Paul
William Cropp, CEO of both Dominion Finance Group and North South Finance, has
been convicted of theft by a person in a special relationship for his
involvement in a business rescue which had the effect of reducing by eight
cents in the dollar funds available for investors in North South.
Acquitted were director
Robert Barry Whale and a senior executive granted name suppression. Charges against Dominion Finance founder,
Terry Butler, were deferred because of ill health.
Justice Lang was to
comment that the root cause of the entire problem was funding of a 2004 joint
venture intended to separate a Dominion Finance borrower from his failing
project. The Dominion Finance executives
charged with criminal offences arising from this business rescue made no
personal gain. When under the pressure
of imminent disclosures forced on them by reporting deadlines, steps taken to
deal with the issue only compounded their legal problems.
Both Dominion Finance
and North South faced severe liquidity problems in late 2007 and early
2008. In September 2008, Dominion
Finance went into receivership leaving nearly 6000 investors owed some $176
million. Current estimates have investors recovering
less then twenty cents in the dollar. North South was in receivership two
months earlier in July 2008. First
ranking debenture holders received a payout of 55 cents in the dollar over the
following two years.
Dominion Finance and
North South shared the same directors but operated in slightly different market
niches: Dominion lent to commercial property developers usually taking a second
ranked security; North South primarily lent on first mortgage security. Each company was a “related company” in
respect of the other and there were constraints on intercompany lending.
Dominion was not
permitted to lend funds to any related party without first obtaining consent
from PGG Trust, the trustee for debenture holders. [Securities law requires a trustee to be
appointed when companies borrow from the public, with the trustee exercising
any oversight specified in its contract with the borrowing company.] By
comparison, North South could lend to related parties without its trustee’s
consent provided the transaction value did not amount in aggregate to more than
two per cent of North South’s total tangible assets in any twelve month period.
Criminal prosecutions
were launched when it was discovered that the two companies on five occasions
made related party deals without getting the required trustee’s consents.
A big drain on liquidity
for Dominion had been a Remuera apartment development initiated by a Mr Mathew
Ridge. Six million dollars had been sunk
into the project with progress amounting to no more than a hole in the ground. By June 2004 it was clear to Dominion that Mr
Ridge would be unable to finalise the project. A rescue package was organised by Mr Butler, Dominion’s
founder. He negotiated a joint venture
arrangement with a business acquaintance.
Evidence was given that Dominion was to finance the joint venture with
Mr Butler required to underwrite the sale of five of the eleven apartments to
be constructed. This underwrite meant Dominion
funding to the joint venture was to become a related party dealing needing prior
consent from the trustee, PGG Trust. No
prior consent was obtained.
Justice Lang ruled
that Mr Whale was not criminally liable for this initial related party
financing because while trustee consent was not obtained Mr Whale did not know
consent was needed.
The court was told the
project was plagued with delays and by March 2008 Dominion was owed $8.4
million. There were still four
apartments unsold with sale proceeds likely to be less than the loan balance. In what was described as a heated Dominion
Finance board meeting prior to 31 March balance date, Mr Butler claimed he had
no personal liability for the apartment sale underwrite. He claimed to have acted as agent for
Dominion; it was a Dominion Finance commitment.
A commercial crisis loomed. For a
number of board members this was their first knowledge of Dominion’s
liability. If the finance company were
liable, then full disclosure of its involvement would be needed in the
company’s financial statements for the year ended 31 March 2008. To deal with the immediate problem, an
intermediary company was set up: WAFD Ltd.
WAFD agreed to purchase the four remaining apartments for $8.6 million,
being the balance owed to Dominion and this purchase was financed with first
mortgage finance from an outside source and a second mortgage of $5.2 million
from Dominion. This reduced Dominion’s total
exposure on the project by some $3.35 million, but left undecided whether Mr
Butler or Dominion Finance was the owner of WAFD. Ownership carried liability for the
loans. The court was told Dominion
subsequently assumed ownership.
Mr Cropp and Mr Whale
faced trial, each charged with theft following allegations they used Dominion
Finance money in a related party transaction without getting prior trustee
approval.
Mr Cropp was
convicted. Justice Lang ruled that Cropp
assisted completion of this transaction in the knowledge that the trustee’s
prior consent was required. PGG, as
trustee, was denied the opportunity to consider whether the transaction would
benefit Dominion – regardless of whether Dominion or Mr Butler were to be the
ultimate of owner of WAFD, it was a related party transaction requiring
consent. Justice Lang was critical of
the way Cropp presented the transaction to Dominion’s credit committee,
disguising the fact that it was a loan to a related party and that the loan had
already been advanced prior to 31 March balance date.
Mr Whale was
acquitted. Justice Lang ruled there was
reasonable doubt whether Whale was aware of the requirement for PGG
consent. It was probable or very likely
that Mr Whale was by this date aware of the requirement but there was no
documentary evidence to prove this point beyond a reasonable doubt.
Questions of related
party lending also arose out of North South liquidity being used to fund
Dominion’s second mortgage on the WAFD transaction. In return for an advance of four million
dollars, Dominion signed a security sharing agreement giving North South an interest
in Dominion’s second mortgage. This
agreement required the consent of a different trustee, Covenant Trustee
Company, since under North South’s rules this related party deal exceeded two
per cent of the finance company’s total tangible assets.
Mr Cropp was convicted
of theft by a person in a special relationship.
He knew North South needed trustee consent and acted in breach of
this. The court was told that Mr Cropp
knew Dominion was going to make a loss on the apartment project. Once North South became involved, it was
going to share in the loss. It was later
resolved that North South could not share in the mortgage proceeds until after
Dominion had been paid because of, amongst other legal reasons, the earlier
failure to get PGG consent to Dominion’s involvement.
Justice Lang said
Cropp knew Dominion needed funds to meet obligations to its investors. Without the WAFD transaction, Dominion would
have been in default and required to give notice to PGG as its trustee, to the
Stock Exchange and to the market – with the commercial consequences that would
have followed.
Mr Cropp was similarly
convicted of theft in relation to further security sharing arrangements put in
place in April and June 2008 when North South made further advances to Dominion
totalling $7.9 million.
Mr Whale was acquitted
of charges of theft in relation to each security sharing transaction. Justice Lang said in one instance Mr Whale
had no direct involvement in the transaction and in others where he was
involved there was no contemporaneous evidence that was aware of the
restriction on North South lending.
R.
v. Whale, Cropp and another – High Court (12.04.13)
13.012