RedGroup trade creditors shun leap of faith

WILLIAM MACE - Stuff. co.nz  05/08/2011

For trade creditors owed almost $20m, the leap of faith at yesterday's RedGroup Retail watershed meeting was a legal opinion too far.

Even a 15-page full-colour booklet titled ''Five Reasons to Vote No'' couldn't convince them - most of the 40-odd people gathered at a conference room in Auckland's downtown Mercure Hotel ignored the advice and voted ''yes''.
But not before a presentation from administrator Ryan Eagle, on a flying visit from insolvency firm Ferrier Hodgson in Australia, to set out the options for Kiwi unsecured creditors of the company that owned Whitcoulls, Borders and Bennetts here until its voluntary administration in February.
He recommended they accept a Deed of Company Arrangement [DOCA] from RedGroup's directors under which a contribution of $3.14m by the company was to be distributed among them, equivalent to 3c in the dollar for those trade creditors at the very back of the queue.
The booklet came from Damien Grant of Waterstone Insolvency, who also took the floor to deliver his view that unsecured creditors could be in line to recover every cent they were owed.
In a 15-minute speech he implored creditors to cast off what he called ''big room syndrome'' and take their chance to raise a hand against the deal.
Grant proposed throwing out the DOCA and issuing a court challenge over a $153m secured debt owed to RedGroup's owner Pacific Equity Partners.
He suggested all unsecured creditors could see all of their money back, about $21.5m, if a court decided the guarantee given by RedGroup to PEP was voidable on grounds that it was not ''fair and equitable''.
PEP's secured claim meant it stood at the front of the queue of creditors and would immediately draw $28m of realised funds from the company in addition to the nearly $30m it had already taken.
But in response to a question from a creditor over whether he had sought a legal opinion on the likelihood of the challenge being successful, Grant said he had not.
''I don't know what the odds of success would be but it would be more than three per cent, so if you're a betting man or woman and you're thinking what the odds would be, you would want the liquidators to go to court and challenge that agreement,'' Grant said.
Sitting at the top table alongside Eagle, Russell McVeagh partner Matthew Kersey told creditors that such a challenge to security under Section 299 of the Companies Act had never succeeded.
Kersey also said that the debt to PEP had served to replace an equivalent debt held by a third party, and therefore a substantial secured creditor would still have stood in the way of unsecured creditors under different circumstances.

Speaking after the meeting unsecured creditor Kevin Chapman (left) of Hachette Publishing said the legal advice, or lack of it, played a large part in the decision.

He said the pay-out was ''peanuts'' and ''meaningless'' for his company, but it was ''more than we had reason to expect a month or two ago''.
Chapman said trade creditors seemed content to close the book on RedGroup's administration.

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