Trend Publishing’s debt compromise is dead in the water following a Supreme Court hearing. Manipulation of creditor classes for voting and a failure to provide adequate financial information before voting meant Trend’s Part 14 debt rescheduling scheme was fatally flawed.
Faced with allegations it put up misleading financial information in a Science and Innovation grant application, coupled with demands from Callaghan Innovation for repayment of initial grant funding of some $383,000, Trend Publishing International Ltd resorted to the Companies Act Part 14 debt rescheduling procedure to fend off creditor claims.
Part 14 allows companies to reschedule debt if approved by a majority of creditors holding 75 per cent of affected debt. Earlier court hearings heard evidence one of Trend Publishing’s motives behind the Part 14 proposal was an attempt to silence Callaghan Innovation’s allegations. Questions had arisen after a Deloitte investigation identified, contrary to Trend’s representations, that the business had poor liquidity and negative equity in 2014 when its grant application was made.
Trend’s Part 14 proposal offered an upfront payment of the first one thousand dollars owed each creditor, with the balance payable by instalments. This proposal was approved by 81.25 per cent of creditors, but 75.53 per cent of votes came from ‘insider’ creditors; being debts owed to Trends management personally or to an associated company controlled by them. Removing from the count ‘insider’ creditors would have seen the proposal approved by only 28 per cent of creditors by value.
The Supreme Court ruled the ‘insider’ creditors should have been polled separately from other creditors. All unsecured creditors had the same legal rights, but some had a different economic interest in the outcome. Creditors with differing economic interests should be grouped separately for voting. ‘Insiders’ had a personal interest in seeing their company continue in business; a different perspective from unpaid outsiders. Interests of the two groups of creditors were diametrically opposed, the Court said. They should not have been lumped together in one group for voting. That was a material irregularity. Voting on the Part 14 scheme was ruled invalid. In addition, one group of creditors should not have voted at all, the Court said. That was creditors owed less than one thousand dollars; promised full payment by the proposal. Their existing right to be paid immediately in full was not being altered by the scheme. Unaffected by the outcome, they should not have voted.
Two of the Supreme Court judges said there was also a material irregularity in the information provided creditors. Initially there was no financial information at all sent creditors prior to the vote. In response to creditor requests, a one page summary was provided two days prior to voting. It did not provide adequate information about the proposal’s effect. In particular, it provided no detail of the ‘fresh capital’ promised should the proposal be approved. Creditors later learnt this amounted to a mere $50,000 put up by an unidentified business friend of Trends co-founder and director David Johnson.
Trends Publishing International v. Advicewise People – Supreme Court (16.07.18)
18.140