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Hot Topic NBR Focus: GMO
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Directorships will suffer: Feltex five

Although their names have now been cleared of criminal charges, Feltex's five former directors say the fall-out of their two-year court battle will deter other directors from seeking public directorships.Having yesterday being found not guilty of Financia

Georgina Bond
Tue, 03 Aug 2010

Although their names have now been cleared of criminal charges, Feltex’s five former directors say the fall-out of their two-year court battle will deter other directors from seeking public directorships.

Having yesterday being found not guilty of Financial Reporting Act breaches – a decision they said they expected – the five said they were pleased to be getting back to normal life after significant disruption.

But Peter Thomas, who was also the company’s former chief executive, said they were angry the case was brought against them after Auckland District Court Judge Jan Doogue rejected each of the prosecution’s arguments.

This would be a deterrent for directors seeking public directorships at a time when New Zealand needs good directors, he said.

“If you were a director sitting out there contemplating public director life and you see the way this case has been conducted – would you?”

The five held a press conference at the Auckland offices of their law firm Bell Gully yesterday afternoon, after  Judge Doogue cleared them of two charges under the Financial Reporting Act 1993, to which they had pleaded not guilty.

The charges related to failing to publish a breach of Feltex’s banking covenants and not properly classifying its $A119.5 million ($NZ157 million) debt facility with the ANZ bank in the company’s December 2005 half-year accounts.

If they had been found guilty, they faced fines of up to $100,000 each.

Shoulder-to-shoulder at the press conference, Peter Hunter, Peter Thomas, Michael Feeney, John Hagen and former chairman Tim Saunders were the vestiges of the once-listed carpet manufacturer that unravelled into receivership, then liquidation, in 2006.

Mr Thomas said the outcome of the case had shown failure on the part of the registrar of companies, Neville Harris.

“The entire prosecution on this case failed – not just missed. It failed.”

He asked what confidence directors would now have in the registrar of companies.

“We expect cases like this to be seriously reviewed by some one before they are bought.

“Where was the balance? Where was the check? Read this judgement and ask, why was this case bought?

John Hagen said the charges had brought irreparable damage to the directors’ professional reputations and they five would be taking their complaints about the case to the registrar of companies Neville Harris.

However, Mr Saunders said the directors had not yet made contact with Mr Harris.

“We’ve not had a note of congratulation from him either,” he said.

A spokesperson for the registrar of companies last night said neither the registrar nor the Ministry of Economic Development would make any comment on the Feltex verdict.

Mr Thomas said the five would pursue “every avenue available to us to seek re-imbursement” for the legal costs.

“Another burden for the New Zealand public.” he added.

Judge Doogue’s judgement recorded that the directors took the appropriate step of obtaining expert advice on the company’s half-year accounts when it employed specialist accounting firm Ernst & Young to review the accounts – the first to be complied under International Financial Reporting Standards.

“Had the engagement been undertaken to the proper professional standard, which the director were entitled to expect, would have identified the errors, which would then have been corrected.”

Judge Doogue found that the directors “cannot be held responsible for Ernst & Young’s failure to identify the appropriate debt classification or to give advice that the breach of covenants needed to be disclosed.”

“These directors were entitled to seek and rely upon specialist advice. Ironically, it seems clear that the company’s specialist advisers were themselves judging the financial statement by reference to the requirements of the previous standards rather than the requirements of the new standards. That is the single most important reason why the director have end up having to face this prosecution…”

“There is overwhelming evidence that these directors are all honest men and that they conducted themselves at all times with unimpeachable integrity.

“There is not one skerrick of evidence to suggest any intention by them to mislead the regulatory authorities, market, shareholders, creditors, potential investors or any other person.”

Feltex raised $24 million when it floated on the NZX in May 2004. The company had debt troubles when it went into receivership and subsequently, liquidation in 2006. Its assets were sold to rival Godfrey

Georgina Bond
Tue, 03 Aug 2010
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Directorships will suffer: Feltex five
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