July 8 – The directors of failed finance company Nathans Finance Ltd. allowed it to become subservient to the needs of its financially troubled owner, VTL Ltd., without informing investors that lending to VTL was being rolled over without normal risk management practices being applied, the judgement in the long-running case against three Nathans directors says.
Judge Paul Heath this morning found former Nathans directors Roger Moses, Donald Young and Mervyn Doolan guilty of offences under the Securities Act for failing to adequately inform investors in the finance company of the risks the company faced.
All three face sentencing on Sept. 2, with maximum penalties available being fines of $300,000 or five years in prison. Another former director, John Hotchin, has already received a home detention sentence after agreeing to cooperate with the prosecution of his former fellow directors.
Evidence in the trial showed Hotchin to be strenuously opposed to fuller disclosure of the company’s true financial position, saying in one email that the risk section in the draft prospectus was worded in such a way as to ensure that “NO cash will come in.”
The Financial Markets Authority welcomed the decision, saying it “makes clear that directors have a personal duty to ensure that disclosure documents and other advertisements do not mislead or deceive.”
The 156-page judgement also details in full the serious difficulties that VTL, an NZX-listed vending machine franchise business seeking to expand into Australia and the U.S. was suffering by December 2006, when the offending Nations Finance prospectus was issued.
“From at least June 2006, the directors of Nathans knew that there was no reasonable prospect that the inter-company debt could be repaid without VTL selling all or some of its business units,” said Judge Heath. By that time, inter-company loans amounted to $79.6 million and represented 46.2% of the Nathans Finance loan book.
“The loans could not be repaid out of revenue. The continual capitalisation of interest on loans to VTL demonstrated that not even that component could be met regularly out of income generated from VTL‘s businesses.
“This information was relevant to the investment risk because it was directly linked to the possibility that VTL may itself, become insolvent.”
Yet the directors were rolling over the VTL loans and capitalising interest without referring them through the “robust” credit-checking process claimed in the Nathans prospectus.
“The absence of any disclosure that loans made to VTL companies were consistently rolled over with interest capitalised was something that would undoubtedly have affected an investment decision,” said Judge Heath.
“By 13 December 2006, Nathans had effectively delegated strategic decisions about its future to the board of VTL. Strong corporate governance does not involve the delegation of strategic decisions about a company‘s business to its parent, particularly when the company is trading on funds from the public to develop its business as a finance company.
“In fact, the directors of Nathans knew, when the prospectus and investment statement went into the market, that the money received would mostly be used as working capital for VTL.”
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