Feltex director grilled about disclosure

Feltex directors (from left to right) Tim Saunders, Peter Thomas, John Feeney, John Hagen and Peter David Hunter. Photo / Paul Estcourt

Deloitte's former chairman John Hagen was repeatedly questioned by the Crown about Feltex's failure to disclose certain information in its interim financial statements when the case resumed yesterday.

Hagen, a former director of the fallen carpet company, said in the Auckland District Court that the board would not have registered the statements if accounting firm Ernst & Young had not approved them.

Feltex paid Ernst & Young A$133,000 to conduct a voluntary review of the statements.

Hagen said he was personally informed by Ernst & Young that the statements to December 31, 2005, were compliant with the newly adopted International Financial Reporting Standards (IFRS).

He said the board was given "clear and unequivocal" confirmation that the statements met all the necessary requirements of a listed company under IFRS.

Ernst & Young was hired to review the statements because it was the first time Feltex had applied them and it was essential to get them right, Hagen said.

The Crown alleges that directors Tim Saunders, John Feeney, Peter David Hunter, Peter Thomas and Hagen did not disclose that the company was in breach of its loan with ANZ and did not properly classify its debt with the bank as current, meaning it was on call.

The directors have pleaded not guilty to these charges laid under the Financial Reporting Act.

However, they now concede that the statements were not compliant at the time they were registered, but claim they believed the statements were correct when they signed them off.

Prosecution lawyer Brian Dickey said the outcome was that the market was not correctly informed of Feltex's financial position.

Hagen said that at the time the statements were prepared "no one" believed there would be a receivership nine months later.

He said the company had been told that ANZ would not pull its loan in and was supportive of the company's debt restructuring measures, for which it had approved an additional $10 million loan to finance the closure of Feltex's Melbourne plant and redundancy and other costs.

Hagen said to suggest that Feltex did not act properly was not accurate as the directors did everything possible to ensure the statements were compliant.

But Dickey said the directors had a responsibility to ensure the statements were correct, so that investors had an understanding of the company's financial position and what they were investing their savings into.

He said that as a former chairman of the New Zealand Standards Review Board, Hagen should have been schooled up on IFRS and its requirements as it was that body which was responsible for implementing the standards in New Zealand.

He asked Hagen whether Feltex had let the market down by not properly disclosing its debt, especially since its liability with ANZ was around A$100 million by December 2005, making it the company's dominant and fundamental debt.

But Hagen denied that the statements would have misled investors, as it was well known Feltex was underperforming - it had downgraded its profit forecast twice in 2005 and the share price had fallen to 50c a share.

He said that it was a director's responsibility to make sure "these things" [such as statements] were done but not to do them themselves.

Hagen said it was unrealistic to expect any director to know every standard under the requirements. He emphasised that that was why Ernst & Young was hired.

The case continues.