LDC Finance was insolvent from the time it was set up and its directors ran it "recklessly, incompetently and with disregard for the basic requirements of a finance company", a lawyer for the firm's out-of-pocket investors has alleged.
The allegations are laid out in a pre-trial decision on how a High Court lawsuit brought by LDC's investors and liquidators should be be run.
The representative action is against the firm's former directors, accountants, trustee and auditor.
The directors named in the proceeding are David Miller, Kevin Elliott, Christopher Hardiman and John Janetto.
The accountants are Carran Miller Strawbridge, now in liquidation.
The firm's trustee was Perpetual Trust (which has since merged with Guardian Trust) and the auditor was accounting firm Sherwin Chan & Walshe.
The six-week trial is due to begin in Nelson in July - almost nine years after LDC collapsed owing 1000 investors about $20 million.
Some got their money back but unsecured investors have received nothing and are still owed more than $12.5 million. Secured investors are still owed about $1.5 million in interest over-and-above what they have already got back.
Any further recovery likely hangs on the outcome of the upcoming court action.
Although the trial is still half a year away, lawyers from the parties appeared before Associate Judge John Matthews last month in a dispute over how the case should be run.
The investors' lawyer, Hugh Rennie QC, said it was believed the evidence showed LDC was "from its incorporation insolvent and operating in breach throughout of prospectus disclosure and other requirements".
"The directors were conducting the operation of the company at least recklessly, incompetently and with disregard for the basic requirements of a finance company," Rennie is quoted as alleging in Associate Judge Matthews' decision.
The directors' lawyer, Tim Spear, told the Herald his clients refuted the allegations and say LDC was solvent when it went into receivership.
Rennie also submitted it was believed Perpetual had "failed to act as a competent trustee" and that it "agreed to or acquiesced in actions which enabled trading to continue when LDC was insolvent".
Perpetual said it strenuously denied the allegations.
The actions or inaction of Sherwin Chan & Walshe allegedly "enabled the issuing of a misleading prospectus" and it failed to identify which borrowers from LDC were "the primary cause of its insolvent position", Rennie alleged.
"Mr Rennie therefore says that the evidence for the plaintiffs will show that from its incorporation, LDC was not an entity to which any informed or prudent investor would have entrusted investments. Its financial statements were a fiction, reporting as assets loans which were not recoverable when due or, in some major instances, at all," Associate Judge Matthews said.
The dispute before the judge concerned whether the trial should be split in two such as in the Feltex class action, as pushed for by the defendants. The investors, however, wanted the bulk of the issues in the case considered at the same time.
Associate Judge Matthews was of the view the plaintiffs were "entitled to run the case the way they wish" unless there was a "manifest disadvantage" to the defendants. He did not believe there was any and directed that the bulk of the claims in the case be argued during one trial.
The defendants have since applied for another judge to review the decision.