secondly, Secured Finance/Secured Lending as lender, has not confirmed the $6m and $231,912 amounts. This was desirable if not essential, given that the initial $3.6m figure was discredited soon after the creditors' meeting. In any event, the fact is that Secured Finance/Secured Lending was presented at the creditors' meeting as a secured creditor on the basis of the amounts said to be owed by Te Anau Ventures Limited and RFD Finance Limited. In the present context it was not appropriate to assert a much increased contingent liability referable to different borrowing companies after the Commissioner challenged the initial claim.[44] Reverting to the revised figure of $1,585,428 owed by Te Anau Ventures Limited to Secured Finance/Secured Lending, Mr Hawkins in an affidavit dated 16 October 2009 questioned whether this indebtedness was not adequately secured by a first mortgage with a priority sum of $1.9m plus interest in any event. He identified 20 certificates of title secured under the mortgage which properties, on the basis of information earlier supplied by Mr Henderson in support of an instalment arrangement sought on behalf of Te Anau Ventures Limited, had a value in excess of $2m. Mr Hawkins therefore contended that the indebtedness of Te Anau Ventures Limited was adequately secured under the mortgage. There was no response to this contention on the part of the four companies. Instead, the focus moved to the assertion that the Atlas Group companies in one way or another guaranteed the indebtedness of other related entities. [45] Where a debt is contingent that fact should be revealed and the contingent creditor may need to be placed in a separate class, or at least their vote may need to be discounted to recognise the realities of the situation. These principles were considered by Thomas J in Re Audax Developments Limited (in rec) (1990) 5 NZCLC 66,798 (HC) at 66,803. The rationale for these requirements is the need to ensure that a class of creditors is bound by a community of interest; as previously discussed (see [26]-[28]). [46] In relation to Atlas there were only two secured creditors, both of whom voted, and the vote of Secured Finance/Secured Lending represented 97% in value. In relation to Schwartz there were five secured creditors of whom three voted at the meeting, with Secured Finance/Secured Lending's $3.6m vote representing 98% in terms of value. These figures speak for themselves. In my view the Secured Finance/Secured Lending vote dominated the secured class in relation to both proposals, when in reality it was overstated by over 50% and when in addition the contingencies required proper evaluation. On the basis of the evidence adduced on behalf of the Commissioner it is probable that neither Atlas nor Schwartz was at risk under the guarantee at least in relation to the sum of $1,585,428 owed by Te Anau Ventures Limited (see [43]).[47] For these reasons I am of the opinion that the Secured Finance/Secured Lending vote should at least have been discounted to a major extent. The unsatisfactory state of the evidence makes it difficult if not impossible to establish the amount of the required discount. Material irregularity is established.Should the votes of related parties in favour of the compromises be recognised?[48] The factual background is not in dispute. In relation to Atlas the unsecured class included five related companies who voted in favour of the compromise, but who had agreed not to receive monthly payments under the proposal (see para 9, clause 3(c) of the proposal). These five entities held almost 74% of the votes in class 1 and accounted for much the greater part of the value in favour i.e. almost 74% of 92%. In relation to Schwartz seven of the 16 entities who voted in favour of the proposal were related parties who had agreed not to receive monthly payments. Their vote represented 82% out of the 95% value vote in favour. [49] The Commissioner argued that either the related parties should have comprised a separate class, or their votes should have been discounted or disregarded. Mr Forbes submitted that, although a related party might be said to be in a different situation to other unsecured creditors, this was not the case where the related party was not to receive monthly payments. The contention was that non- participation in the proposed benefits of the compromise placed the related parties in a position where they could evaluate the interests of other unsecured creditors and vote with those interests in mind. [50] I do not accept counsel's argument. The essential issue which unsecured creditors were required to confront in assessing the compromise proposals was whether it was in their interests to accept a time payment scheme, or whether the companies should be placed in liquidation and their affairs investigated. Related parties who were not to receive monthly payments had no interest in the payment proposal, including whether it was secure or not. There was nothing in it for them. The related