ANZ advised of $64m loss if Feltex failed, court told

Former Feltex Carpets chairman Tim Saunders. Photo / Dean Purcell

An independent advisor told ANZ in 2006 it faced a $64 million loss if Feltex went into liquidation and that a trade sale was the best way forward.

Former ANZ senior executive Peter Holland told the Auckland District Court today an assessment by corporate insolvency specialists McGrath Nicol in the months leading up to Feltex's collapse revealed ANZ would suffer a substantial loss if the company collapsed.

It became apparent that a sale of some form would be in the bank's best interests, Holland told the court during the second day of the Feltex's defended hearing.

Feltex went into receivership in September 2006, then into liquidation, leaving 8000 shareholders who had invested $254 million in its public float just two years earlier, out of pocket.

The five former directors of the carpetmaker are in court on charges of two breaches of the Financial Reporting Act.

The five – former chairman Tim Saunders, and Michael Feeney, Peter Hunter, Peter Thomas and John Hagen - have pleaded not guilty to the charges.

The charges, laid by the Companies Office, allege the company's half-year accounts to December 2005 did not disclose that it was in breach of its loan agreement with ANZ.

Holland, who worked in the side of the business which focused on preserving bank's capital and preserving loans, took over the client relationship with Feltex from another part of the bank in November 2005.

Holland said ANZ wanted to minimise the loss for the bank where possible and ensure the bank's exposure was protected.

"Liquidity problems mean pressure on cash. Put simply that's potentially running out of cash and the word for that is insolvency," he said.

"That's what my business unit was focussed on but what we were also focussed on was for the company to manage their way through their problems."

Profit investment initiatives were encouraged, he said.

Feltex sold its yarn plant in Melbourne in 2005 to save money and ANZ approved an advance loan of A$10 million to cover the costs of closing the plant.

By this time the company was "heavily leveraged" and in 2006 owed ANZ more than $120m.

Godfrey Hirst had earlier made an offer for parts of the business, but this was rejected by management and the board of Feltex.

Days after the receivers were called in Feltex's assets were sold to the rival firm.

The hearing continues.