Two
directors of Capital + Merchant Finance, Wayne Leslie Douglas and Neal Medhurst
Nicholls, have been acquitted of criminal charges laid in respect of loans to a
Palmerston North development known as The Hub.
It was alleged they had a close personal involvement in the development
which was kept hidden from investors. Capital + Merchant went into liquidation in
2009. Some 7500 investors are unlikely
to see any return on their $167 million invested.
Douglas and Nicholls
were jointly charged with theft of $14.4 million of investors’ funds and with deceit
by issuing a false prospectus. The High
Court was told the charges arose from loans made by Capital + Merchant during
the period 2002-05. The two directors
owned Capital + Merchant through a chain of other companies and trusts.
The court was told
that in 2002 a financier called National Mortgage Nominee Co Ltd had taken
possession of a seven storey building in central Palmerston North, later to become
part of The Hub. The building owner had
“done a runner” owing about three million dollars. Messrs Douglas and Nicholls were directors of
National Mortgage, a contributory mortgage company which pooled investors funds
into property loans. The two directors
were keen to sell the building and recover the money due. There was some suggestion that they had
personally guaranteed repayment. A
partner in Stace Hammond, the law firm acting for Capital + Merchant,
introduced them to a Mr Stokes as a man with some business experience in rural
and commercial real estate who might be able to assist.
In a series of
transactions over the next few months, interests associated with Mr Stokes
purchased the seven storey building in question plus an adjoining property –
all with funding provided by Capital + Merchant. The purchases were entirely debt-funded. The intent was that both properties would be
redeveloped into accommodation, then sold to repay Capital + Merchant.
Evidence was given that
Capital + Merchant funded costs of the redevelopment. There were delays and substantial cost
overruns. As the development neared
completion rooms were let to tenants. Demand
was poor. The buildings are old. The
cost of heating and maintenance were high, meaning revenue was insufficient to
pay interest on the Capital + Merchant debt let alone contribute towards
repayment of the loans advanced. In the
end, Capital + Merchant purchased the development and sold to another buyer.
Justice Wylie ruled
that Douglas and Nicholls were not guilty of theft because while they did
control Capital + Merchant, loans made to The Hub were not in breach of the
company’s lending obligations set out in the trust deed required of all
companies borrowing from the public. It
was argued that loans to The Hub were “related party loans” with Mr Stokes merely
being the “front man” for the “real” borrowers: Douglas and Nicholls. Related party loans by Capital + Merchant were
prohibited by its trust deed. While
there are grounds for suspicion that Douglas and Nicholls were the real
borrowers, this was not established beyond reasonable doubt, Justice Wylie
said.
Criminal convictions
for deceit in relation to Capital + Merchant’s issue of a prospectus also
depended on The Hub loans being non-disclosed related party transactions. Justice Wylie said prospectus disclosure
rules at the time of the loans were governed by regulations under the
Securities Act. Douglas and Nicholls had
no legal or beneficial interest in the companies and trusts fronted by Mr
Stokes when the loans were made. There
was no obligation to separately disclose The Hub loans as Douglas and Nicholls were
not related parties.
R.
v. Douglas & Nicholls – High Court (19.07.12)
12.019