parties who voted in favour of the compromise must, I think, have been motivated to ensure that the companies were not placed in liquidation. Indeed, theappearance is that the related parties were included in the unsecured class of creditors in order to ensure that the 75% vote in favour was secured. [51] In relation to Atlas, without the related party vote in favour of the compromise the percentage in value in favour would have been about 61%. With regard to Schwartz without the related party vote the total in favour by value would have been about 57%. I regard the inclusion of related parties in the unsecured classes as a material irregularity. [52] The relevant principles were aptly described by Street J In Re Jax Marine Pty Limited (1967) 1 NSWR 145 (SC) at 148:The test is ... whether or not the persons who, prima facie, appear to constitute the class of unsecured creditors should be dissected into separate classes by reason of some particular matter so affecting the rights of some as to render it impossible for them to pursue their own interests concurrently with their participating in the pursuit of the interests of the class in which they appear to be members. ... Quite frequently it is necessary to discount, even to the point of discarding from consideration, the vote of a creditor who, although a member of the class, may have such personal or special interest as to render his view a self-centred view rather than a class-promoting view. (emphasis added)The application of these principles supports the conclusion which I have reached. [53] The untrammelled findings of material irregularity under the last two headings are necessarily decisive. The s232 applications are granted in relation to Atlas and Schwartz.Are the compromises unfairly prejudicial to the Commissioner?[54] In addition to material irregularity in obtaining approval of a compromise s232(3)(c) provides that a creditor who voted against the compromise and who maintains its terms are "unfairly prejudicial to that creditor" may also seek an order that he is not bound by its terms.[55] In the alternative the Commissioner also seeks to invoke this jurisdiction. He does so on the grounds: (a) that the timeframes for payment of both the preferential debts and the unsecured debts of Atlas and Schwartz are unacceptably long; (b) that it is unlikely periodic monthly payments due under the proposal will continue to be made over the required period; (c) that the compromises have the effect of removing the Commissioner's preferential status in relation to core tax debts, which status is statutorily conferred in the public interest and should not be lightly taken away; (d) that the terms of the compromises purport to "illegally contract out" of the statutory regime by which interest and penalties on overdue tax debts are imposed, notwithstanding the Commissioner's obligation to assess and collect these amounts, and (e) that the terms of compromise are of such a nature as to be irreconcilable with the Commissioner's paramount obligation to uphold the integrity of the tax system. [56] These arguments raise issues which are equally relevant in the context of the s236 applications made on behalf of each of the four companies. The submissions of counsel on both sides reflected this reality. The arguments advanced by the Commissioner that the Atlas and Schwartz compromises were unfairly prejudicial on him were treated as equally relevant in the s236 context. Mr Forbes likewise responded to the s232(3)(c) application by reference to his submissions in support of the s236 applications. [57] For the reasons already given I am satisfied that material irregularity in relation to approval of the Atlas/Schwartz compromises has been shown. On that ground the Commissioner cannot be held to the terms of those compromises. Ideally, it would be preferable to also consider the unfair prejudice ground on a stand-alone basis, but in view of the crossover between the respective applications I propose to consider matters in the s236 context.Should this Court approve the four compromises pursuant to s236?The required approach[58] Section 236(1) provides:Approval of arrangements, amalgamations, and compromises(1) Notwithstanding the provisions of this Act or the constitution of a company, the Court may, on the application of a company or any shareholder or creditor of a company, order that an arrangement or amalgamation or compromise shall be binding on the company and on such other persons or classes of persons as the Court may specify and any such order may be made on such terms and conditions as the Court thinks fit.