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

Liquidation: re Rayland Investments

Fees claimed by Auckland insolvency practitioner Mark Norrie were cut in half by the High Court for unnecessary work done on the liquidation of property developer Rayland Investments Ltd.

Associate judge Bell described the claimed $32,900 liquidation fees as going beyond work done in the interests of company creditors but instead advancing the liquidator’s own personal interests.  The High Court was told Rayland Investments was put into liquidation by a creditor owed $68,500.  On learning of the Mr Norrie’s appointment as liquidator, Rayland Investment’s owner Mr Larry Fan indicated that cash would be put into the company to clear all debts.  Unsuccessful negotiations between the two followed with Mr Norrie putting a tight deadline on demands Mr Fan sign what Judge Bell called a one-sided settlement deed.  Mr Fan was to front up with $100,000 in cash with penalty interest at 29 per cent, compounding monthly, for late payment.  Mr Norrie’s duties or his remuneration were not specified.  Mr Fan did not sign despite Mt Norrie’s threats to report him to the Integrity and Enforcement Unit at the Companies Office.  Mr Norrie threatened to take from Mr Fan his company car, later finding the vehicle was not owned by the company.

The company’s external creditors totalled $76,500.  The High Court disallowed much of the fees and expenses claimed by Mr Norrie for continuing with the liquidation.  Judge Bell said liquidators are not entitled to payment for work not required and unnecessary.  Mr Norrie showed little interest in resolving matters. he said.  It is common practice for liquidators to put liquidation on hold where directors and shareholders are making an honest effort to raise finance to pay all creditors. It is where liquidators treat directors and shareholders with hostility and take a “play to the whistle” approach that there are disputes about liquidators’ remuneration, Judge Bell said.          

re Rayland Investments – High Court (23.08.17)

17.107

Tax: Clancy v. Inland Revenue

Bankrupt Christchurch rebuild contractor John Clancy had an Inland Revenue reparations order overturned but faces further jeopardy.  The High Court signalled his ten month’s home detention for tax offences could be reviewed if suitable reparations are not possible following a rehearing as to his financial position.

John Edward Clancy left a trail of angry creditors after the 2015 collapse of his company: Hanguk Business Investments One Ltd.  His company failed to account for PAYE deductions, Kiwisaver deductions, student loan repayments and superannuation cash contributions totalling just over $456,000.  Payments made late reduced the amount outstanding to $369,500. Contractors went public with their complaints about non-payment by Clancy-owned companies.  Clancy pleaded guilty to tax offences in aiding and abetting Hanguk Business’ failure to forward required tax deductions to Inland Revenue. The High Court was told Clancy had been the director of 34 companies since 2005 of which seven had gone into liquidation owing Inland Revenue over $2.2 million.    

On the aiding and abetting charge, Clancy was sentenced to ten months home detention and ordered to pay $150,000 reparation at the rate of $225 per week.  Repayments would take thirteen years.  Clancy had initially offered to pay reparations at $58 per week.

Clancy appealed the reparations order.  Reparations imposed must be realistic, given an offender’s financial resources, Justice Gendall said.  While a reparation report need not always be prepared for the sentencing judge, he said, a report should have been made available before sentence in this case.  He referred the question of reparations back to the District Court for reconsideration.  It is possible, said Justice Gendall, the remainder of the sentencing package may have been influenced by the prospect of Mr Clancy paying a significant amount by way of reparations.  That may require reconsideration, he said.  The maximum penalty for aiding and abetting is five years imprisonment and a $50,000 fine.

Clancy v. Inland Revenue – High Court (23.08.17)

17.106