15 May 2015

NZF Money: Gibson v. Robert Burnes Trustee

NZF Money Ltd investors might see more than the 25 cents in the dollar already paid out after receivers from KordaMentha clawed back a further $1.8 million with a High Court ruling denying rival creditors claim to priority.
At issue were securities agreed by NZF Money in what amounted to a commercial panic in October 2010 as the government guarantee scheme was due to expire and NZF faced a severe liquidity crisis with receivership looming.  As a “second-tier” lender, NZF Money was critically exposed with a badly impaired loan book.  Refinancing its own debt was going to be difficult as investors flooded out of the company at the conclusion of their government guarantee.  The High Court was told NZF Money operated on razor thin liquidity when the government guarantee ended on 12 October 2010: $3.93 million was available to meet $3.86 in payments flowing out.  Of the cash available, $3.2 million came from credit facilities cobbled together at the last minute in three so-called security sharing arrangements.  Funds came from the Hillview Trust, controlled by NZF Money director Pat O’Connor.
NZF Money went into receivership in July 2011 with insolvency specialists KordaMentha appointed receivers.  Hillview argued it was entitled to $1.8 million out of the receivers’ realisations, ahead of any payout to investors.  At issue was the status of the October 2010 security sharing arrangements.  Hillview had priority if the arrangements were made “in the ordinary course of business”.  Failing that, investors had priority.
Evidence was given that the term “security sharing” was something of a misnomer.  The Hillview securities claimed to take priority over assets previously secured by a trustee debenture protecting the interests of investors.  This could be done if the trustee for debenture holders gave consent.  No consent was given.  Alternatively, priority would follow if the arrangement was “in the ordinary course of business”.
Justice Fogarty ruled the arrangement was not.  NZF Money had not entered into such deals in the past.  The situation was so urgent that the funds were advanced before documentation was completed.  It was telling that Mr O’Connor, who was already an investor in NZF Money for some $1.8 million, was willing to commit a further two million through Hillview Trust but only with some solid mortgage security from NZF Money. 
Claims by Hillview Trust for repayment rank behind payments to investors.
Gibson v. Robert Burnes Trustee (2009) Ltd – High Court (15.05.15)
15.048