[59] Before an approval application is considered the Court may pursuant to subs 2 direct that notice of the application be given to persons affected, direct the holding of a creditors' meeting, require that a report on the compromise be prepared by an expert and may also direct who is entitled to be heard in relation to the application. In addition, s237 enables the Court in approving a compromise to impose terms and conditions considered necessary or desirable to give effect to the compromise. [60] Section 236 is a new provision. Its predecessors, s159 of the Companies Act 1933 and s205 of the Companies Act 1955, only authorised the Court to sanction a compromise where a majority in number representing 75% in value of creditors had approved the terms. [61] The new s236 was extensively considered by the Court of Appeal inWeatherston v Waltus Property Investments Ltd [2001] 2 NZLR 103 (CA). The case concerned an amalgamation of 29 companies, not a compromise. Waltus invested in commercial property. Shareholders held units in an individual company which in turn owned a commercial property. The amalgamation proposal envisaged the existence of a single new holding company, owned by existing shareholders, who would hold shares in it of proportionate value to their previous investment. Waltus proceeded under s236 and directions were made requiring shareholders' meetings to be held. The amalgamation proposal was approved, save in relation to two of the 29 companies.[62] Although the circumstances of Waltus were entirely different to the present case, I consider that a lengthy extract from the judgment of the Court given by McGrath J is worth quoting in full:The discretion under s 236[31] When read in conjunction with s 238, which expressly indicates that the Court may approve an amalgamation under Part XV even though it could be effected under Part XIII, it is plain that the legislature intended that under the Part XV procedure the Court should have a broad discretion, limited only by the policy and purposes of the Act. The scope of the power of the Court under s 236 is to be considered in that light. [32] The principles that the Court applied in deciding whether or not to sanction an arrangement pursuant to s 205 of the 1955 Act were stated by Smith J in Re C M Banks Ltd [1944] NZLR 248 at p 253 as follows:The duty of the Court is to see (1) that there has been compliance with the statutory provisions as to meetings, resolutions, the application to the Court, and the like: (2) that the scheme has been fairly put before the class or classes concerned; and that if a circular or circulars have been sent out, as is usual, whether before or after the making of the application to the Court, they give all the information reasonably necessary to enable the recipients to judge and vote upon the proposals; (3) that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and (4) that the scheme is such that an intelligent and honest man of business, a member of the class concerned and acting in respect of his interest, might reasonably approve.Of these, the first test, that the statutory requirements have been met, is now to be read in light of the very broad procedural powers given to the Court by Part XV. The Court is of course likely to continue to follow the practice suggested by the Act of directing that meetings be held of shareholders or creditors to consider and approve the proposal. In that context the second and third tests in Re C M Banks will continue to apply. [33] The fourth test was the subject of comment in Suspended Ceilings (Wellington) Ltd v Commissioner of Inland Revenue (1997) 8 NZCLC 261,318 (CA), both in the majority judgment of Henry and Keith JJ and the minority judgment of Thomas J. The case concerned an appeal against the refusal of approval of a unilateral proposal by a debtor company seeking to have a single unwilling creditor bound to the "compromise" of a debt. In that context the majority doubted that its duty was to see that the scheme was such that an intelligent and honest person of business, acting in his or her own interest, might reasonably approve in terms of the fourth test in C M Banks Ltd. The majority in Suspended Ceilings said at p 261,321:We are inclined to the view that an applicant under s 236 should at least satisfy the Court that it would be unreasonable not to make the order sought. There is no statutory threshold which an applicant needs to overcome before approval can be sought, and it seems to us that to enquire merely whether an intelligent and honest business person might reasonably approve is, or may be, an inadequate safeguard for interests which oppose the application. The present case is an example. The compromise is between the company and the Commissioner, and involves no other person or class of persons. Even if the compromise was one which an intelligent and honest business person could reasonably approve, it may also be one which could reasonably be rejected by that hypothetical person. If opposition is based on reasonable grounds, it isdifficult to see why the compromise should nevertheless be forced on an opponent. It is unnecessary however to reach a final decision on this issue, ...