Trends
Publishing’s attempted debt compromise was to silence Callaghan Innovation’s
allegations of false representations in Trend’s application for a research and
development grant, the Court of Appeal indicated. The way is open for investigations into
Trends management with allegations in court of reckless trading, breaches of
director duties and failure to keep proper records.
Co-founder and director
of media company Trends Publishing International Ltd, David Johnson, came under
fire in late 2014 after Callaghan demanded repayment of some $383,000 being
initial instalments of a Science and Innovation grant. Callaghan alleged Trends had not been upfront
about its financial position. A
subsequent Serious Fraud Office investigation was closed with no further action
taken.
The Court of Appeal
confirmed an earlier court ruling setting aside Trends proposed Companies Act
Part 14 debt compromise. All unsecured
creditors should not have been grouped together for voting; different creditors
had different interests in the outcome. The
debt compromise offered all unsecured creditors, including Callaghan, $1000
upfront, the balance to be paid in instalments with funding from an undisclosed
source. The deal was voted through by
the appropriate majority of 75 per cent of unsecured creditors by value. Nearly all the creditors voting in favour
were “insider creditors”. Nearly three-quarters of this voting pool were votes
exercised by a company controlled by Mr Johnson: Thecircle.co.nz Ltd. Prior to the vote, Thecircle waived security held
so it could vote as an unsecured creditor.
At the same time, Thecircle was agreeing not to receive any payment.
The Court of Appeal
ruled insider creditors should have been separated into a different pool for
voting. They held a different economic
interest in the outcome. It was in their
interest to keep the company out of liquidation. Voting pools should not have been determined
purely by legal rights as unsecured creditors.
Callaghan Innovation itself should have voted alone as a separate pool,
the Court ruled. This had the effect of
giving Callaghan a right of veto over the Part 14 proposal. Unlike other unsecured creditors, its debt
was disputed and it faced threats of counter-claim litigation in respect of
that same debt. As part of the Part 14
proposal, Callaghan was to give up all rights to sue while Trends would be left
free to pursue its threatened claim against Callaghan. Callaghan had a different economic interest
in the proposed scheme compared with unsecured trade creditors.
Cancellation of the
Part 14 scheme allows creditors to try and force Trends into liquidation. Evidence before the court from an insolvency
specialist indicated there are grounds for investigation. There are suspicions some of Trends’
liabilities were listed as equity and there are doubts about the value of
Trends claimed intellectual property assets.
Trends
Publishing v. Advicewise People – Court of Appeal (24.08.17)
17.108