Carpet firm's directors want compo

Feltex directors (from left) John Hagen, Peter Thomas, Tim Saunders, Peter David Hunter and John Feeney attend a press conference yesterday afternoon. Photo / Sarah Ivey

The Feltex trial has highlighted the risks of being a director at a time when New Zealand needs good people on company boards, the failed carpet company's former chief executive Peter Thomas said yesterday.

Feltex's five directors have waited for four years to be cleared of Financial Reporting Act (FRA) charges.

Thomas said the directors would be seeking compensation and would take any redress options available to them.

All five directors, Thomas, Tim Saunders, John Feeney, Peter David Hunter and John Hagen were found not guilty at the Auckland District Court.

Saunders, the company's former chairman, said the board obviously regretted the failure of the company and the vast amount of money investors lost when Feltex was placed into receivership by ANZ in 2006.

But he said the company's commercial failure did not justify the criminal charges that were laid against them.

Saunders said the case had taken "four years out of our lives" and had had a detrimental effect on their families and on their reputations as reputable businessmen.

He said they were all positive men who were looking forward to getting on with their lives.

"[We] are pleased with the result and with the tone of the judgment. It is the outcome we were expecting and hoping for.

"The judgment confirms the directors acted with honesty and integrity."

Thomas said future directors could be deterred from acting on the boards of listed companies because of the associated risks seen through this trial and the effect such proceedings can have on a director's reputation, family and future earnings. The Crown alleged the directors failed to report the company was in breach of its A$100 million loan with ANZ and incorrectly classified its debt with the bank as non-current instead of current, meaning it was on call, in its half-year accounts to December 31, 2005.

The directors later conceded the above details were not reported in the company's interim accounts, but claim at the time they signed the documents they believed the statements met all the required accounting standards for a listed company.

Feltex paid accounting firm Ernst & Young A$113,000 to conduct a review of the accounts to ensure they were correct and complied with the newly adopted International Financial Reporting Standards (IFRS).

Ernst & Young did not pick up the lack of disclosure in the accounts and verbally assured the board they were correct when questioned before the documents were registered.

Yesterday, Judge Jan Doogue said: "There is not one skerrick of evidence to suggest any intention by them [the directors] to mislead the regulatory authorities, market, shareholders, creditors, potential investors, or any other person.

"These directors were entitled to seek and rely upon specialist advice."

She said the directors took "all reasonable and proper steps" to ensure the applicable requirements of the FRA would be complied with and that they acted in good faith and made proper enquiry.

She said their reliance on the reassurance of the reviewers [Ernst & Young] was warranted in the circumstances. "They took these steps not because they were seeking to protect themselves but in order to promote the interests of the company by ensuring compliance with the FRA in this new and challenging accounting environment.

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

This decision could have an effect on a civil case before the courts.

About 1700 investors have brought a class action against Saunders, Feeney, Hunter, Sam Magill (chief executive before Thomas), Craig Horrocks and Joan Withers.

Hagen and Thomas are not defendants in this case.

The action alleges the prospectus, at the time when Feltex floated in May 2004, contained information that was wrong or omitted to make information available that could have affected a decision to invest in the company.

When Feltex collapsed in September 2006 about 8000 investors lost millions.

VERDICT 'COMFORT' FOR OTHERS CHARGED

Other directors facing charges may take some comfort from the strength of yesterday's not guilty verdict, a legal expert says.

Chapman Tripp partner Roger Wallis said the Feltex judgment would provide some reassurance to the directors in the Lombard and Nuplex cases.

Directors of finance company Lombard - including former Cabinet minister Sir Douglas Graham - have had criminal and civil charges laid against them for alleged breaches of the Securities Act.

The Securities Commission has laid civil charges against Nuplex directors for alleged breaches of continous disclosure rules.

Wallis said the Ministry of Economic Development and Securities Commission should strongly enforce statutory requirements to maintain investor confidence.

But directors also needed to be confident they would not be penalised for decisions that were taken after full consideration and after seeking expert guidance, he said.

"The crux of the decision is where Judge Jan Doogue states directors must pay attention and give appropriate consideration to material placed before them. They are entitled to impose trust in others so long as they take reasonable steps to ensure that such trust is warranted and are not alerted to reasons why the trust may be misplaced."

Wallis said this meant directors could rely on professional advice from accounting firms and other experts in areas such as financial reporting.

"Investors will not be well-served if, in attempting to protect their interests, the legal risks for directors become such that talented and well-intentioned people are deterred from taking on directorships."

Former Shareholders' Association chairman Bruce Sheppard supported this claim, saying the case could put people off becoming directors of listed companies and as a result "the smartest directors would probably not join boards".

"[The] risk profile of being a director has gone up. They are going to have to pay incredible attention to detail, more detail on compliance and less on running the company, which would result in reduced returns for shareholders," he said. "There are no winners in the case."