[34] The present decision concerned a corporate restructuring, involving application for approval of an amalgamation under s 236 rather than for orders binding a creditor to a company's unilateral proposal to compromise a debt for a sum less than the amount. The higher test of commercial reasonableness suggested by the majority in Suspended Ceilings may not be pertinent beyond its particular context. [35] In Canada, in the context of legislation also giving the Court broad power in respect of procedure and practice to approve a proposed arrangement, the test of the intelligent and honest business person is supplemented by consideration of whether the arrangement is fair and equitable. (Re Canadian Pacific Ltd (1990) 73 OR (2d) 212 which draws on dicta of Bowen LJ in Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213. See also Fraser and Stewart,Company Law of Canada (6 th ed, 1993) at p 586.) Indeed the latter element can be seen as implicit in the former. (Re Milne and Choyce Ltd [1953] NZLR 724 (CA) at p 745.) The combination of both tests is clearly apt in the context of the Act where competing interests are involved which must be balanced by the Court in deciding whether and, if so, on what basis to approve an amalgamation proposal. [36] In the exercise of its discretion to approve in that context the Court should weigh the interests of the applicants, and any special majority supporting them, against the interests of any dissentient minority. The policy of the Act is not only that an appropriate majority should be able to reconstruct and give fresh direction to the activities of a company, but also that a minority should be protected from that degree of change to which it is unreasonable to require all shareholders to submit. In particular the Court should guard against any perception that the size of majority support for a proposal of itself should dictate the outcome of an application under s 236 as the Court is as much the guardian of the minority's interest as it is that of the majority. Both must receive the fullest consideration. (emphasis added)The revised compromise proposals[63] The terms of compromise which I am asked to approve are similar to those which were advanced at the creditors' meeting on 2 October. Creditors are classified unsecured or secured/preferential. Secured creditors are to retain their rights under their securities. In relation to each of the four companies a sum is to be paid monthly into separate pools for the benefit of the unsecured and secured/preferential creditors of each company. I shall set out the figures shortly. Payments are to be made from each pool to the creditors on a pro rata basis. However, a number of creditors who are related parties to the Atlas Group, have agreed not to receive payments.[64] Whereas in October the sums required to fund the compromise proposals were to come from within the Atlas Group companies, the revised proposals ultimately included a common term as follows:8. The compromise proposal shall be subject to the following conditions: (a) That Hotel So Corporation Limited ("Hotel So") shall provide a guarantee to [each of the four companies], in a form satisfactory to the CIR, or as is otherwise approved by the Court, of the unsecured creditors' payments and the preferential/secured payments; and (b) That Hotel So shall provide a guarantee to the CIR, in a form satisfactory to the CIR or as is otherwise proved by the Court, of all tax liabilities incurred by [each of the four companies] as from 2 October 2009, until such time as the unsecured creditors' payments and the CIR's preferential payments have been completed.Because Schwartz and Yellow Cross are in receivership para 8(b) of the proposal provides that Hotel So will guarantee payments of tax liabilities from the date the receivership is terminated (rather than from 2 October 2009). [65] The total amount to be found per month from within the Atlas Group, or from Hotel So, is as follows: Unsecured Secured/Preferential Atlas $1,600 $2,400 Schwartz $700 $3,800 Char Char $900 $4,500 Yellow Cross $1,600 $6,000 _____ ______ $4,800 $16,700 Total: $21,500 per month or $258,000 per annum [66] I now turn to a consideration of the four compromise proposals in terms of the principles described in In Re C M Banks Limited, but as modified in Waltus. In the circumstances of this case I consider that the merits of the four proposals can be assessed under the following headings.Have the statutory provisions been complied with and are the views of creditors known?