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Trends Publishing loses appeal over creditor compromise

A unanimous verdict from the Court of Appeal.

Jonathan Underhill
Wed, 13 Sep 2017

Trends Publishing International has lost its Court of Appeal challenge to a High Court ruling setting aside a compromise deal it struck with creditors that the lower court found had been manipulated to the detriment of Callaghan Innovation.

Court of Appeal Justices Mark Cooper, Raynor Asher and Denis Clifford dismissed the appeal, ruling that there should have been separate classes of creditors, especially for Callaghan, and ordered Trends to pay costs.

In coming to their decision, the judges considered changes to the law covering companies that wished to compromise their debts with the introduction of the Companies Act 1993, which took the procedure to reach a compromise out of the High Court's direct control. Under the Companies Act 1955, such a proposal had to be by a scheme of arrangement with court approval required.

But the Appeal Court agreed with High Court Justice Paul Heath that the new law required classes of creditors entitled to vote on a compromise to be defined correctly and gave them the right to apply to the court over anything unfairly prejudicial or any material irregularity.

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 put Trends at risk of insolvency, according to Trends founder David Johnson.

In 2015, Callaghan sought to terminate the grant and get repayment of funds advanced. Johnson consulted experienced insolvency practitioner Steven Khov of Waterstone Insolvency and under Khov's guidance devised a proposal to compromise the debts, which blamed Trends' financial difficulties on the revocation of the Callaghan funding grant.

The proposal sought to impose a moratorium on creditors' recovery proceedings. Of 62 unsecured creditors owed about $4.3 million, some $3.1 million was owed to, which counts Johnson as director and shareholder. Other creditors included Trends' general manager and one of its directors.

Trends also filed a counterclaim against Callaghan for $22 million.

Thecircle's position was unusual because two months before the compromise was proposed Trends had given it a personal property securities interest over all Trends' property. Thecircle then waived that security so that it could vote as an unsecured creditor. Voting by 'insider creditors' ensured the compromise achieved the required 75 percent support. The 'challenging creditors' - Callaghan, Advicewise People, Mediaworks Radio and Webstar (part of Blue Star Group) voted against the proposal.

The Court of Appeal judges ruled that both legal rights and potentially competing economic interests should be taken into account when evaluating the need for separate classes of creditors.

"The circumstances of Trends' dispute of the debt to Callaghan strongly suggest that the compromise was being used at least in part as a device to defeat Callaghan's substantive claim," the judgment says. "We consider that the compromise was unfairly prejudicial to the challenging creditors".

Their reasons include that the 'insider creditors' should have been put in a separate class of creditors and the compromise process indicated a wish to keep control of the company and avoid liquidation. Insider creditors and Johnson "may have much to lose from a liquidation and the challenging creditors much to gain" and some of the actions of the insider creditors "indicate commercial manipulation in order to control voting". There was insufficient information provided to allow creditors to properly assess the plan, and Callaghan should have been in a separate class for voting because its debt was disputed and it was subject to the counterclaim.

The Court of Appeal concluded that the actual compromise offered to challenging creditors "was dismal in terms of return".


Jonathan Underhill
Wed, 13 Sep 2017
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Trends Publishing loses appeal over creditor compromise