ICON DIGITAL ENTERTAINMENT LTD V WESTPAC NEW ZEALAND LTD HC AK CIV 2007-404-007124

ICON DIGITAL ENTERTAINMENT LTD V WESTPAC NEW ZEALAND LTD HC AK CIV 2007-404- 007124 20 November 2007IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2007-404-007124UNDER Part 4A of the High Court Rules and ss 239F and 280 of the Companies Act 1993 IN THE MATTER OF an application under ss 239F and 280 of the Companies Act 1993 BETWEEN ICON DIGITAL ENTERTAINMENT LIMITED Applicant AND WESTPAC NEW ZEALAND LIMITED Respondent Counsel: M D Arthur/J A McMillan for applicant Judgment: 20 November 2007 at 5.30pmJUDGMENT OF ASSOCIATE JUDGE ABBOTTThis judgment was delivered by me on 20 November 2007 at 5.30pm pursuant to Rule 540(4) of the High Court Rules.Registrar/ Deputy RegistrarSolicitors: Chapman Tripp, PO Box 2206, Auckland[1] Icon Digital Entertainment Limited (Icon) has applied for permission to appoint administrators pursuant to Part 15A of the Companies Act 1993. [2] Icon's directors have resolved that it is or may be insolvent, and to appoint Brian Mayo-Smith, Shaun Neil Adams and Stephen John Tubbs (the proposed administrators) as the administrators. [3] Icon's banker, Westpac New Zealand Limited (the respondent) supports the directors' decision to put Icon into voluntary administration, and the appointment of the proposed administrators. [4] The Court's permission is needed because within the past two years the proposed administrators have provided professional services to Icon (an independent financial review and monitoring of Icon's performance) and because, arguably, the proposed administrators and their respective firms have had a continuing business relationship with Westpac (Westpac has appointed them as receivers of various companies, and has procured their appointment as investigating accountants). Under ss 239F and 280(1)(ca) and (cb) of the Companies Act 1993 the proposed administrators are disqualified from appointment as administrators by reason of their prior connection with Icon or Westpac unless the Court orders otherwise. [5] Icon applies for permission relying on the very factor which disqualifies the proposed administrators from appointment as of right, namely, the knowledge of Icon that they have built up through their role as professional investigating accountants.Ex parte application[6] Icon asks that interim orders be made on the papers, without notification to the rest of its creditors. It does so on the grounds that it urgently needs ongoing funding from Westpac to continue to trade, and Westpac wants it either to be put into administration or receivership.[7] Icon seeks an interim order only, on the basis that (under ancillary orders being sought) its creditors will have an opportunity to challenge the appointment if unhappy about it. [8] The application is supported by affidavits by Mr Mayo-Smith, by a director of Icon, Mr Stephen Mark Dods, and by the chief credit officer of Westpac, Gregory Alan Peebles, together with a detailed memorandum of counsel. Westpac is named as sole respondent (it is Icon's major and first ranking secured creditor, currently owed approximately $13 million secured under a general security agreement which it is entitled to enforce). Westpac has endorsed its consent on the application. [9] I accept that there are grounds for urgency and for making of interim orders ex parte.The originating application and directions as to service[10] Icon has applied by originating application under Part 4A of the High Court Rules. [11] I accept that this is an appropriate application to bring by leave under r 458D(1)(e) of the High Court Rules. It is comparable to an application for directions by a liquidator or receiver (which may be commenced by originating application). This procedure is also prescribed for any application for Court appointment of an administrator (under s 239L) by unsecured creditors, liquidators or the Registrar of Companies. The procedure also allows the Court opportunity to give directions as to service (under r 451). [12] The affidavits filed in support of the application show that the persons most likely to be affected are Icon's creditors, of whom there are approximately 125, owed in the region of $5.918 million. The delay that would be occasioned by giving notice to all other creditors at this point could well be adverse to the interests of Icon (and therefore to the creditors as a whole) and to the interests of Westpac as secured creditor, in that there is a risk that creditors learning of the application would seek toavoid the effects of a moratorium. This would not occur if other automatically qualified administrators were appointed. [13] The order being sought, permitting appointment of the proposed administrators on an interim basis, and with notice to all other creditors at the same time as notice of the first meeting of creditors under the administration, will both protect the creditors' rights generally, and treat them equally and fairly, (given that all creditors will learn of the moratorium arising out of the voluntary administration) at the same time. They will then have rights to challenge the proposed administrators. [14] The ancillary orders being sought are appropriate as directions for service.The substantive application[15] The object of voluntary administration and the requirement for the Court's leave are helpfully set out in the following sections of counsel's memorandum in support of the application:i) The