Freeze of NZF Group assets to continue

Justice David Collins says there's enough evidence to suggest NZF Money's directors breached their fiduciary duties in the controversial NZF Homeloans sale.

He has ordered the continuation of a freezing order over the assets of the failed lender's parent company, NZF Group, with changed conditions. 

NZF Group chief executive Mark Thornton, one of the directors facing civil action, says the company is considering an appeal. 

Successful legal action by NZF Money receivers could add $3m to the kitty - a boost of between 15 and 20 per cent on the sum available to repay investors.

NZF Money went into receivership in July 2011 owing $16.4m and receivers KordaMentha have estimated investors might recover between 25 cents and 42 cents in the dollar.

In this afternoon's oral judgment, Justice Collins says: "There is in my view, sound evidence to support the submissions that the directors of NZF Money were focusing on the interests of NZF Group to the detriment of NZF Money.

"These actions of the directors support the plaintiff's case that the directors failed to fulfil their fiduciary and section 131 of the Companies Act 1993 duties to NZF Money."

Kordamentha has taken civil action against NZF Group, as well as Pat O'Connor, Mark Thornton, Peter Huljich, John Callaghan and Richard Waddel - who are substantial NZF Group shareholders and directors of NZF Group and NZF Money in October 2010 when the NZF Homeloans sale was signed off.

Justice Collins says he has "grave doubts" over NZF Group's ability to meet any judgment in the case.

In coming to that conclusion he points to the company's NZX announcement last month which "signalled NZF Group is likely to face liquidity challenges", as well as the resignation last week of its secretary and chief financial officer, and the fact the Serious Fraud Office and Financial Markets Authority are investigating its affairs. 

Justice Collins urged NZF Money's receivers - who sought the continued order - to press for the first possible hearing date to resolve the issue.

Just how much cash NZF Group will be able to use to pay its day-to-day expenses and legal bills will depend on the company disclosing its assets, as ordered by the court on April 5.

Justice Collins warns if the parties can not arrive at a figure themselves then the court will step in. 

Costs were reserved. 

'Nuclear weapon'

Earlier, NZF Group says the "nuclear weapon" of freezing its assets shouldn't be used to prevent it from doing its business.

The battling NZX-listed financial services company is attempting to overturn an interim order approved by Auckland's High Court on April 5, over the contentious sale of NZF Homeloans shares from subsidiary NZF Money to the parent company.

NZF Money went into receivership in July 2011 and in September the homeloans business was part of a package of assets sold in an effectively 80% sale to Australian company Resimac.

NZF Money's receivers now argue money from the sale should be returned to NZF Money's creditors and given the company's "weakening financial position", there's a risk of dissipation.  

In the High Court this morning, NZF Group barrister Phil Rice said arguments over the sale are "tenuous" and he described the use of freezing assets by the courts as a "nuclear weapon".

"This public company needs to be able to do the very business of buying, holding and selling of investments.

"What the plaintiff is asking you to do is prohibit or prevent [the company] from carrying out its business."

'Ample assets'

Mr Rice says there are "ample assets" to cover any claim by the receivers against them over the NZF Homeloans sale.

But counsel for receivers Kordamentha, Bruce Stewart QC, who is pursuing a priority hearing of the case, suggested if the company has so much money it shouldn't have a problem keeping the proceeds of the NZF Homeloans sale separate.

Mr Rice says NZF Group has already chewed through the allowed $100,000 to cover monthly expenses and "I haven't been paid".

Mr Stewart repeated an assurance the receivers were willing to allow any reasonable request for the company to meet its commitments.

NZF Group maintains NZF Homeloans was "ring-fenced" as part of its home loans division, it made an operational loss and even if the business had been sold while it was owned by NZF Money its bank, Westpac, would have taken the sale proceeds  to reduce debt owed in its "warehouse" facility.

Mr Rice says it couldn't be sold as a standalone company - and it was "tainted" by being owned by a finance company - so it was transferred to NZF Group so the entire homeloans division could be sold.

Its funds were effectively trapped, he says, at a time when the bank was hounding it for repayments.

But Mr Stewart says the gloomy financial picture of NZF Homeloans was different to that painted in the company's own prospectus released just months earlier, in which NZF Homeloans apparently made a profit of more than $4 million. 

Justice Collins asked Mr Rice whether NZF Group's NZX announcement on March 26 was the signal of a liquidity problem. He said it was "insofar as it qualified its obligation to pay interest".

The announcement said the company had an excess of liabilities over assets of about $4m, but had sufficient cash to pay interest on capital notes for at least 18 months if no new investments were made.

It went on: "Regarding the notes, the company has started discussions with the trustee (Perpetual Trust Limited) regarding the payment of interest and a conversion to equity, and whether a proposal will be put to shareholders and note holders in the coming months. In addition, NZF does not expect that sufficient cash reserves will be generated between now and maturity of the notes in 2016 to fully redeem them for cash, meaning that the notes will convert to equity."

Mr Stewart has asked the court to enforce an order made on April 5 for NZF Group to provide the cash balance of its bank accounts.

'Severe doubts'

Stephen Hunter, for KordaMentha, said an independent valuation of NZF Homeloans - sent to the court last night and tagged for NZF Group's internal use only - raises questions about a $1.6m adjustment which pushed the company's accounts into the negative.

Mr Hunter told Justice Collins the transaction struck the author of the report as "odd". It relates to capital notes - short-term, unsecured debts - "trapped" in a trust account, the value of which was being reversed.

"If you're leaving an asset in it, it still has value," Mr Hunter says.

It is clear the author has "severe doubts" about the transaction, which is central to the value of NZF Homeloans, he says.

The author suggested the auditors be asked if the transaction follows accounting rules, Mr Hunter says.

Mr Rice says NZF Money had equity trapped in its homeloans business "when it was trying to raise money to get the bank off its back".

He disputes the $3m price-tag the receivers have put on the effecitvely 80% sale of NZF Homeloans' assets in a September 2011 deal with Australian company Resimac. 

The Financial Markets Authority and the Serious Fraud Office are investigating party-related transactions between NZF Group, its companies and directors.

Brendan Mills, a senior litigation solicitor for the FMA, appeared this morning in support of Kordamentha's action, but because it didn't file an affidavit or apply to be an "intervener", Justice Collins ruled it wasn't party to the proceedings.

Failed lender NZF Money went into receivership last July owing investors $16.4m.

NZF Money's receiver KordaMentha successfully sought an interim court order freezing the assets of NZF Group over the contentious sale of NZF Homeloans, a NZF Money subsidiary, to NZF Group for $1000.

Receivers Brendon Gibson and Grant Graham say the sale was significantly undervalued, by about $3m.

They are seeking damages, interest and costs against five current or former NZF Money directors and demand NZF Group accounts for the sale from its failed subsidiary.

The receivers have also flagged a transaction on the eve of the company's receivership, involving a $1.4 million investment by NZF Group founder Pat O'Connor's family trust.

In court documents, NZF Group said it wants to invest in two new joint ventures and if it is denied access to its frozen assets it might have to call in liquidators.

Last month, the Serious Fraud Office opened an investigation into a range of transactions between members of NZF, its directors and officers from July 2006 to the present.

NZF Group says it has no knowledge of related party transactions at the heart of the SFO probe.