Harlequin Property’s independent trustee has heavily criticised plans from the company’s chairman for the future of the troubled investment scheme.
Papers lodged by trustee KPMG and Harlequin with the court in Saint Vincent and the Grenadines, where Harlequin is based, show a rift between the two parties over whether the investment can, or should, be brought back from the brink of collapse.
Six thousand mainly UK pension investors ploughed around £400m into the unregulated overseas property scheme via financial advisers, hoping for ‘guaranteed returns’ of 10 per cent a year on off plan villas, which never came.
KPMG’s Brian Glasgow was brought in last October as trustee of the troubled company, to get the best deal for Harlequin’s creditors, including investors, as it entered insolvency proceedings.
He has raised a series of concerns about last ditch plans to revive the ailing investment.
The proposals come from David Ames, chairman of Harlequin Property, who is seeking to stave off any claims against him and other directors from investors, and steer the company through receivership.
Mr Ames’ draft proposal, seen by FTAdviser, argues investors will benefit more from the sale of the resort if it can be turned around as a going concern than if it is forced to enter bankruptcy.
But KPMG in its January 2017 report stated it “has no basis for believing it likely… [Harlequin] will be able to make a viable proposal to its creditors”.
Harlequin’s final proposal needs to convince KPMG's Mr Glasgow it is a better deal for investors than liquidation.
Part of the disagreement between Mr Ames and Mr Glasgow is how much of the around £10.5m Harlequin won in a High Court case in December against the investment's former accountants will actually be available to either save the business or return to investors.
KPMG 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.
Based on those estimates, that leaves only around £1.5m of the proceeds available to fund the scheme and/or distribute to investors and other creditors.
Major creditors include utility companies at Harlequin’s flagship resort Buccament Bay in Saint Vincent, which have cut off the water and electricity over non-payment of bills, forcing the resort to close and severing Harlequin’s main revenue stream.
Central to Mr Ames’ draft proposal, lodged with the SVG court on 26 January, is for ownership of Harlequin, in the form of shares, to be transferred in full from Mr Ames to the investors, in a “debt for equity swap”.
However KPMG, in its response to the draft proposals, dated 24 January, stated “the company [Harlequin] has not articulated the reasons why its proposal of a debt for equity swap would be more beneficial for creditors than a bankruptcy”.
“It has not presented a valuation of the company’s shares, nor is it clear whether there exists a viable market for those shares”, it added.
Mr Ames, in his proposal, said Harlequin doesn’t have the cash to pay for a valuation.
KPMG also stated Harlequin has “not accounted for a significant portion of the deposits that it received from purchasers” of its off plan properties, which is in the region of £70m according to an English High Court judge.
Quoting from statements made by Judge Justice Coulson in December, in a case Harlequin won, the KPMG report stated: “Mr Ames was asked where that large sum of money had gone.
"He purported not to understand the question… It was not his money, and he gave the impression that he did not ultimately care about it.”
The KPMG report went on to state that: “Without such an accounting, the Proposal Trustee [Mr Glasgow] is in no position to determine the full extent of assets that may potentially be available for distribution among creditors.”
“The draft proposal [from Harlequin] makes no provision for tracing the funds that may have been wrongfully diverted from the company.
“Indeed it seeks to release the directors of the company, including Mr Ames, from any liability.
“It is therefore impossible to conclude that the terms proposed by the company would place the creditors in a better position than they could be in if the company went into bankruptcy.
“The tracing powers of the trustee in bankruptcy could, conceivably, yield a wealth of assets that have not been taken into account in formulating the proposal.”
KPMG also criticised Harlequin’s “failure to keep such books of accounts as are usual and proper” for the last three years, a claim Harlequin disputes.
In a bid to appease Mr Glasgow, Mr Ames is proposing a creditors’ trustee board will oversee the running of the company so Mr Ames would no longer have any official involvement.
Mr Ames also proposes Harlequin’s flagship resort in St Vincent, Buccament Bay, be operated by a third party operator under a five year contract.
The trustee board would be tasked with managing the relationship with the resort operator and selling land that was earmarked for development in Barbados, known as Merricks.
But the KPMG report is also critical of these plans.
“Based on the present iteration of the company’s proposal, the creditors will be left to muddle through these issues in order to recover their funds as best they can.
“Ultimately, in order to recover sums owed to them, the creditors will be required to conduct a sale of the major assets of the company.
“This is tantamount to a liquidation scenario, except the creditors will have lost the benefits of a bankruptcy process, by which a trustee in bankruptcy will have wide powers to recover defalcated sums through asset tracing exercises and litigation.”
An Harlequin spokesperson said in a statement that, subject to court approval, Harlequin still has a maximum of two months remaining to enter a final proposal, and that in the coming weeks it will work with KPMG to "satisfy its requirements and finalise its proposal to ensure it is robust and addresses any concerns or queries raised".
The Harlequin spokesman added: "Attempts to pre-emptively undermine the proposal before it has been finalised are cynical, premature and against investors’ interests."
The spokesperson claimed Harlequin has conducted a survey of 500 investors where 93 per cent want to avoid liquidation if possible.
"We are working with investor groups to finalise a proposal package – including Harlequin Property SVG investors taking control of Buccament Bay Resort and overseeing a new hotel management company - that will give HP SVG investors a viable alternative to liquidation.”
laura.miller@ft.com
