It was a choice between one more throw of the dice or taking steps to call entrepreneur Warwick Jones to account for use of funds by his company Design Electronics Ltd to commercialise technology facilitating remote real-time access to workplace data.
Design Electronics is insolvent.
For Nelson-based investor Michael Lookman and his family trust, it was time to call a halt. He is owed $1.8 million. His 2016 joint project with Mr Jones has resulted in little but angst. Mr Lookman’s trip to the High Court (in 2019) resulted in a failure to recover immediate repayment from Design Electronics; repayment was not due until 2021. An earlier court application (in 2018) saw Mr Jones ordered to make company financial information available, an obligation that was not honoured as ordered.
For Mr Lookman, the frustration has been he thought security for his loan would be given over patents and trademarks developed by Design Electronics. Mr Jones later said there was no intellectual property rights available as security; intellectual property developments were ‘all in his head.’
Mr Lookman demands that Design Electronics be put into liquidation and that Mr Jones performance as director be put under scrutiny. Mr Lookman offered to put up $250,000 cash to get an investigation underway. He alleges Mr Jones has traded recklessly, in breach of the Companies Act.
The High Court was told agreement was reached in 2022 that Design Electronics would repay the $1.8 million owed Lookman Trust by instalments. It failed to pay the first instalment. Lookman Trust put Design Electronics into liquidation in April 2023 for non-payment.
Within months, Auckland insolvency practitioner Bryan Williams was floating a proposal that Design Electronics’ liquidation be suspended with the company restructured, kept alive both to collect revenue from its existing services and to enable further development of current products.
Lookman was furious.
The manner of Design Electronics’ restructuring and the motives of those behind it were challenged in the High Court. Lookman Trust alleged the restructuring process was rigged and that Mr Williams was in league with Mr Jones in a scheme to benefit Mr Williams and to protect Mr Jones.
At time of its liquidation, Design Electronics had three commercial services in operation (an internet service, a gas measuring business, and a sensor system coupled with a management system available for commercial use) plus an aged care management system in development.
These services were generating annual gross revenue of some $400,000.
Restructuring proposed that Design Electronics’ liquidation be suspended, with existing service contracts and associated revenue staying with Design Electronics, whilst projects in progress would be transferred to a new company for further development.
It was anticipated that Design’s unpaid creditors, including Lookman Trust, would then be repaid over time out of Design Electronics’ current income stream. To reduce Design’s debt burden, named specified investors would switch their existing claims to the new company. They would take their chance with the new company, providing fresh working capital to further develop existing projects.
Realignment of all these contractual rights was achieved with the Companies Act Part 15A voluntary administration procedure. Touted as a flexible quick-fire method of restructuring insolvent companies, Part 15A restructuring requires creditor vote in support totalling 75 per cent of the company’s indebtedness. Fail to get sufficient voting support; liquidation follows.
Design’s creditors’ August 2023 vote, the so-called ‘watershed’ meeting, saw approval by the slimmest of margins: 75.3 per cent.
Lookman Trust immediately challenged the outcome, alleging creditors were both miscounted and the level of their indebtedness miscalculated.
A number of investors counted as creditors were in fact shareholders, Lookman Trust said. They were issued with convertible securities in return for their cash injections.
The High Court heard evidence of messy and ambivalent record keeping within Design Electronics such that legal advice to Mr Williams, now in charge of the voluntary administration process, was that they should be treated as creditors, not shareholders.
Justice Anderson confirmed their status as creditors entitled to vote.
Lookman Trust alleged interest owed these investor/creditors had been manipulated to push their votes over the 75 per cent threshold.
Justice Anderson ruled that a recalculation would bring down the percentage vote in favour, but still marginally within the 75 per cent requirement.
Lookman Trust argued there had been a behind-the-scenes voting deal, prohibited by Part 15A.
The court was told of a mass email sent prior to the watershed meeting by one of the investor/creditors to a working group of investor/creditors who had worked on the restructuring proposal. The email reminded group members ‘it is vital that you do vote to ensure passage of the recommended resolution.’ This was evidence of a secret block-voting deal, Lookman Trust said.
The same email stated recipients were free to vote ‘as they see fit,’ Justice Anderson pointed out. The email was more an exhortation to vote, than a direction how to vote.
Lookman Trust’s application to terminate the restructuring scheme was dismissed. The principal effect of the scheme was not to curtail an investigation into Mr Jones’ past management of Design Electronics, Justice Anderson said. It was designed to enable a managed wind down of Design’s business with a greater return for creditors than would be achieved on liquidation.
Jones v. Williams & Lookman v. Williams – High Court (24.04.24)
24.102