[67] Part 15 of the present Act breaks new ground in that a compromise may be approved absent prior approval of it at a creditors' meeting. But, in Waltus at [32] the Court of Appeal observed that it was likely the practice of holding a meeting of shareholders or creditors would continue to apply, albeit by direction of the Court rather than by statutory necessity. [68] In this case the initial compromise proposals were considered by creditors on 2 October. The Char Char and Yellow Cross proposals were not approved. In relation to Char Char unsecured creditors approved the proposal, but in relation to the secured/preferential class only one of three parties voted in favour, albeit that party (Secured Finance/Secured Lending) represented 98% by value. In relation to Yellow Cross a majority of unsecured creditors supported the proposal, but their vote represented only 59% by value. The secured/preferential creditors returned one vote in favour (Secured Finance/Secured Lending) and two against, while the for vote represented 74% by value (if the Secured Finance/Secured Lending claim was accepted at face value, $3.6m). [69] I have already set out my reasons for concluding that the votes in favour of the Atlas and Schwartz proposals were tainted by material irregularity. [70] With regard to the present s236 applications there is no further evidence of the views of creditors. In error, the applications were originally filed as interlocutory applications, rather than as originating applications. Mr Forbes submitted that this irregularity was not of moment because creditors were put on notice of the original proposals in anticipation of the 2 October meeting. While this is so, the manner in which the applications were brought precluded the opportunity for directions to be made under s236(2). This I regard as quite unsatisfactory and as indicative of the casual manner in which various aspects of the compromise initiatives have been handled.[71] On 14 December (almost two weeks after the hearing) endeavour was made to regularise matters by the filing of originating applications in support of each compromise proposal. This had been foreshadowed at the hearing. In my view this was a situation of too little too late. The Commissioner filed his s232 applications on 16 October 2009. By a joint memorandum dated 4 November counsel proposed a timetable for the joint hearing of both the s232 and the s236 applications, including a term that the latter be filed by 5 November. The respective applications were fully argued on 30 November. In these circumstances, the clock cannot be turned back in order to accommodate the belated filing of the originating applications. [72] Creditors of Char Char and Yellow Cross were advised of the impending sections 232 and 236 applications on 6 November 2009. The notices detailed the outcome of the vote in relation to each company at the October creditors' meeting, referred to the Commissioner's application under s232 and advised of the intention for Char Char and Yellow Cross to apply under s236, with similar applications to be made by Atlas and Schwartz "to cover the contingency that the [Commissioner's] applications in respect of these companies may be successful". [73] The notices included this:12 I consider that it will definitely be in the overall interests of secured and unsecured creditors of all four companies that the compromise proposals in respect of each of them are, if applicable, ordered by the court to be binding on each of them and all of their respective secured and unsecured creditors, including the CIR. 13 I do not consider that there is any prospect that unsecured creditors will receive anything if any of the companies is liquidated. 14 Funding for the compromise proposals will come from related companies which I control, which are quite profitable. That funding will not be available, of course, to any of the four companies if it is liquidated. 15 An independent report from a chartered accountant on the compromise proposal and the applications to the court is being obtained and will also be provided to any creditor who wishes to have it. 16 It will be assumed that each creditor's stand in regard to the court applications will be the same as how that creditor voted on the compromise proposals, unless the creditor advises otherwise and subject to any direction given by the court. If that is not the case, or may not be, then that creditor or the creditor's solicitor should contact Mr Smith.Details were then provided concerning how information could be received from Mr Smith, as solicitor for the companies. The notices were signed by Mr Henderson as the sole director of Char Char and Yellow Cross. [74] The findings I have already made in relation to material irregularities remain relevant in the present context. For the reasons already discussed I do not consider there is reliable evidence available as to the true level of creditor support for the compromises. And in addition, the s236 applications have been presented in a most informal manner. Creditors are not directly appraised of the revised terms of the compromises, rather they have been invited to make further inquiry if they see fit. Mr Forbes argued that because the amendments serve to improve the proposed terms of compromise the process employed should not be viewed as a matter of concern. I do not agree. To my mind I am being asked to approve four compromises absent a proper and adequate opportunity for creditors to have an informed input.Might an intelligent and honest businessman reasonably approve the compromises?