Marketing meets law: related party debt was used as a teaser to get creditors onside in an Insolvency Act part-payment scheme offering creditors a derisory amount in full settlement of debts.
Former restauranteur Keppel John Brown’s scheme of arrangement settling his debts with payment at six cents in the dollar received High Court approval despite fifty per cent of debt voted in favour being related party debt which pulled out after the necessary majority of creditors voted in favour.
The High Court was told Mr Brown’s multiple failed restaurant businesses owed $1.26 million, including $610,000 owed close relatives. His proposal offered creditors a lump sum payment of $40,000; payment of three cents in the dollar. The legal twist was that while family creditors owed $610,000 would vote, they agreed to stand back if the proposal was approved, raising payment for remaining creditors to about six cents in the dollar. Their voting power gave momentum to the deal; once it was on its way, they pulled out.
Insolvency Act schemes of arrangement require High Court approval following votes in favour by a majority of affected creditors holding 75 per cent in value of compromised debt. The court routinely turns down proposals where voting is gerrymandered by having relatives voting in favour.
At Mr Brown’s creditors’ meeting held using Zoom, a majority of creditors owed 80 per cent by value voted in favour the proposal. In the High Court, Associate Judge Smith discounted related party debt in determining creditor majorities. Notionally removing $610,000 related party debt from the creditors’ meeting saw remaining in favour a majority of creditors by number and a narrow majority of 75.8 per cent by value. The scheme of arrangement was approved.
Evidence was given that Mr Brown currently manages a commercial cleaning business on a $140,000 salary.
Re Brown – High Court (26.05.20)
20.091