Court of Appeal rejects appeals against shareholders' class action

Attempts by the former directors of the failed carpet maker Feltex to halt a class action by 2852 shareholders who lost $250 million have been thrown out by the Court of Appeal.

All five appeals against the class action started by Feltex shareholder Eric Houghton were rejected in a judgment issued by the court today, clearing the way for the class action seeking repayment of shareholders' original investment to proceed.

Feltex made an initial public offering of shares in mid-2004 and by December 2006 was in liquidation with all shareholders' funds lost.

Shareholders are alleging Fair Trading Act and Securities Act breaches, negligence, dishonesty and deception, although claims of breaches of fiduciary duty have been struck out in earlier appeals.

Former Feltex directors named in the action are its chairman and one-time Contact Energy director Tim Saunders, current Mighty River Power and Auckland International Airport chairwoman Joan Withers, Feltex's then chief financial officer, Sam Magill, and directors John Feeney, Craig Horrocks, Peter Hunter and then chief executive Peter Thomas.

The appeals fell broadly into three categories:

• The way the case was being managed should not be allowed.
• Statute of limitation rules should prevent shareholders seeking redress.
• That some claims were not sufficiently made out to pass tests of arguability.

Counsel for the Feltex directors objected to the way in which the courts allowed Tony Gavigan, a former Fay Richwhite investment banker who has undertaken to organise case management, time to source guaranteed funding of at least $200,000 to meet court costs in the event the shareholders' action failed.

They also objected to Mr Gavigan's conduct in the proceedings, including delays and missed deadlines, which a previous appeal court decision had found were more the product of "an excess of enthusiasm rather than bad faith".

"What was critical was securing Mr Houghton's access to justice through appropriate funding arrangements. That objective has now been satisfied," Court of Appeal president Mark O'Regan and fellow judges Tony Randerson and Rhys Harrison ruled.

On the complaints alleging Mr Magill "engaged into manipulation" of Feltex's earnings, the judges agreed the "evidence in support was not strong", but that it "provided a sufficient factual foundation for arguability, involving as it does an element of deceit".

"Mr Houghton is on notice that he has a significant hurdle to cross if he is to prove" that Feltex had engaged in so-called "channel-stuffing", where goods in excess of those ordered had been sent to customers to boost reported revenue, along with alleged attempts to shift the timing of receipts.

"But for now, the action must remain," the court ruled.

Apparent conflicts between rulings in other Commonwealth jurisdictions were also rejected as grounds for appeal, with the judges siding with Australian judgments that justified the class action moving forward, rather than a "narrow" English ruling on statutes of limitation.

The appellants were, in effect, arguing for an unmanageable and wasteful exercise in which as many as 6000 separate causes of action would be required, rather than a single class action, the judges said.

Reduced to its essential elements, this element of the appeals related to High Court rules intended to prevent "stale" or "ancient" claims being pursued and the inability of defendants to mount adequate defences.

These could not be held to apply in this case.

(BusinessDesk)