[75] Mr Forbes strongly submitted that the central and determinative issue concerned the commercial sense and viability of the four proposals. He posed the rhetorical question – what benefit was there in the liquidation of the four companies from the perspective of unsecured creditors? The answer, he suggested, was none. By contrast, counsel urged that if each compromise was approved there was a good prospect that unsecured creditors would receive full payment of their debts over time. [76] Counsel also submitted that in the event of liquidation, the Commissioner could only expect to receive a fraction of the core tax debt by virtue of his preferential status, but nothing more. Given his statutory obligation to collect over time the highest net revenue that is practicable within the law, it was suggested that the Commissioner's motivation in opposing the compromises was "called into question in the present case". The argument continued:[The] proposals ... made ... are likely to see all unrelated, unsecured creditors and some secured creditors, as well as the [Commissioner] paid in full, where secured creditors will still have the benefit of their security, where the [Commissioner] will still have the benefit of his preferential status andwhere the proposals are supported by a substantial, creditworthy guarantor; as against the alternative that otherwise unsecured creditors, including in substantial part the [Commissioner], are unlikely to get anything on a liquidation.[77] Mr Forbes also submitted that the level of support for the revised compromise proposals was likely to be higher than was the case in October, if anything. The level of support received by Atlas and Schwartz at the October meeting and the likelihood of increased support for the Char Char and Yellow Cross proposals was stressed. Counsel referred to Mr Henderson's affidavit of 25 November, to which was annexed a voting form from New Zealand Breweries Limited, which confirmed that although it had not voted in October, it would now vote in favour of the Char Char proposal. This change to the secured creditor vote would have tipped the balance in favour of the Char Char proposal. [78] By contrast Mrs Clark contended that if the votes of non-participating related parties at the October meeting were removed from consideration, the majority of the remaining unsecured creditors were opposed to the compromises. In percentage terms 39% by value in relation to Atlas, and 86% by value in relation to Char Char were said to be in opposition. Mrs Clark submitted that this level of opposition by arms-length unsecured creditors was sufficient in itself to require that these applications be refused. [79] I do not consider that the widely divergent viewpoints of counsel are surprising. As already discussed the composition of each class of creditors is highly contentious, particularly in relation to the inclusion of related parties in the unsecured lists and in relation to the contingent debt of Secured Finance/Secured Lending in the secured lists. Further, I doubt that creditors in general are properly appraised of the revised proposals in any event. To gauge the true level of support would require, in my view, resolution of the issues in relation to which I have found material irregularity; followed by a further vote with revised creditors' lists and revised proposals available to all the creditors. This is simply not attainable in the present situation. Returning, however, more directly to the intelligent businessman test I consider the next aspect must first be considered.Would an intelligent businessman view the payment of monthly contributions as secure?[80] Mr Henderson provided calculations relevant to what I understood to be his preferred option (option 3) for the compromise proposals. Option 3 incorporated more up to date figures as to the total sums owed to the Commissioner. Exhibit A4 set out the calculations which showed the time it will take for the payment of the Commissioner's preferential debt, he being the only creditor in the secured/preferential class who is to be paid out. The relevant periods are two months in relation to Atlas, 3.7 years in relation to Schwartz, 2.7 years in relation to Char Char and 4.6 years in relation to Yellow Cross. With regard to unsecured creditors (after removal of non-participating related parties) the time spans are Atlas 5.1 years, Schwartz 6.1 years, Char Char 2.5 years and Yellow Cross 6.7 years. [81] The initial total monthly payment required to cover all four compromise proposals is $21,500 (see para [63]). This figure will reduce from time to time as the payment out of the Commissioner in his preferential capacity, or of groups of unsecured creditors, is attained. [82] The intention is that the four companies will make payments to the extent of their ability to do so and any shortfall will be made up by Hotel So pursuant to a guarantee on approved terms. The ability of Schwartz and Yellow Cross to pay or contribute to the monthly contributions is now gone. On 15 December the businesses of these companies were sold in arms-length transactions by the receiver. I assume that this will result in the Commissioner receiving payment of part of his core preferential debt, about 28% from the sale of Yellow Cross and about 6% from the Schwartz sale. [83] It seems inevitable that to a large extent the burden of meeting monthly payments under the four proposals will fall on Hotel So. Atlas, as a holding and management company, is unlikely to be able to meet the payments due to its own creditors. Char Char is still trading, but at what level of profitability (if any) is unclear. In relation to Hotel So, evidence was adduced intended to demonstrate its ability to meet the total monthly liability, if need be.