Directors of Nathan Finance have been convicted of misleading the public about the company’s financial position when they failed to disclose the full extent of intercompany debts and wrongly stated that these loans were on the same terms as loans to third party borrowers. The directors claim that they acted honestly, but that was not a defence in itself. They must have reasonable grounds for that belief.
Kenneth Roger Moses, Mervyn Ian Doolan and Donald Menzies Young were prosecuted in the High Court for breaches of the Securities Act 1978. Another director, John Lawrence Hotchin, earlier pleaded guilty.
Over 7000 investors were left out of pocket when Nathan Finance went into receivership in 2007, owing about $174 million.
Nathan acted as a conduit for funds borrowed from the public. Critical for Nathan investors were the lending policies and liquidity of the company. Nathan is a wholly owned subsidiary of the VTL group: a company which sold vending machines and installed proprietary software to record transactions. This was a type of business which found normal bank financing difficult to obtain.
The Nathan prospectus played down the extent of intercompany lending at a time when the bulk of funds were onlent to VTL companies. The prospectus stated there was no history of bad debts written off. While this was literally true, it was misleading as interest on VTL loans was rolled over and capitalised into loans at a time when there would be serious doubt about full recovery.
In the High Court, Justice Heath acknowledged that the directors honestly believed that comments made in the prospectus were not misleading, but this alone was not an adequate defence. They had to reach an independent judgment on the question. The directors relied on advice from management and professional advisers that everything was “compliant”. In particular, the directors said they were relying on company employees, the company auditors, the registrar of companies and the trustee appointed to represent debenture holders – each of which had a role in the preparation of a prospectus. A review of the content of a prospectus was not something directors could delegate to someone else, said Justice Heath. It was for the directors to read each prospectus and determine for themselves whether the statements made reflected the position of the company, as they knew it.
Following conviction, a decision on penalties was deferred for a later hearing.
R. v. Moses, Doolan & Young – High Court (8.07.11)
07.11.03