24 August 2017

Debt Compromise: Trends Publishing v. Advicewise

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