[84] This was provided by Mr Simon Abbott, a chartered accountant who previously had no business or professional association with the Atlas Group companies or with the companies associated with Hotel So. He was provided with management accounts containing actual and projected profit and cash flow figures for Hotel So to March 2010 and March 2011. On the basis of this information Mr Abbott expressed the opinion that the actual and future cash flow of Hotel So should be "more than adequate" to meet the total monthly payments of $21,500 or $258,000 per annum. Mr Abbott also noted that Hotel So's costs had increased significantly in September 2009 which he was advised was the result of capital restructuring undertaken by the company which leases the hotel premises to Hotel So. This company, Property Ventures Limited, is part of a group which also includes Hotel So. The companies are under the effective control of Mr Henderson. [85] Mr Alan Robb, an adjunct professor of accounting, swore an affidavit in answer to that of Mr Abbott. The methodology employed by the latter in projecting the future cash flow of Hotel So is known as EBITDA – earnings before interest, tax depreciation and amortisation. Mr Robb criticised the use of this methodology. He considered that it is suitable to project the net cash flow of a business if its transactions are for cash (no sales on credit), expenses are paid for in cash and if there is no inventory held over the relevant period. He doubted that these requirements applied to Hotel So. Mr Robb also deposed that he had previously compared EBITDA calculations against net cash flow information for two large hotels over a four year period. He found that the EBITDA figure exceeded the actual net cash flow by between 38% to 186%. Hence, Mr Robb rejected the use of EBITDA as an appropriate indicator of future net operating cash flows. [86] Mr Abbott provided an affidavit in reply. In it he said that he was conscious of the limitations relevant to the EBITDA methodology. These he said were taken into account at the time of his first affidavit. In particular, he had checked whether in the years to March 2010 and 2011 Hotel So would make interest payments, principal repayments, capital purchases and tax payments; or experience an increase/decrease in its inventory. He received advice in the negative and in relation to taxation payments Mr Henderson advised him that tax losses were available to other entities which would offset any tax payable by Hotel So.[87] In addition Mr Abbott said that he had undertaken further work in order to check his previous conclusions. He used a fully integrated cash flow model, relied on the five assumptions above (as to interest, principal and so on), and obtained information concerning the historical pattern of Hotel So's receipts and payments. In the result Mr Abbott concluded that his earlier EBITDA figures were accurate and if anything slightly understated. He repeated his opinion that the projected monthly cash flow of the business should be more than sufficient to meet the payment of $21,500 per month or $258,000 per annum. [88] The experts were not cross-examined. On the face of it Mr Abbott's figures appear to indicate that Hotel So could meet the total monthly liability in the short to medium term. Provided the information supplied to Mr Abbott was accurate and the assumptions upon which he acted were justified, his conclusions with reference to the period to March 2011 could prove to be sound. But particularly in relation to unsecured creditors the payment timeframe significantly post-dates 2011 – being over six years in relation to two of the proposals (see para [80]). Despite Mr Abbott's evidence the ability of Hotel So to support the compromises into the distant future must, in my view, remain a matter of significant concern. An intelligent man of business would I think share this concern, and not be simply mesmerised by the promise of payment. That said, I do not consider the hypothetical businessman would necessarily disapprove of the revised proposals.Are the compromise proposals fair and equitable?