Nathans Finance directors 'blind' to their duties

Nathan's Directors Donald Young (pictured), Kenneth Moses, and Mervyn Doolan in the High Court at Auckland yesterday. Photo / Paul Estcourt

The Nathans Finance directors were blinded by their ambition for parent company VTL, a vending machine business, to the extreme detriment of the subsidiary's Kiwi investors, a court heard yesterday.

The finance company took down $174 million when it collapsed in 2007, leaving 7000 mum-and-dad investors without their retirement savings.

The Securities Commission's case against the former Nathans directors started yesterday in the High Court at Auckland.

Crown lawyer Colin Carruthers, QC, opened the trial by saying Nathans had an "inherent conflict between VTL and its [Nathans] investors".

He said the directors held an unreasonable belief in the viability of the VTL model, and from December 2006 until Nathans was placed into receivership, relied on what was "really hope that its business might be saved".

"Those beliefs and hopes seem to have blinded them from their duties as directors of Nathans to its debenture investors in favour of the interests of VTL.

"Nathans and its flow of debenture funds were the lifeline to VTL with loans on terms that were not arm's length and which were simply uncommercial from Nathans' perspective. Loans to related parties were never repaid on due dates, but were simply rolled over and interest capitalised."

Carruthers said yesterday this case demonstrated the risk associated with related party lending from a subsidiary (Nathans) to its parent (VTL).

"The business of the parent company was failing, and it used funds obtained from the public by relying on the financial strength and prudential lending standard of the subsidiary.

"The result was that there was no cash flow to enable Nathans to pay its debenture investors interest or to repay principal, except from the cash it obtained from new investors providing fresh funds to Nathans."

Carruthers said as a result, what was said to Nathans' investors in offer documents and marketing letters was "completely divorced from what was actually happening".

"The unreasonable belief held by the accused in the prospects of the VTL business clouded their judgment when acting as Nathans directors, and was to the extreme detriment to a large [7000] number of investors."

The criminal charges against the Nathans directors, who were also VTL directors and owners, Mervyn Doolan, Kenneth (Roger) Moses and Donald Young were filed in 2008.

A fourth director, John Hotchin, younger brother of Hanover's Mark Hotchin, pleaded guilty to similar charges last month and was sentenced at the beginning of this month.

Hotchin had his sentence reduced from a jail sentence of up to three years to 11 months of home detention.

This was in part reduced because he has agreed to assist the Crown in its prosecution of Nathans.

Yesterday, Doolan, Moses and Young entered not guilty pleas.

Nathans was primarily a funding vehicle for VTL, and its associated entities that purchased vending franchises from VTL.

The group operated in the United States, Europe, Australia and New Zealand.

VTL bought vending machines and installed its own software into the machines.

It then established a franchised network of operators that leased the machines from VTL. Nathans acquired funds from the public by offering debt security in the form of debenture stock.

It is these offerings - prospectuses, investment statements and advertisements - that led the commission to begin an investigation into Nathans for alleged Securities Act breaches.

The directors are defending allegations that the statements they issued concerning related party lending (to VTL), the quality of its loan book, its loan management practices and its management of liquidity were untrue.

The commission claims the directors made untrue statements in the company's registered prospectus and investment statement of December 13, 2006.

It further alleges the directors made untrue statements when they signed a prospectus extension certificate on March 30, 2007.

The case continues today.