Fran O'Sullivan: Hanover's legal man goes in to bat

Eric Watson. Photo / Kenny Rodger

Hanover Finance investor John Hepburn has written to Commerce Minister Simon Power suggesting the "agencies within his ministry's portfolio" need to give their urgent attention to the plight of former secured depositors in Hanover Finance.

The plight of the former Hanover investors - who voted by a very narrow margin last December to accept shares in Allied Farmers in exchange for the finance company's so-called loan assets - was made even more poignant this week with the resignation of John Loughlin as chairman of Allied Farmers after its own finance company subsidiary was placed into receivership last Friday.

Hepburn's letter points out there were over 17,000 secured depositors - a large proportion of them retired - who were owed $552 million at June 30, 2008 by two companies (Hanover Finance and its associate United).

"Until November last year - barely nine months ago - these people had been advised they could expect to be repaid that amount, albeit over five years. The following month the value of their deposits was reduced by 22 per cent.

"Then the reduced principal was attributed a value of 20.7 cents per Allied Farmers new share. Trading started late December in the 10 cent range. Eight months later the closing price of these shares on Friday, 20 August is 2.6 cents meaning that secured depositors, about 90 per cent of whom still retain their shares, are suffering an 85 per cent loss - what a debacle!

"I believe the agencies within your ministry's portfolio owe secured depositors their urgent attention."

Hepburn's letter was sent the same day that Loughlin tendered his resignation. Allied Nationwide Finance has about $130 million owed to about 4500 depositors, most of which is covered by the government retail deposit guarantee. But the former Hanover investors are not covered.

A series of letters that Hepburn sent to former Hanover Finance chairman Greg Muir, the Securities Commission and the Serious Fraud office in recent months has finally stirred up a veritable hornet's nest.

As disclosed in last Wednesday's column, the retired accountant had got nowhere seeking answers from the above parties over his concerns that $17.052 million of the combined total of Hanover and United dividends for the June 30, 2008 year had been paid to two high-profile shareholders - Eric Watson and Mark Hotchin - when there was not sufficient retained earnings within the companies to do so.

In his letter to the Commerce Minister, Hepburn asks if he agrees that it was indeed appropriate that SFO director Adam Feeley's office did not acknowledge his communication until three-and-a-half months after he sent his April 1 letter.

The publication of Hepburn's concerns in last week's Business Herald did prompt Hanover Finance's legal adviser Roger Wallis to finally respond in writing to the investor on the salient points.

In essence, Hanover contends that since the Companies Act 1993 was enacted there is no longer a requirement that dividends are declared out of retained earnings. "Rather the legal test is that the company satisfy the solvency test in section 4 of the Companies Act and sign a solvency certificate recording the grounds for solvency."

Wallis went on to reiterate that in relation to all the dividends that were declared in the year ending June 30 - which was just three weeks before Hanover Finance effectively closed its doors - the directors signed the requisite solvency certificates before the dividends were paid.

Not all the dividends resulted in net cash outflow from the company as the dividends were reinvested into the company by the shareholders, to reduce related party borrowings, as suggested by the company's rating agency and financial advisers to a fund-raising programme the company was pursuing.

In his letters to the NZ financial market watchdogs, Hepburn had contended that Hanover Finance (and United) had paid out the dividends at a time when the financial statements for the year to June 2008 had yet to be audited.

But Wallis contends the relevant financial statements were the audited financial statements dated December 31, 2007 (the interim result) together with monthly management accounts and weekly liquidity reports.

"The audited financial statements for Hanover and its guaranteeing subsidiaries for the year ended June 2008 were in fact not drawn up until 24 September 2008, after the company had made the decision to negotiate the terms of a debt restructured with its trustee (from July 2008 onwards).

"The financial statements drawn up on 24 September 2008 included significant provisions which had the effect of reducing the profit that otherwise would have been derived in the year ended 30 June, 2008.

"By that time, of course, the international financial markets were in turmoil, following the collapse of Lehman Brothers on 15 September, 2008."

In his initial letter to Muir - sent last December following an investors meeting - Hepburn wanted to know if the shareholders intended to repay the $17 million of dividends.

Neither Muir nor Hanover chairman David Henry replied.

Wallis said the shareholders do not accept that the dividends were improperly declared and paid. And moreover they had contributed significant additional assets to the company including more than $10 million in cash and $40 million in property assets as their contribution to the 2009 debt restructure.

"Whilst those assets, once contributed to the company, deteriorated in value by the time of the Allied Farmers transaction in late 2009, the value of the shareholders support assets even in December 2009 exceeded the $17 million of dividends you refer to," wrote Wallis.

Eight months on, of course, the value of the former Hanover assets has continued to slip.

In my view there are still major questions over why the directors of a company that was facing financial issues - it did, after all, effectively shut up shop in July 2008 - agreed to pay out cash dividends in the first place instead of conserving its assets.

A finance go-round may have been used to reduce Watson and Hotchin's inter-related loans exposures. When it came to crunch-time they may have been persuaded to tip $10 million of cash and $40 million of property assets back into the pot.

But the clear counter-factual is what would their position have been if the dividends - some $45.5 million were paid in total - had been retained within Hanover. That's the question that remains unanswered.