[89] Mrs Clark advanced a number of submissions which may be conveniently considered under this heading. These included that related unsecured creditors were not bound by the terms of compromise, that there was no independent person who was to oversee implementation of the proposals and that there was no obvious rationale for the entire compromise initiative. [90] The first point meant that there was nothing to prevent related parties, who were not supposed to benefit from the compromises, nonetheless receiving repayment of their debts during the lengthy periods of the compromises. However, Iaccept the contrary argument that this is an aspect able to be met by a condition imposed pursuant to s237 of the Act. [91] The second concern related to Mr Henderson's integral position and role in relation to implementation of the compromise proposals. He is the director of most, if not all, of the relevant companies. He was in a similar role when the debts were incurred and the companies became insolvent. Yet, the s236 applications do not envisage the presence of an independent person (or perhaps a committee) charged with responsibility to oversee implementation of the proposals. [92] The Commissioner sought to amplify this concern by reference to the compliance record of companies under Mr Henderson's control. Some 64 companies are presently registered with Inland Revenue which are under the direct control of Mr Henderson. This group of companies as a whole is delinquent in relation to compliance with general tax obligations. An affidavit sworn by Mr Hawkins on 16 November showed that 90% of income tax returns from the 64 companies were outstanding. Where returns had been filed, tax of $2.4m was outstanding. In relation to GST returns 27% were outstanding, as was $3.8m of GST. Similarly, 14% of PAYE returns were outstanding, representing an overdue payment of $268,000. In response to the defaults the Commissioner had issued 28 statutory demands and filed 13 liquidation proceedings. He had also filed 44 District Court applications seeking orders requiring various companies to file overdue returns. [93] In light of this compliance history the Commissioner contended that the Court should be slow to conclude that the absence of an independent person or committee charged with responsibility to oversee implementation of the proposals was a concern of no or little moment. To the contrary, particularly in light of the poor compliance record of companies under Mr Henderson's control, his role in relation to the compromise proposals was advanced as a matter of significant concern. [94] The third matter concerned the absence of any obvious rationale for the initiative in bringing the present applications before the Court. Each is a directresponse to a liquidation application of the Commissioner. The businesses of Schwartz and Yellow Cross were sold in mid-December. There is no apparent reason for these companies to continue in existence. In the absence of evidence as to the rationale for the compromise initiative, counsel submitted that it must be to avoid liquidation orders and the resulting examination of the affairs of the companies by a liquidator. Such examination, it was suggested, may well result in action being taken against present and former directors for breach of their duties, and also perhaps recovery action against related companies in respect of inter-company transactions. [95] In my view Mr Henderson's position as the director of all relevant companies and as the person responsible for implementation of the compromise proposals, is untenable. In addition, I accept the argument that there is no apparent reason for the composite compromise initiative, in particular as it relates to Schwartz and Char Char. Ordinarily one would expect a compromise initiative to be designed to "give fresh direction to the activities of a company" as McGrath J observed at [36] inWaltus. A plan or direction is not clear in this case. This invites acceptance of the interpretation for which the Commissioner contends. [96] For these reasons I am by no means satisfied that approval of the compromise proposals is appropriate in relation to any of the four companies. In general I am influenced by the inadequate manner in which the proposals have been promoted, the consequent uncertainty as to the true level of support for the proposals, the timeframe(s) over which payment is to be made, the security of payment particularly in the longer term, the pivotal position of Mr Henderson in relation to oversight of the proposals and the absence of any coherent rationale for the scheme of proposal as a whole.Conclusion[97] The s236 applications are refused. Costs are reserved. If sought, the Commissioner may file a memorandum and the applicants will have 15 working days within which to respond. The winding up petitions in relation to each company shall be listed for call in the Associate Judge's list on Monday, 15 March 2010.____________________________________________________________________Solicitors: Crown Law Office, PO Box 2858, Wellington 6140 for Plaintiff Cousins & Associates, PO Box 22-115, Christchurch for Defendants (Counsel – A J Forbes QC, PO Box 2929, Christchurch)