F&I Finance: Eaton & Marshall v. LDC Finance

The High Court has ordered that $7.8 million dollars held by LDC Finance supposedly as a secured creditor of failed Nelson finance company Finance & Investments (F&I) be returned to F&I and refunded to depositors owed some $15.9 million.  F&I had been borrowing from the public without issuing a prospectus. 

The 2008 recession affected many finance companies operating like banks, borrowing short and lending long.  A liquidity crunch propelled them into liquidation when investors demanded repayment.

LDC Finance along with F&I both went into receivership in 2008 after runs by depositors.  LDC Finance claimed security over F&I assets: 706 loans outstanding with a total face value of $13.3 million.  LDC had provided working capital finance to F&I.

Evidence was given that F&I was established in the 1960s by two car salesmen: Andrew Harding and Murray Schofield.  It operated like a small informal bank with transactions washing through the company’s cheque account.  F&I operated as a partnership.  In the 1960s, this did not require formal registration of a prospectus when soliciting working capital from the public.  Investors placed money with F&I on call, or for short term six months periods.

The rules changed in 1983 when securities legislation required partnerships like F&I to issue a prospectus when borrowing from the public.  F&I did not catch up with the new rules.  One of the penalties for trading without a prospectus is that the transaction is void: the money received has to be repaid in full, immediately.  A trust exists in relation to the unpaid money. 

After F&I went into receivership, unpaid investors sued claiming LDC as a secured creditor had no right to seize assets which represented “their” money.  In the normal course of events these investors would need to point to physical assets funded by their money.  But in this case, their funds had been banked in F&I’s bank account which had been overdrawn at various times.  Detailed investigations by forensic accountants established that individual investor’s deposits could not be tracked through F&I’s bank account into specific assets: individual F&I loans.

Justice Fogarty ruled that securities law created a trust over F&I’s assets in favour of the unpaid investors.  He further ruled that LDC was aware that F&I was trading without a registered prospectus at the time it took security over F&I assets.  This came to LDC’s knowledge when negotiating terms with F&I over the injection of further working capital after a seven million dollar F&I loan went sour in 2006. 

This knowledge meant assets covered by LDC’s claimed security were subject to a trust in favour of unpaid F&I investors.  LDC could have what was left over only after F&I investors were repaid out of F&I assets.

The owners of F&I will be personally liable to make up any shortfall in payments due to F&I investors.

Eaton & Marshall v. LDC Finance Ltd – High Court (23.05.12)

12.014

Bridgecorp: R. v. Roest

Two further Bridgecorp directors convicted of making false statements have been sentenced: Cornelis Robert Roest sentenced to six years six months imprisonment and Peter David Steigrad sentenced to nine months home detention together with 200 hours community work and ordered to pay $350,000 reparation.

False statements were made when Bridgecorp presented a misleading picture of its liquidity while raising funds from the public in early 2007.  The 14,500 investors who had placed $459 million with Bridgecorp are expected to recover less than ten cents in the dollar.

Mr Roest was an executive director of Bridgecorp.  Justice Venning said Roest was heavily involved in the company’s daily operations and was responsible for its financial management including preparation of expected cash flows.  Roest was found to have acted dishonestly with intent to deceive investors.

The court was told there was no prospect of reparations being paid.  Mr Roest was described as having no assets and being bankrupt.

Justice Venning said Roest appeared to have no insight into his offending, regarding himself as innocent despite the verdicts and unable to accept the harm caused investors.

Mr Steigrad was a non-executive director.  He has commercial experience in marketing and advertising.  As a non-executive director of Bridgecorp he had no day-to-day responsibilities within the company, but attended monthly board meetings.

Justice Venning said while Steigrad failed to properly carry out his duties as a director to an extent that imprisonment would be an appropriate penalty, he was the least culpable of the five Bridgecorp directors.   It was to his credit that he demonstrated genuine remorse and acceptance for his wrongdoing.  He was assisting in making reparations to investors.

Justice Venning indicated that home detention should not be seen as a soft option.  Steigrad is an Australian resident, but would be detained in New Zealand.  He was permitted a five day window to travel to Australia prior to commencing his sentence.  The court did not disclose the address in New Zealand where the home detention was to be served.

R. v. Roest & Steigrad – High Court (18.5.12)

12.012

medical negligence: Allenby v. H

The medical profession continues to enjoy statutory protection from negligence claims now that a Middlemore hospital surgeon has been held not personally liable for the consequences of a failed sterilisation operation.

The Supreme Court was asked to rule whether a woman who became pregnant after a failed sterilisation operation had suffered “personal injury” caused by medical misadventure.   By answering “yes” the Accident Compensation Corporation became liable to pick up the claimed damages.

The court was told that a woman named only as “H” suffered mental illness after giving birth in 2005 following a failed sterilisation.  As a general rule, accident compensation does not cover adverse consequences of any medical treatment, unless it was the direct result of medical misadventure: a failure to exercise the skill and care reasonably to be expected in the circumstances.  In this case, a clip was not correctly attached to one of her fallopian tubes.

Evidence was given that on average there are only six to seven compensation claims in any one year for personal injury caused by medical misadventure.

Over three decades, various amendments to accident compensation legislation have led to confused results for claims arising from pregnancy following a botched sterilisation.  Some judges have ruled it is for the Corporation to pay, others have ruled that the woman must sue the doctor personally for negligence.

The Supreme Court has had the final say: it is for the Corporation to pay.

Allenby v. H – Supreme Court (9.05.12)

12.013