How creative can you book in times of need? That question was central to a high-profile lawsuit recently filed before the Enterprise Chamber in Amsterdam between the second largest gym chain in the Netherlands, SportCity, and one of its most important creditors, the American investment fund HPS Investment Partners.
During the corona crisis, the company, with 110 branches across the country and which also includes the now renamed Fit for Free gyms, ended up in financial difficulties. Just like many other companies. Government-imposed lockdowns forced the company to keep the doors of its gyms closed for months in both 2020, 2021 and 2022. And that meant a (considerable) loss of income. In 2021, the company suffered a loss of 25 million euros. In 2022 of 41 million euros.
Check
It was the start of a long-running conflict between SportCity and its main financier. Right at the start of 2021, HPS Investment sounded the alarm at the gym chain because it no longer met the financing conditions. SportCity then looked for a way to prevent a forced bankruptcy and went to court. There it was successfully protected against such an unwanted bankruptcy by appealing to new bankruptcy legislation, the so-called WHOA.
The following year, however, SportCity did something that, according to HPS, was even outright illegal. In 2021, SportCity had included an item in its books of approximately 30 million euros under the heading ‘Covid debt’. That was subscription money from members who had continued to pay during the gym closures, but which SportCity thought it would probably have to pay back later, when customers asked for their money back.
But in 2022, it converted some of that mail into a provision, some of which SportCity subsequently decided was unnecessary to compensate customers. That part could be added to the turnover. Because the pandemic was now almost over and, according to SportCity, it was becoming increasingly certain that customers would not have their money back after all. This change benefited the result and other financial indicators, which thus became slightly less bad.
HPS disputes SportCity’s reading and sees it mainly as an attempt to artificially improve finances. In this way, the chain could prevent HPS from claiming collateral, which should protect the interests of HPS, but which would not benefit SportCity itself. When providing the loan, HPS had set strict financial requirements, and if they were not met, the American investment fund would be allowed to claim the loan and the collateral. In this case, the collateral was shares in (the parent company of) SportCity, which are now owned by the Dutch investor Bencis. With the shares, HPS would gain de facto control over the gym chain.
Accounting interventions
The details of the conflict are described in detail in the decision of the Enterprise Chamber, which dates back to the end of July but remained unnoticed until the Financial Daily reported on Tuesday. The decision clearly shows how far companies that were in need during the pandemic sometimes went to save their lives.
Many companies have probably searched diligently for ways out of the crisis, and possibly also pushed the boundaries. The impact of the corona crisis on the business community was considerable, as the Netherlands Bureau for Economic Policy Analysis already investigated in 2020. However, this rarely becomes very visible, making it difficult to estimate to what extent these measures are appropriate or not. The case between SportCity and HPS lifts a corner of the veil, even though the lawsuit itself took place behind closed doors.
In the end, the Enterprise Chamber did not fully comply with HPS’s requirements (destruction or at least adjustment of the 2021 annual accounts). SportCity was allowed to do the accounting procedures. But the judge does think that SportCity should not have included the challenged Covid debt item, and its later conversion, without further explanation. The Enterprise Chamber also ruled that the annual accounts of 2021 “seriously fall short” in providing insight into the financial position of the gym chain.
Robert van Moorsel, lawyer at the Corporate & Recovery.legal office in The Hague and specialized in corporate and bankruptcy law, concludes: “It is good that these kinds of cases are subsequently made public. Corona was both a period of pure fear, hope for better times and new setbacks. This led to an art-and-fly job for companies and often for investors as well. This was often hidden from the general public. Now that there is more peace, this matter can really be looked at and handled properly.”
Read also: The budget gym is advancing