The directors for failed carpet maker Feltex want to know the identity of a British backer for the looming class action, and are seeking to oust Tony Gavigan, the driving force behind the proceedings, the Court of Appeal heard today.

The directors of the company at the time of its 2004 float don't have enough assurance their costs will be covered if they successfully defend the class suit being brought by Feltex shareholder Eric Houghton on behalf of some 3,000 other investors, their counsel David Cooper told Justices Mark O'Regan, Anthony Randerson and Rhys Harrison in Wellington.

The directors at the time were Tim Saunders, Sam Magill, John Feeney, Craig Horrocks, Peter Hunter, Peter David and Joan Withers.

Cooper's concern is that UK-based Harbour Litigation Funding isn't directly involved, rather an unnamed associate is funding the action with an undisclosed level of insurance cover for costs, via Gavigan's wholly-controlled New Zealand entity, Joint Action Funding Ltd.


The directors are seeking details of the funding arrangement, including the identity of the actual British entity as well as the level of insurance cover, Cooper said.

Counsel for Houghton, Austin Forbes, said Harbour didn't disclose the terms of its commercial arrangements, but said the level of insurance was sufficient to cover costs. There were also tax issues for the UK entity directly funding the action.

Justice Harrison tried to convince counsel to come to an agreement over the disclosing certain terms of the funding arrangements, saying this case didn't need any further necessary delays.

Cooper also questioned the suitability of Gavigan as an appropriate court-approved funder, saying he had breached court orders and made misleading statements that their acquittal in a 2010 action taken by the Registrar of Companies for alleged breaches of the Financial Reporting Act was based on a technical argument.

"If a responsible funder is put in the position of funding with control in the same way (as in Australia), there's nothing for us to complain about," Cooper told the court. "The complaints we have made are with particular entities."

The other parties to the class suit include broking firms Credit Suisse, First NZ Capital, and Forsyth Barr, who sold and promoted the offer.

Counsel for Credit Suisse, Adrian Olmey, told the court the procedural process was flawed, with one proceeding filed with all 3,000 participating shareholders included as joint plaintiffs rather than a representative claim. Because of that process, many of those joining shareholders would not be able to participate because it would have exceeded the statutory limitation of six years to file a claim.

When it finally gets to court, the Feltex action will be divided into two stages. The first will hear Houghton's entire case, with the second using the first for binding rulings on common claims.

The hearing is set down for two days, and is proceeding.

Feltex collapsed in 2006, owing creditors between $30 million and $40 million, and destroying some $254 million in shareholder value.