By Gareth Vaughan
Perpetual Trust's parent company is confident of successfully fending off a legal claim from disgruntled investors in failed property lender Capital + Merchant Finance, whose directors are facing Financial Markets Authority and Serious Fraud Office charges, but expects more such claims to emerge.
Pyne Gould Corporation (PGC) says the action against its subsidiary Perpetual, which was Capital + Merchant's trustee, stems from a small group of investors who are seeking NZ$1.4 million, representing their principal investments, plus interest. The investors' allege Perpetual Trust failed to monitor compliance by Capital + Merchant with the terms of its trust deed and offer to investors.
"Perpetual Trust has no present obligation to any of the investors," PGC says in a notice of meeting and information memorandum on the proposed distribution of its 72.21% stake in Building Society Holdings, which will be known as Heartland New Zealand from June and seek bank registration from the Reserve Bank in the second-half year.
"The advice given in respect of the claim indicates that there is a low likelihood of the claim succeeding and any possible future obligation materialising. Consequently no provision has been made in Perpetual Trust's accounts."
PGC says, however, that claims of this nature against trustees "may increase in the wake of various finance company failures."
In a separate action against trustees, Australian litigation heavy-weight Slater & Gordon and Auckland firm Turner Hopkins announced plans in March for a class action style law suit against trustees, auditors and other professionals who presided over the demise of many finance companies.
Trustee for 24 failures
Perpetual has served as trustee for 24 companies and entities that have experienced some level of failure in recent years including Boston Finance, Capital + Merchant Investment, Capital+Merchant, Cymbis/Fairview, Dominion Finance, Dorchester, First Step Trusts, Hanover Capital, Kiwi Finance, LDC Finance, Lombard Finance, Mascot Finance, MFS Pacific (OPI), Nathans Finance, Numeria Finance, Provincial Finance, St Laurence, Strata Finance, Strategic Finance, Structured Finance, Totara Mortgage Fund, United Finance, Vision Securities and Finance & Leasing.
That means Perpetual, which tragically lost 10 staff in the February 22 Christchurch earthquake, presided over nearly a third of the 63 companies and other entities that raised money from the public and have collapsed over the past five years, (more than any other trustee), putting NZ$8.6 billion worth of deposits held in 205,649 accounts at risk. See our Deep Freeze List for full details.
Accounting firm Grant Thornton was appointed receiver to Capital + Merchant by Fortress Credit Corporation, which was owed NZ$20.55 million, on November 23, 2007. The receivership came after reinvestment rates from Capital + Merchant investors tumbled to between 10% and 20% from about 50% within a year. The company had about 7,500 secured debenture holders owed NZ$167 million.
KordaMentha was appointed second receiver by Perpetual on November 29, 2007 and the Official Assignee appointed liquidator on December 15 2009. Capital + Merchant was incorporated less than 10 years ago, in January 2002.
59% recovery estimate melts away
Grant Thornton's initial recovery estimate saw debenture holders getting back up to 59% of their money. Given Fortress is the first ranking charge holder, all loans are under Grant Thornton's control until vulture fund Fortress is repaid. Capital + Merchant had 55 loans at the date of Grant Thornton's appointment with a book value of NZ$182.6 million. Of these eight were second or third mortgages worth NZ$48.3 million and six were related party loans worth NZ$37.6 million.
Fortress has been repaid NZ$62.3 million and is owed just NZ$1.45 million which Grant Thornton hopes to have cleared by year's end. However the receiver now says there won't be any recoveries to debenture holders from Capital + Merchant's assets .
"In our view, the only recoveries for debenture holders will be from any legal claims against various parties," Grant Thornton says.
The Securities Commission, now absorbed into the Financial Markets Authority, has laid both civil and criminal charges against Capital + Merchant directors Neal Nicholls, Owen Tallentire, Colin Ryan and Robert Sutherland, and criminal charges against Wayne Douglas who resigned as a director in February 2007. The watchdog alleges the company's offer documents and advertisements misled investors by misrepresenting the investment risks, especially in relation to related party lending, insurance cover and liquidity. The defendants deny the charges.
The criminal charges carry a maximum penalty of five years imprisonment or fines of up to NZ$300,000. Separate criminal charges against Nicholls and Ryan carry a maximum fine of NZ$300,000 plus NZ$10,000 for every day the offence is continued. In the civil case the regulator has applied for declarations of civil liability and civil pecuniary penalties of up to NZ$500,000 against each of the current four directors.
Meanwhile, the Serious Fraud Office arrested and laid six charges against Nicholls and Douglas last December. The charges involve nearly NZ$14.5 million worth of related party lending between April 2002 and September 2004 to three companies that converted two Palmerston North high rise office blocks into student accommodation. The SFO said it was continuing to investigate a number of other transactions "of serious concern to us.”
The Financial Markets Authority also has powers to take retrospective civil action against company directors, auditors or trustees and can take over proceedings that have already been launched by investors.
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