KEY POINTS:
The Securities Commission's report on failed carpetmaker Feltex is likely to provide the company's liquidator with some ammunition in its action to recover $20 million from the company's former directors and may see them barred from other boards, the Shareholders Association says.
In the report issued yesterday, the
commission reiterated its earlier finding that Feltex's prospectus was "not misleading in any material particulars" but it found the company failed to disclose material information to the market concerning changes to its banking facility with ANZ Bank in October 2005.
It also failed to disclose the breach of its banking covenants in its December 2005 half-year financial statements and it did not properly classify its debt in in the same set of accounts.
"These matters variously raise issues about the governance of the company by the Feltex board and about the conduct of Feltex's auditors, Ernst & Young," the commission said.
However, it said that as Feltex was now in liquidation there was no realistic chance of taking enforcement action.
But it believed Feltex's board failed to pay sufficient attention to the breach and failed to consider whether there were any financial reporting obligations arising from it. It has now referred the matter to the Registrar of Companies.
Shareholders Association chairman Bruce Sheppard said the Registrar of Companies could potentially bar the directors from serving on other boards, and the association would write to the office requesting that.
He said the commission's report was "an interesting and damning document".
While he believed Ernst & Young, as one of the NZICA's biggest member firms, was unlikely to suffer any meaningful penalty from their industry body, the report could have implications for Feltex's directors, who the association has strongly criticised for their part in the company's failure.
"The issue is, is there enough in there for the liquidators to have a personal crack at the directors for breach of fiduciary duty?"
Feltex's liquidators, McDonald Vague, have already said they intend to pursue Feltex's directors in the High Court, seeking more than $20 million in damages from them. The directors at Feltex at the time of the receivership were John Feeney, John Hagen, Peter Hunter, chairman Tim Saunders and Peter Thomas.
McDonald Vague's John Vague had identified several issues where he believed there was enough information to make demands on the directors alleging breaches of various provisions of the Companies Act and Financial Transaction Reporting Act.
In a statement issued on behalf of Saunders, Thomas, Feeney, Hagen and Hunter, they said the changes in the banking arrangements of Feltex "were already known to the market" and the subsequent breach of the banking covenants was "foreshadowed in market analysts reports and were generally known to the market".
Ernst & Young said it did not agree with the commission's findings, "in particular, [on] the thoroughness of our review procedures".
Feltex collapsed in September last year, less than 2 1/2 years after it was floated to New Zealand retail investors.
Some 8800 investors, many of whom had bought shares at $1.70 in the May 2004 IPO, were left with nothing, as were unsecured creditors, owed $13.1 million.
Within a week of the receivers being called in, old rival Godfrey Hirst had secured a deal to buy Feltex's assets.
The sale enabled the ANZ bank, owed $135 million, to walk away with what the receivers described as just a "small loss" on its investment.
UNDER THE CARPET
Securities Commission's findings:
* The IPO prospectus was not misleading.
* Feltex failed to disclose material information regarding changes to its ANZ banking facility.
* It also failed to disclose the breach of its banking covenants and did not properly classify its debt in its December 2005 half-year financial statements.
* Ernst & Young's work on those statements "failed to meet the required standard".