High Court overturns debt compromise, Trends Publishing case   8 Sep 2016

Thursday 08 September 2016 04:19 PM

High Court overturns debt compromise in Trends Publishing case, process 'fundamentally misused'

By Edwin Mitson

Sept. 8 (BusinessDesk) - The High Court has ruled a compromise agreement reached between magazine publisher Trends Publishing International and its creditors last year be set aside due to a "fundamental misuse of the compromise process" in a case that was partly brought by government innovation funder Callaghan Innovation.

Callaghan provided combined funding of $313,536.70 in two tranches to Trends in April and June 2014, but in October of that year it called in Deloitte to look into the money Trends had received. The Serious Fraud Office became involved in December.

Trends chief executive David Johnson told the court that a press release sent to media confirming the involvement of the SFO had, "a dramatic effect on Trends' business, both in the company's ability to generate... revenue and on staff morale." Within a short period of time, about 60 percent of staff had left.

The result of Deloitte's investigation was sent to Trends in April 2015, and Callaghan terminated the grant, demanding the repayment of funds within 10 working days.

The Deloitte report, which was published in a heavily redacted form under the Official Information Act, concluded there had been potential breaches of the grant terms because the company had projected inaccurate or misleading information relating to staff costs associated with R&D, hadn't detailed project management documentation and had made ineligible expenditure claims such as a director’s life insurance premiums, bank fees and international travel insurance.

In May 2015, a compromise agreement formulated by Waterstone Insolvency and its general manager, Steven Khov, was sent to creditors.

The ruling shows that at the time Trends owed 62 organisations a combined $4,343,843. Of that sum, the majority or $3,080,361, was owed to a company called Thecircle.co.nz, which was associated with Trends. In order to vote on the compromise, Thecircle waived security that it held on this money. However, the compromise deal did not include secured or preferential creditors, so Thecircle retained the right to enforce its debt while gaining the ability to vote on the compromise deal.

Trends CEO Johnson was the sole director and an indirect shareholder in Thecircle.

Two other related parties, Trends general manager Louise Messer and one of Trends directors, Paul Taylor, were owed a combined $150,030. The High Court ruling lumps all these parties together as "insider creditors."

The compromise agreement meant unsecured creditors owed money would receive full payment up to $1,000. Sums owed over and above this would be paid out on a pro-rata basis. The agreement had to be backed by 75 percent of the total value of affected creditors.

At a meeting on May 22, 2015, which was chaired by Waterstone's Khov, Thecircle, Louise Messer and Paul Taylor all voted in favour of the agreement, which represented 75.73 percent of the total value of affected creditors.

Minor creditors, who were owed less than $1,000, all backed the deal, while a further 19 creditors also supported the proposal. In all, the compromise gained the support of 81.25 percent of affected creditors.

Trends' lawyer told the court that there was no reason for the court to intervene and it was unnecessary for the insider creditors to be placed in a different class to other affected creditors because affected creditors would receive more from the compromise than from liquidation.

However, Justice Paul Heath ruled, "the insider creditors should have been put into a separate class for the purpose of voting on the compromise...without the insider creditors, a 75 percent majority in value of affected creditors could not have been achieved."

His judgement also concludes that "I see no good commercial reason for including the insider creditors within the group of affected creditors who were to vote on the proposed compromise. The explanation given by (Trends Chief Executive) Mr Johnson is implausible." Justice Heath said the meeting of creditors had been "structured deliberately."

Waterstone's Steven Khov didn't give evidence to the hearing, a fact Justice Heath laments in his judgment. "Mr Kov was uniquely placed to provide a plausible explanation of the reasons why the compromise was framed in the form circulated to affected creditors." Justice Heath goes on to add, "Mr Khov's silence speaks volumes."

The ruling states that Trends has yet to pay any money to any creditors.

Costs were awarded against Trends.

Callaghan was not the only party bringing the case against Trends - Advicewise, Mediaworks, and Blue Star Group were the other creditors involved in the case.

Richard Perry, chief financial officer for Callaghan Innovation welcomed the verdict. "The judgment has the effect of restoring all the creditors’ full entitlement to have their debts repaid, and vindicates Callaghan Innovation’s decision to join the court action. It also entitles the creditors who took the action to recover their legal costs from Trends."

This is not the end of the matter. A counterclaim by Trends against Callaghan is due to be heard on Nov 21, 2016. It accuses Callaghan of breach of contract and defamation through the termination of its funding agreement and seeks an unliquidated sum. An inquiry into damages is sought as part of that hearing.

(BusinessDesk)

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