Trends Publishing challenges High Court ruling on separate classes of creditors

Trends Publishing International, which claims it was left in a cash squeeze after Callaghan Innovation rescinded its research grant, has challenged a High Court decision to set aside a compromise deal it struck with creditors that the court found had been manipulated.

Trends made its case in the Court of Appeal yesterday before Justices Mark Cooper, Raynor Asher and Denis Clifford.

The respondents, also known as the challenging creditors - Advicewise People, Callaghan Innovation, Mediaworks Radio and Webstar (part of Blue Star Group) - had opposed the compromise under which Trends would pay creditors 15 cents in the dollar, saying the vote of creditors was manipulated by "insider creditors" including Thecircle.co.nz, whose sole director is Trends shareholder and chairman David Johnson. Thecircle.co.nz waived a security held over Trends for about $3.1 million in order to qualify as an unsecured creditor and cast a vote in favour of the plan.

High Court Justice Paul Heath found in favour of the four respondents, who were owed about $3.2 million in total but were outgunned in the creditor vote for the compromise deal, which was approved by 39 of the 48 total creditors, including 22 minor creditors owed less than $1,000 apiece. Heath said in his Sept. 7 judgment that his decision to set the compromise aside and award costs against Trends "was premised firmly on the basis that Trends, through its directors (as proponents of the compromise) had manipulated the majorities so as to secure a result favourable to insiders".

Callaghan paid Trends a total of $313,537 in April and June 2014 but as a result of an investigation later that year it concluded the grant money had been secured with "false representations as to Trends' financial position", according to Heath. As a result, it terminated the contract and demanded repayment. Trends initially sued Callaghan for defamation over a media release that said the government funding body had called in the Serious Fraud Office but that suit was dropped.

Trends still has a counterclaim against Callaghan for $22 million which is set down for a High Court hearing in November and in the Court of Appeal yesterday, its lawyers cited an investment bank that had been interested in selling 30 percent of the company's software for $20 million.

Trends argued yesterday that Heath erred in law in finding that the insider creditors should have been placed in a separate class for the compromise vote, that their interests meant they couldn't properly consult with other creditors for a common purpose, that the challenging creditors were prejudiced as a result of Trends failing to allow at least two classes of unsecured creditors and only calling one meeting, and that voting rights were deliberately manipulated.

In an amended second grounds of appeal, Trends also challenged the High Court finding that the insider creditors had different economic interests and that the failure to put them in a separate class caused prejudice against the challenging creditors. It also said the High Court erred in setting aside the compromise rather than just ordering that the challenging creditors not be bound by the deal.

For Trends, lawyer Harriet Enright told the bench that Heath's ruling was "unfair to the majority". She said Callaghan had triggered the need for the compromise by demanding repayment of the grant funding and if it had been given a right to veto the plan then "Trends would be severely prejudiced". The compromise had been proposed to allow Trends "to trade through the period of the insolvency".

In court, Bisley said the appeal centred on a compromise deal "that was plainly conducted in a way that didn't sufficiently distinguish between different classes of creditors" and was "fundamentally flawed because it didn't talk about the future of the company".

He said while Trends' case was that it had been tipped into a position of potential insolvency by Callaghan, the reality was "it had been in a difficult financial situation for a number of years" which had required payment plans to meet its obligations to both the Inland Revenue Department and staff, while rent hadn't been paid for 3 1/2 years.

Trends' lawyers "had suggested insider creditors were in the same position as other creditors. In my submission that is plainly wrong. They had different legal rights." While there was "a very interesting legal issue to discuss" about the status of different classes of creditors, it didn't affect the outcome of the appeal, he said.

The bench reserved its decision.

(BusinessDesk)