Why is it that retired accountant John Hepburn is still waiting for answers from former chairmen of the now defunct Hanover Finance on why $45.5 million in dividends was paid to its prominent shareholders in the financial year which ended just three weeks before the controversial finance house effectively shut its doors?

Hepburn - who was a secured depositor in Hanover Finance - has written to former Hanover Finance chairman Greg Muir (initially through the company's lawyer Roger Wallis of Chapman Tripp and then directly to Muir at his Tourism NZ address), the Securities Commission and the Serious Fraud Office alerting them to his concerns that the company's decision to pay out the entire $45 million in dividends for the June 30, 2008 year could not be justified.

His concern was initially flagged by information contained in the December 2009 Grant Samuel report which was prepared for investors in advance of their vote on the proposal to swap their Hanover investments for shares in Allied Farmers.

In particular, information that showed Hanover Finance made an after-tax profit of $10.176 million for the period June 30, 2008 year, yet paid out $45.5 million in dividends to its former shareholders Eric Watson and Mark Hotchin, and, that the associated United Finance, which showed an after tax loss of $3.204 million for the same period, also paid out dividends of $12.8 million over the same period.

Information in the Grant Samuel report showed that Hanover Finance's retained earnings were -$9.624 million at June 30, 2008. United Finance's retained earnings were -$7.428 million. A combined $17.052 million deficit.

On December 10, 2009 - just days before the former depositors in Hanover Finance, Hanover Capital and United Finance voted by a very narrow margin to accept Allied Farmers' proposal - Hepburn wrote a letter to Muir via Wallis saying he had attended an investor briefing the previous day at the Bay Park Events centre in Mount Maunganui.

He had posed a question to Hotchin to which he felt he did not receive a satisfactory answer so he was writing to Muir, who was chairman at the relevant time, seeking clarification.

Hepburn wrote that he had asked Hotchin at that meeting if the shareholders intended to repay the $17.052 million.

But he was not satisfied with the response.

Hepburn's contention was some $17.052 million of the combined total of Hanover and United dividends for the June 30, 2008 year should not have been paid to the shareholders as there were not sufficient retained earnings within the companies to do so.

He was particularly concerned to find out whether the dividends had been struck on the basis of audited financial statements.

He noted that on July 23 - just three weeks after the June 30 balance date - the company announced it was suspending repayment of interest and principal to its investors.

His contention was that it was unlikely that audited financial statements would have been received by then. He told Muir the $17.052 million should not have been paid to the shareholders but should have been returned to the secured depositors account.

He also questioned the redemption of $9.733 million of preference shares saying in his opinion they ranked behind secured depositors' interests.

On March 1, Hepburn again wrote to Muir (this time care of the Tourism NZ chair's Wellington office) including a copy of his December letter. He said Wallis had told him during a December 24 phone call that his earlier letter had been discussed with Hanover Finance's (then) chairman David Henry and he was told Henry would reply on Hanover's behalf.

No communication eventuated.

Nearly four months after waiting for replies to his original letter to Muir, Hepburn went to the authorities.

On April 1, Hepburn took his concerns to the Serious Fraud Office and the Securities Commission.

In a joint letter to SFO chief executive Adam Feeley and commission chairman Jane Diplock, Hepburn reiterated he was writing to them with respect to "possible overpayments" of common share dividends made by Hanover Finance and United Finance shortly before their announcements that all payments of interest and principal to secured depositors were being suspended on July 23, 2008.

Hepburn reiterated he had tried on five occasions to get answers to what he saw as apparent irregularities. He went on to state that an examination of the minute books for the board of directors would shed light on the situation.

"If the sum of $26.785 million could be recovered from these very high profile, very wealthy shareholders then that would mean almost an extra 5 per cent recovered on their investment for every secured depositor of record at July 23, 2008."

The commission's response was prompt.

On April 8, Simon McArley (acting director for primary markets) wrote back saying he had reviewed the matters. The commission's jurisdiction was limited. Under the Securities Act 1978, it was empowered to address matters relating to the adequacy and accuracy of disclosure documentation produced by a public issuer at the time it offers securities to the public.

"Your complaint relates principally [sic] the director's management of the company and performance of their duties to the creditors and shareholders of the company.

"This is outside our current jurisdiction.

"The only remedies available to you in this respect would be personal action against the directors for breach of those duties.You would need to seek advice of a suitably qualified and experienced legal practitioner to assess the feasibility of any such action."

The SFO didn't reply to Hepburn in writing. In a Listener article published last month, Feeley confirmed the SFO had done no work on Hanover.

Hepburn finally received a telephone call from an SFO official several weeks back to say she was looking into the matter and he could expect a response within 10 days.

The SFO official's deadline came and went.

Feeley didn't appear to know anything about the Hepburn letter when I called him last week to get the SFO's response on its inquiries.

When Feeley said he'd talk to McArley about it - who has left the Securities Commission and is now the SFO's general manager markets and corporate fraud - I pointed out that his new hire had already passed the parcel on this issue while at the commission.

Last Friday, Hepburn says he got a call from SFO's Sasha Cleaver to say that his concern would be looked at after the Securities Commission finalised its own broader inquiries relating to compliance issues and Hanover Finance.

In my opinion, it is abundantly clear to all but the deliberately blind that the Hanover loans book which was at the centre of last December's so-called rescue effort was hopelessly overvalued. Allied Farmers' share price has since fallen through the floor. Commentators - including myself in last Wednesday's column - have variously called for Allied Farmers to be put into statutory management, or into receivership.

Diplock, in an article published in last Saturday's Weekend Herald - in response to "a number of commentators have been calling for the statutory management and querying why it wasn't used for finance companies such as Bridgecorp, Nathans or Capital + Merchant" - reiterated it should only be used in limited circumstances.

It's instructive that Diplock's article ignored the elephant in the room: Allied Farmers/Hanover.

There could be a simple explanation behind why Muir and other high profile former Hanover directors like Ngai Tahu leader Sir Tipene O'Regan signed off on the $45.5 million in dividends.

In an earlier Listener article, journalist Rebecca Macfie wrote: "In the final year before the company defaulted, dividends of $45.5 million were signed off - $17 million of that in the six months to June 2008.

But the dividends the directors approved in those last perilous months are said to have never left the business - they were paid on condition the money was used to reduce the related-party loans (to outfits associated with Hotchin and Watson) that riddled the company's books and made Hanover unpalatable to the corporate lenders it was trying to woo."

Hepburn's contention is that practice would have been out-of-line with the conventions he had upheld while employed for the best part of 20 years as the financial controller of one of Canada's largest commercial property companies.

He now understands that it will not be until October - at the earliest - that the SFO actually does study his letter.

In my view, New Zealand investors are entitled to clear answers from the former chairmen of Hanover Finance, its former directors and shareholders on such issues.