The High Court has ordered a defunct timber company to pay back $750,000 it borrowed from the Northland Regional Council plus interest after the business closed and defaulted on its repayments.
Resource Enterprises Ltd (REL) has failed to pay $860,580, made up of $819,932 in outstanding principal and costs and $40,647 in interest from March to August last year.
The council sent a formal demand in August for the company to settle its debt and, when it failed to pay, a statement of claim was filed in the High Court at Auckland.
Justice Christian Whata ruled REL didn't have a defence to NRC's statement of claim and ordered it to pay $860,580 together with interest from August 20, 2019.
REL can appeal the High Court ruling but
NRC chief executive Malcolm Nicolson said the council would keep up the fight to account for ratepayers' money.
The Marsden Pt-based company opened in 2014 but stopped operating in May 2017, in large part because of a significant increase in the price of local logs, as well as factors pertaining to international wood trading.
In seeking capital, REL put its proposal to the NRC's economic development arm, Northland Inc. Of the $4 million REL needed to set up a sawmill, NRC provided $750,000 and the rest was secured through ASB.
NRC lent the money despite red flags being raised by Forme Consulting Group, engaged by Northland Inc, to review REL's proposal for funding.
In August last year, NRC Councillors voted to record the loan as an "impairment loss" but that in no way discharged the financially struggling company of its legal liability to repay the loan.
In court, REL directors Maher Mohammad Jammal and Harkirat Singh Gill challenged a Deed of Priority that afforded ASB priority in terms of debt repayment and argued they did not receive independent advice at the time of its execution.
They claimed their signatures on the loan documents were not properly witnessed — a claim their lawyer strongly denied.
Jammal said NRC initially sought an equity investment in the sawmill because it generated jobs but ultimately demanded the transaction be concluded by way of a loan.
But NRC maintained both men have no arguable defence as they clearly contracted to provide the guarantees and indemnities irrespective of the deed.
On the claim by Jammal and Gill that they were never advised of the deed's implications, Justice Whata said: "On the contrary, the guarantors were not third party guarantors removed from the detail of the transactions.
"They were the directors of REL who sought the loan," he said.
According to Northland Inc at the time REL opened, the mill was expected to employ about 20 people under full production and have an estimated economic impact of about $20m.
Information held by the council indicates 19,600cu m of sawn timber and half-round slabs were exported from the mill through until March 31, 2016.
The council has no information on the volume of exports for the period from April 1, 2016, until the mill ceased operation in October 2017 as the sawmill wasn't obliged to provide such statistics.
Main concerns about REL's operations were an "optimistically low" budgeted log price of $85 per cu m, which the sawmill forecast would remain static for seven years, low gross margins and high operating costs.
"Hence losses, possibly substantial, were likely to occur within a five-year period," the Forme report said.
Log prices have risen about 40 per cent since 2014.
Forme said no firm log contracts were in place for REL when the report was written and also highlighted the extremely limited ability of the proposed sawmill to produce alternative products should the proposed markets in Saudi Arabia and India fail.
The REL proposal targeted using 71,000 cu m of logs per year on one shift and rising to 133,000 cu m on two shifts, but Forme said the company would need to pay a competitive price for logs.
Forme said if the log price moved up it would affect profitability.
It said every $1 change in log price over the seven-year modelling period would affect the net profit before tax by $877,000, or $133,000 a year once the sawmill double-shifted.
When the sawmill double-shifted in the second year of operation, Forme said the production efficiency gains would be realised and the gross margin for the Northland Inc/NRC money remain constant at $8 cu m from that year onwards.