Feltex’s liquidator, McDonald Vague, is pushing ahead with its court case against five former directors of the failed carpet maker, spurred on by admissions made in the case the five recently won against the Registrar of Companies.
McDonald Vague director Iain McLennan told interest.co.nz the Registrar of Companies case, including a District Court trial, had been watched closely.
“We were happy with some of the admissions that were made,” McLennan said. He declined to elaborate on just which admissions had caught his eye.
ANZ, owed A$119.5 million, ran out of patience with the company’s board and tipped Feltex into receivership on September 22, 2006 with McGrathNicol appointed receivers.
The receivership came just 27 months after Feltex's NZ$1.70-a-share, NZ$254 million initial public offering (IPO) in June 2004 when private equity group Credit Suisse First Boston Asian Merchant Partners sold out lock, stock and barrel. Shareholders lost everything.
McDonald Vague was appointed liquidator in November 2006. It subsequently filed a High Court statement of claim seeking about NZ$41 million from the five – former chairman Tim Saunders, ex-CEO Peter Thomas, John Hagen, Peter David Hunter and John Michael Feeney. The liquidator’s allegations include reckless trading and negligence. It also maintains Feltex was "balance sheet insolvent'' for at least 11 months before the receivers took the reins and breached sharemarket continuous disclosure laws.
The statement of claim goes as far as saying Feltex's board had failed, since 2001, to annually forecast, project or budget "with any reliability" Feltex's financial performance.
Allegations denied, trial eyed
In a statement of defence the five deny the allegations, saying they followed legal advice from Bell Gully and Alan Galbraith QC and auditor Ernst & Young's advice on sharemarket disclosure rules, and took Deloitte's counsel on Feltex's solvency.
McDonald Vague tried mediation with the five earlier this year. However, McLennan said the talks ended “very quickly.”
“We’re not in any talks with them at present,” said McLennan.
“We’re preparing for a trial in May of next year (and are) working on briefs of evidence and such at the moment,” he added. “At this stage we expect to be in court next May.”
A three-week trial is set down starting May 16, 2011, almost five years after Feltex was put into receivership.
McGrathNicol’s most recent report says the receivers of Feltex’s New Zealand operations have repaid A$49.2 million to ANZ and the receivers of the firm’s Australian operations have, under cross guarantees, repaid A$67.4 million. This includes A$10.1 million repaid as recently as the six months to March 21 this year. At that date, the balance due to ANZ was just A$2.9 million, plus accrued interest since the receiver’s appointment.
Registrar of Companies loses
In his case, Registrar of Companies Neville Harris alleged the five ex-Feltex directors breached the Financial Reporting Act because the company's unaudited interim financial statements for the six months to December 31, 2005 did not correctly state the current status of the NZ$100 million-plus ANZ Bank facility, or disclose that terms of this lending had been breached by Feltex.
Harris' action came after a 2007 Securities Commission investigation into the Feltex IPO, subsequent disclosures and reports. It referred breaches of the Financial Reporting Act to Harris.
Despite the directors acknowledging they had breached the Financial Reporting Act, the Act provides a defence if the directors prove they took all reasonable steps to comply. After evidence from the directors, ANZ staff, and Feltex’s auditors Ernst & Young, Judge Jan Doogue ruled the five had established this defence, and acquitted them on August 2. Harris decided not to appeal.
Judge Doogue went as far as saying there was “overwhelming evidence” the five were “all honest men” who conducted themselves at all times with “unimpeachable integrity.” She said there was no evidence to suggest any intention by them to mislead regulatory authorities, the sharemarket, shareholders, potential investors or anyone else.
The liquidator's claim, under the Companies Act and Securities Markets Act, includes NZ$9.1 million of shareholders' losses between August 25, 2005 and December 31, 2006 when Feltex was allegedly in breach of continuous disclosure rules. See the latest liquidator's report.
Rival Godfrey Hirst ultimately plucked Feltex from the receivers in a NZ$129 million deal in October 2006. After acquiring Feltex, Godfrey Hirst shut four - Christchurch, Kakariki, Foxton and Feilding - of Feltex's six New Zealand factories at the cost of about 415 jobs.
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