Why didn't Richina Pacific play its biggest ace when it needed to extract funds from China to pay back loans to its New Zealand subsidiary Mainzeal?
That surely should have occurred to Richina's executive chairman and largest shareholder Richard Yan.
If a request had been fronted personally by former Prime Minister Dame Jenny Shipley — who was Mainzeal's chairman and, for a period, a director of Richina Pacific — it would surely have been received with good faith.
Shipley's reputation has taken a pasting since the High Court judgment by Justice Francis Cooke which found her and three other directors breached their duties under section 135 of the Companies Act by engaging in what is colloquially called reckless trading.
Damages of $6 million have been personally awarded against her over the collapse of the New Zealand construction firm.
But in 2008-2010 she was riding high in China.
Not only was she an independent director of the Shanghai and Hong Kong-listed China Construction Bank — the world's second largest bank which in 2019 boasts $US3400 billion total assets and a market capitalisation of $US238b.
But she was also a board member of the Beijing-based International Finance Forum, an independent, international organisation, founded with support from the Chinese Government and financial institutions, in October 2003.
Her standing in China was later recognised with her appointment to the board of the prestigious Boao Forum for Asia — commonly known as China's Davos — held annually on Hainan Island and attended by the Chinese president who has a summer house there.
If any New Zealander had connections in China which Richina could have been brought to bear to ensure Mainzeal's loans to its parent company were remitted, Shipley had and does.
But unfathomably, this does not appear to have happened.
The construction firm's demise can be traced back to 2004 and 2005.
Justice Cooke said this was when capital was extracted from Mainzeal for Richina Pacific to buy assets in China, including the Shanghai Leather company, today worth more than US$700m ($1b). Although, at trial Yan refused to confirm that figure.
In 2009, Shipley resigned from the Richina board but kept her Mainzeal directorship.
Justice Cooke noted while Mainzeal had negative equity of $44.8m, Richina Pacific had extracted considerable funds from Mainzeal. This had been done to help secure assets of considerable value in China, the judge said.
These transactions were completed via loans of some $42m which were recorded as assets on Mainzeal's books.
But they were not paid back when necessary.
Expert advice given during the Mainzeal trial said that while Chinese authorities could allow Chinese companies to acquire businesses overseas, the authorities were unlikely to support money being used for failing enterprises.
This advice neglects the fact that in the post-GFC environment, Chinese companies were investing in loss-making New Zealand firms (just not their own).
• In May 2009, Chinese appliance manufacturer Haier confirmed it would take a 20 per cent cornerstone stake in Fisher and Paykel Appliances as part of a $189m capital raising. This was broadly seen as a lifeline for the NZ company which had faced financial difficulties with the world-wide economic downturn.
• In November 2009, Agria emerged as the biggest shareholder of PGG Wrightson with 19 per cent after the unprofitable rural services group raised a total of $249.4m selling shares and notes to slash its debt levels.
• In July 2010, Shanghai-listed Bright Dairy agreed to buy a majority stake in Canterbury milk processor Synlait Milk, subject to regulatory and shareholder approval.
Both Haier and Bright Dairy would also have been required to gain regulatory approvals from Chinese authorities before investing into New Zealand companies.
During the High Court trial, former diplomat Charles Finny argued that a subsequent deal where Richina paid back some of the loan by supplying Chinese building materials to Mainzeal was potentially illegal under Chinese law and a "circumvention of Chinese foreign control systems".
Surely, an upfront resolution would have been better all round?
My view is, in the 2008-2009 environment where New Zealand and China had signed a path-breaking free trade deal, Chinese authorities could have been encouraged, if necessary at both diplomatic and political levels, to ensure Mainzeal could be repaid.
Richina's founder also had significant Chinese connections of his own.
The judgment disclosed a Yan-led project to acquire vineyard interests on Waiheke Island to be developed as a hotel for Chinese Communist Party officials, "with cash used from Mainzeal's accounts to assist the purchase".
Yan later promoted a project to build New Zealand House on land Richina held in Shanghai. New Zealand authorities turned it down.
Crucially, the judgment discloses tension with Richina's own shareholder group over the Mainzeal holding.
This tension in the shareholder group remained a significant factor right through until Mainzeal's demise, said Justice Cooke. He disregarded a small shareholding that Shipley's family trust had in Richard Pacific as "largely immaterial".
"It was not in his (Yan's) personal interests or the interests of his fellow shareholders to offer support in a legally binding way."
Richina Pacific "extracted" amounts from Mainzeal by way of loans through vehicles that did not themselves have the ability to repay.
This money was used by the Richina Pacific group for its considerable advantage — to acquire assets in China that are now extremely valuable.
By the end of 2009, the amount borrowed, including interest, was more than $42m.
Excluding the value of these loans from Mainzeal's balance sheet meant that Mainzeal was insolvent, and was continuously so from 2005 through to its failure in 2013, the judgment said.
As Justice Cooke noted, it is clear that Yan and the other Richina Pacific shareholders have benefited very substantially from using Mainzeal's funds. They still have an A-class land asset in Shanghai worth an estimated US$700m.
Mainzeal directors have trashed reputations and the construction firm's creditors have been screwed.
It is not too late to put pressure on the Chinese authorities to compel Richina to disgorge the loans to the NZ liquidators of Mainzeal.