objects of the voluntary administration regime (Part 15A of the Act) are:to provide for the business, property, and affairs of an insolvent company, or a company that may in the future become insolvent, to be administered in a way that— (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or(b) if it is not possible for the company or its business to continue in existence, results in a better return for the company's creditors and shareholders than would result from an immediate liquidation of the company.ii) In many respects, the role of an administrator is similar to that of a receiver, in that each would usually trade the business on, and look to sell or restructure the assets to provide for maximum return. The key distinction is that the administrator puts a restructuring proposal to all creditors, who then vote on it at the watershed meeting. The administrator is obliged to achieve the best result for creditors as a whole, whereas the receiver is primarily responsible to recover the secured creditor's funds. The receiver is however obliged to have regard to other creditors' and the company's interests so the difference in terms of duties owed is perhaps not so marked.iii) The purpose of s 280 of the Act is to ensure that persons who are appointed as liquidators or administrators have sufficient independence, competence and integrity to carry out the role without causing risk to creditors or third parties. The Select Committee reporting back on the proposed introduction of subsections 280(1)(ca) and (cb) said that:These new provisions are intended to prevent a perception that the liquidator may be partial towards either the company's creditors or its debtors.[16] The proposed administrators are all members of the accounting firm BDO Spicers. Mr Mayo-Smith and Mr Adams work in the Auckland office. Mr Tubbs works in the Christchurch office. Only Mr Mayo-Smith was involved in the independent review of Icon. The Christchurch office had no part in that assignment. The involvement of Mr Mayo-Smith and the Auckland office has been over a seven and a half month period. [17] The proposed administrators, and their firm, are professional insolvency practitioners. Their appointment by Westpac as receivers, over the past two years, and their acceptance of appointments as investigating accountants in respect of other companies (at Westpac's instigation) has been in that professional capacity. [18] I take the view that the proposed administrators', and BDO Spicers' involvement with Icon does not compromise their independence or their ability to carry out their task of administrator professionally and effectively: a) Mr Mayo-Smith's and BDO Spicers' appointment as investigating accountants, although made at Westpac's behest, was under contract with Icon, but was to act independently both of Icon and Westpac; b) I see no reason to consider that independence from Westpac is being called into question by the mere fact that they have undertaken professional appointments in relation to other companies in the past. [19] I have no reason to believe the proposed administrators will lack the independence, competence and integrity needed to carry out their role without causing risk to creditors of third parties. To the contrary, I accept that theirknowledge of Icon, built up through the role as investigating accountants, will assist them to carry out the administration more quickly and efficiently. [20] It is also of some significance that Westpac would be free to appoint the proposed administrators as receivers, and trade and unsecured creditors could be worse off if this application was not granted and Westpac chose to appoint the proposed administrators as receivers. Mr Peebles states that Westpac will appoint receivers if the proposed administrators are not appointed, but would prefer to appoint them as administrators. Mr Peebles says that Westpac's confidence in the proposed administrators will be a factor in Westpac extending the further funding needed by Icon as a matter of urgency. He also expresses the view that a voluntary administration is likely to result in a better return (for Icon and for all other creditors) than receivership, and for staff. [21] I make the following orders as sought: a) This application may be made by way of originating application; b) Pending further order of the Court, notwithstanding ss 239F, 280(1)(ca) and (cb) of the Companies Act 1993 (the Act), Brian Mayo-Smith and Shaun Neil Adams of BDO Spicers (the firm) and Stephen John Tubbs of BDO Spicers (Christchurch) Limited, may be appointed as administrators of Icon Digital Entertainment Limited; c) This application is adjourned to 11.45am on 17 December 2007; d) Leave is reserved to any creditor of Icon to file a notice of opposition to the application prior to that next hearing date; e) The application and these orders shall be served, on all creditors notified of the first meeting of creditors pursuant to s 239AO(1)(a) of the Act, at the same time and in the same manner as notice under s 239AO is given by the administrators; andf) The administrators' notice to creditors under s 239AO(1)(a) of the Act shall include advice to creditors of the next mention date of this proceeding, and advice that if they wish to challenge the interim order made, they are entitled to do so by filing and serving a notice of opposition prior to the next hearing date of the proceeding._________________________Associate Judge Abbott