Lawyers representing a company which funded the animated comedy series Bro'Town and the Inland Revenue Department have reached a confidential out-of-court settlement.

Bro'Town Production launched civil proceedings against the IRD which began at the High Court at Auckland last week.

The proceedings followed an unorthodox decision made by New Zealand on Air to provide funding for the show by way of a loan, instead of its usual process of providing a grant.

The government broadcast funding agency last week issued a statement to the Herald stating that "The producers and a private investor have been in dispute with the IRD about a production investment structure for series 1 and 2 of bro'Town funded in 2002 and 2004.

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A NZ on Air spokeswoman confirmed that it was the first and only time the the agency had entered a loan arrangement to fund a production.

Diplomat and former NZ On Air chief executive Jo Tyndall last week told the court that the agency chose not to fully fund the show because it had already met its budget for the year, and did not have funds available.

Under its typical funding structure, NZ on Air provides a grant with no expectation that it should be repaid, unless the show is a commercial success.

Bro'Town was created and produced by Elizabeth Mitchell who approached her brother Tim Mitchell about how to get funding for an idea she had about turning the Naked Samoans into a TV show after being denied funding by NZ on Air.

He told the court last week that he believed the existing NZ on Air funding structure was not conducive to private funding and there "did not appear to be an incentive" for the producers of the show to seek an investor.

He established a new plan - asking NZ on Air for a loan, which would be repaid in payments, and then in interest after loan was repaid.

It was a completely new model, but Mitchell told the court he believed it would be more attractive to investors.

That investment later came from Tony Radisich, who set up the company Bro'Town Productions with Nigel Smith, providing funding for series one and two.

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The company's lawyers Geoff Clews and Sam Davies last week told the court that NZ on Air was advised to seek a binding ruling on whether the model was appropriate. However, that ultimately was never done as the agency claimed it was outside of its responsibilities.

Questions were later raised over whether the investors got into the project for genuine commercial reasons, or as a means of tax avoidance.

Mitchell told the court that Radisich asked to change to the model for the second series, which at the time he believed was to give the investor more control over the project.

IRD lawyer Alan Goosen asked whether Radisich was seeking the change because it would provide a tax benefit, but Mitchell said he believed it meant that the investor, through his company, would have access to all of the revenue the show made.

An out-of-court settlement between the two parties was reached this morning.