Allied Farmers refuses to pay Hanover final NZ$5 million settlement; alleges "serious breaches"

Allied Farmers has announced it has refused to pay a final NZ$5 million settlement to Hanover Finance because it still has claims against Hanover over "serious breaches" worth more than the NZ$5 million.

Allied Farmers Managing Director Rob Alloway said Hanover's owners, Mark Hotchin and Eric Watson, had released personal guarantees and sold assets at less than market value in an apparent attempt to raise funds to repay cash during a moratorium agreed in late 2009. This meant they avoided having to use NZ$10 million put aside in a trust to help pay investors and avoided having to put in their own personal money to top up the account.

“These claims relate to a number of transactions where we have been unable to ascertain any sufficient commercial rationale or benefit to Hanover, including the release of personal guarantees and the sale of assets at what Allied considers to be less than market value," Alloway said.

"In some instances, it appears to Allied Farmers that the overriding reason that Hanover entered into such transactions was in order to generate the cash funds required to meet its repayment obligations to investors under the moratorium agreement” Alloway said.

“Generating cash in the manner that it did, had the effect of avoiding Hanover having to utilise the NZ$10 million held in a solicitor’s trust account for the purpose of protecting the initial payments under the moratorium," he said.

"Had the funds on trust been used in the period to 31 December 2009, Hanover’s shareholders would have been obliged under the terms of the moratorium to pay their own money into the trust account to restore the NZ$10 million so that this amount was available to underpin the next year’s moratorium payments.”

The announcement comes on the eve of a June 30 deadline imposed by Allied Farmer's banker Westpac to renegotiate a NZ$16.5 million loan facility.

Here is the full statement below from Allied Farmers.

On 17 November 2009, Allied Farmers Limited and Hanover Finance Limited/United Finance Limited (Hanover) entered into an Agreement for Assignment of Finance Assets in Exchange for Debenture Obligations (Agreement).

Last evening, Allied Farmers informed Hanover that in Allied Farmers’ view, Hanover’s conduct in relation to transactions that Hanover executed in the period prior to the completion of Allied Farmers’ purchase of the Finance Assets pursuant to the Agreement constituted serious breaches of Hanover’s obligations pursuant to the Agreement. Allied Farmers has therefore given notice to Hanover that:

-Allied Farmers has substantial claims (Claims) against Hanover resulting from Hanover’s breaches of the Agreement;

-The value of the Claims exceeds $5 million and accordingly Allied Farmers considers that it is entitled to and will set off the Claims against the obligation that it would otherwise have had under the Agreement to pay Hanover $5 million on 30 June 2010. That payment will not therefore be made.

-Allied Farmers considers that it is entitled, as a result of Hanover’s breaches of the Agreement, to cancel the Agreement under the Contractual Remedies Act, and has notified Hanover that it has cancelled the Agreement.

The effect of this cancellation is, in summary, to bring to an end any future obligations under the Agreement that have not yet arisen unconditionally.

The cancellation of the Agreement does not, without more, cancel or unwind those parts of the Agreement that have already been performed.

Allied Farmers’ Managing Director, Rob Alloway said: “We want to make it clear that this cancellation does not affect the parts of the transaction that we completed in December 2009 when the former Hanover debenture holders swapped their debentures for shares in Allied Farmers."

"Allied has the assets and the Hanover investors retain their Allied shares. The cancellation simply underscores Allied Farmers’ entitlement to set off its claims against the obligation it would otherwise have had to pay $5 million to Hanover on 30 June”.

The Claims arise in relation to Hanover’s breaches of its obligations under the Agreement, which obligations included the following (from time to time):

-to administer its assets in the usual and ordinary course;

-to consult with Allied Farmers in relation to proposed transactions;

-not to dispose of any Finance Asset without the prior consent of Allied Farmers;

-not to terminate or adversely vary or fail to enforce the terms of any Hanover contract assumed by Allied Farmers;

-not to enter into any abnormal or unusual transaction which adversely affected its assets; and

-to apply cash generated after 30 June 2009 only to specified costs or pay it to Allied Farmers.

“These claims relate to a number of transactions where we have been unable to ascertain any sufficient commercial rationale or benefit to Hanover, including the release of personal guarantees and the sale of assets at what Allied considers to be less than market value."

"In some instances, it appears to Allied Farmers that the overriding reason that Hanover entered into such transactions was in order to generate the cash funds required to meet its repayment obligations to investors under the moratorium agreement” Mr Alloway said.

“Generating cash in the manner that it did, had the effect of avoiding Hanover having to utilise the NZ$10 million held in a solicitor’s trust account for the purpose of protecting the initial payments under the moratorium. Had the funds on trust been used in the period to 31 December 2009, Hanover’s shareholders would have been obliged under the terms of the moratorium to pay their own money into the trust account to restore the NZ$10 million so that this amount was available to underpin the next year’s moratorium payments.”

In addition, Allied Farmers has informed Hanover that it believes it has further substantial claims against persons who were directors and/or officers of Hanover from time to time (Director Claims).

Those rights arise, among other things, from conduct that Allied Farmers considers constituted breaches of their duties to Hanover, all rights in relation to which have been assigned to Allied Farmers pursuant to the Agreement.

”We have reserved the right to make Director Claims against directors and officers of Hanover at relevant times, including in particular those persons who are beneficial owners of Hanover Group” said Mr Alloway.

“We have considered all these matters very carefully. As the matters are likely to be part of legal proceeding and they involve third parties, Allied will not be making any further comment about the details of transactions that form the Claims”.

Allied Farmers will update the market in the event of any further developments.