InvestmentsFeb 27 2017

Court decision sees Harlequin edge closer to liquidation 

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Court decision sees Harlequin edge closer to liquidation 

Harlequin Property SVG, the troubled overseas investment group, has edged closer to liquidation, after a court ruled against giving it more time to right itself.

Six thousand mainly British pension investors ploughed around £400m into the unregulated overseas property scheme via UK financial advisers, hoping for ‘guaranteed returns’ of 10 per cent a year from luxury villas, which never came.

The company entered formal insolvency proceedings in October 2016, giving it a maximum of six months to “work with a professional trustee to assist it to sort out its business affairs”, according to a Harlequin spokesperson.

However the court in Saint Vincent and the Grenadines, where Harlequin is based, on Friday (24 February) refused a third application by Harlequin chairman David Ames to give him more time to come up with a viable alternative to liquidation.

A Harlequin spokesperson said the company will be appealing the decision, and claimed it has been “advised by Counsel in the Caribbean that it has a strong prospect of success”.

In the court’s decision to refuse the extension, Justice Sir St. Clare Roberts stated it was on the grounds that he was “not satisfied that the insolvent person [Mr Ames] has acted or is acting with due diligence”.

On the viability of Mr Ames’ draft proposal for Harlequin, the judge said: “There is still the lack of financial data which is necessary for the proposal.”

“The whole proposal in many aspects is based on opaque projections,” he continued.

As an example, the judge referred to the financing of Mr Ames’ plans to pull Harlequin out of insolvency proceedings, based on obtaining funds of around £10m from Mr Ames’ successful suing of Harlequin’s former accountant Wilkins Kennedy.

However how much of the money Harlequin won in the High Court case in December will actually be available to either save the business or return to investors is in dispute.

KPMG’s Brian Glasgow, trustee for Harlequin, estimates 40 per cent - £4.2m - of the award will go to pay Harlequin’s lawyers, with a further £4.8m going to cover other aspects of the litigation funding.

Justice Sir St. Clare Roberts said of Mr Ames’ plans to finance Harlequin’s rescue with this money: “There is no real substantive basis for this, what is really a hope, that there will be sufficient funds to finance the proposal.”

On the second key plank of the rescue proposals, the transfer of ownership of Harlequin to investors in a debt for equity swap, the judge said the majority of creditors have rejected that.

“[It] seems to me that there will be a question as to the value of the equity of the proposed shares,” he said.

He added: “I do think that the recent happenings involving the main shareholder Mr. David Ames will tarnish the value of those shares that are intended to be swapped for the debt,” which is understood to refer to the announcement on 17 February that Mr Ames has been charged with fraud by the Serious Fraud Office, following an investigation since 2013.

The judge’s concerns about the value to Harlequin investors of a debt for equity swap echoed that of KPMG in its report on the draft proposals.

“[Harlequin] has not presented a valuation of the company’s shares, nor is it clear whether there exists a viable market for those shares”, the KPMG report stated.

Mr Ames, in his proposal, said Harlequin doesn’t have the cash to pay for a valuation.

Insolvency practioner Mr Glasgow’s role was to try to reach a financial solution that would satisfy Harlequin SVG's creditors, largely made up of investors and the Financial Services Compensation Scheme.

However if, as is the case, a proposal put forward by Harlequin is not viable or is rejected – and no appeal by Mr Ames is successful -  then Harlequin will enter into formal liquidation.

If that happens, Harlequin’s land and hotel assets – including its flagship Buccament Bay resort – are likely to be sold off for the proceeds to be distributed among creditors, after insolvency costs.

This is likely to mean serious losses to all Harlequin investors.

The FSCS joins investors as a creditor because it has paid out around £100m in relation to claims against advisers who sold Harlequin and then, unable to pay compensation for complaints, were forced to shut up shop.

Once the FSCS has paid out a claim it takes over the investors’ rights, including the right to pursue Harlequin to clawback some of the compensation it has paid.

A Harlequin spokesperson told FTAdviser: “Harlequin Property (SVG) Limited (“HP SVG”) filed its proposal for creditors with KPMG on Friday 24th February before the court reached its decision for the company to enter bankruptcy. 

“Sadly, the court’s decision took away the opportunity for Harlequin Property SVG investors/creditors to vote on the proposal and may result in liquidation, which was exactly what 95 per cent of those who recently voted in a survey wanted to avoid.

“Harlequin believes a grave injustice has been done and many HP SVG investors will be alarmed by what has taken place.”

laura.miller@ft.com