Monday 16th July 2018
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The Supreme Court has rejected an appeal by Trends Publishing International over a deal it put to creditors, which it said was "fundamentally misconceived" as a related party had an equal say on whether to accept the compromise.
Auckland-based Trends put forward a proposal to 62 creditors, who it owed $4.3 million, when government research and development grant agency Callaghan Innovation sought to claw back $383,000 of funding. The terms of deal were disputed by Callaghan and several other creditors, claiming Trends manipulated the process because related party Thecircle.co.nz, owed $3.1 million in unpaid rent, had an equal vote on the proposal. The High Court and Court of Appeal agreed with the creditors.
The Supreme Court bench unanimously rejected Trends' appeal, although the reasoning behind the decision was split. Justices William Young, Susan Glazebrook and Mark O'Regan ruled the process of the compromise was "fundamentally misconceived", as the challenging creditors including Callaghan, MediaWorks, Blue Star Group and Advicewise People would have received between 11 percent and 18 percent of the debts owed to them whereas 17 creditors owed $1,000 or less would be paid in full.
Trends proposed to pay an initial pool of $50,000 followed by nine monthly payments of $13,300, covering the first $1,000 for all creditors and a pro rata share of the remainder, excluding related parties. The result would have benefited creditors owed less than $1,000 the most.
"There would be an appearance of substantial unfairness if creditors who are offered a return of 11-18 percent on their debts were bound by the votes of creditors who receive substantially better returns," the judgment said.
Chief Justice Sian Elias and Justice Ellen France agreed with the decision but for different reasons, saying the "material irregularity" of the deal was "through inadequacy in the information provided".
"In the absence of any convincing justification, it may be inferred that the inducement for those owed small amounts despite the confiscation of value from larger creditors was designed to obtain a majority in number of those voting in favour of the compromise," they said.
The minority decision saw the abuse coming from the nature of the proposal in that "it entailed promotion by directors who risked potential liability if the company was put into liquidation and who therefore had a conflict of interest not overcome by disclosure and provision of proper information about the circumstances of the company, nor by the creditor vote that followed," they said.
The case has its genesis in government grants awarded to Trends by Callaghan Innovation in 2014 amounting to about $383,000. Late that year and based on a report from Deloitte, Callaghan decided that the grants had been induced by false representations as to Trends' financial position. It referred the matter to the Serious Fraud Office and publicity around that "had an adverse impact on the ability of Trends to continue trading," the judgment said.
In 2015, Callaghan sought to terminate the grant and get repayment of funds advanced. Trends put forward the proposal to creditors with the help of insolvency practitioner Steven Khov of Waterstone Insolvency.
Trends is seeking damages from Callaghan for what it claims are breaches of the funding agreement and defamation through the press release issued by the government funding agency and the complaint to the SFO, the judgment said.
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