Crown's kid gloves for SCF Directors

It is now more than 6 months since South Canterbury Finance was placed into receivership. Yet, as far as we know, the Crown, despite provisioning around $600m for its losses on making good the company's debenture holders, appears to have allowed to lapse perhaps its best chance at making the directors personally liable to contribute what they can.

Under the Securities Act 1978 (sec 37A), directors of issuers are responsible for ensuring that no allotment of securities takes place if:

at the time of allotment, the investment statement or registered prospectus relating to the security is known by the issuer of the security, or any director of the issuer, to be false or misleading in a material particular by reason of failing to refer, or give proper emphasis, to adverse circumstance.

In such cirsumstances the subscriber has the option to avoid the allotment, and the directors are personally liable to repay the securities with interest if the the issuer does not:

(3) An allotment made in contravention of this section is (whether or not the issuer is in liquidation) voidable at the instance of the subscriber by notice in writing to the issuer at any time within the prescribed period.

(4) For the purpose of subsection (3) of this section, prescribed period means—

• (a) a period of one year after the security or a certificate of the security has been sent to the subscriber; or

• (b) a period of 6 months after the subscriber knows, or ought reasonably to know, that the allotment was made in contravention of the provisions of this section—

whichever is the lesser.

(5) Without limiting any enactment or rule of law, an allotment made in contravention of this section shall be valid unless notice avoiding the allotment is given by the subscriber in accordance with subsection (3) of this section.

(6) Where an allotment made in contravention of this section is avoided by the subscriber under subsection (3) of this section, the issuer shall forthwith upon receiving notice under that subsection, repay the subscriptions to the subscriber.

(7) If such subscriptions are not so repaid within one month after the date of the receipt by the issuer of notice under subsection (3) of this section, the issuer and all the directors thereof shall be jointly and severally liable to repay the subscriptions with interest at a rate prescribed from time to time by regulations made under this Act from the date on which such notice was received:

Provided that a director shall not be so liable if he or she proves that the default in the repayment of the subscriptions was not due to any misconduct or negligence on his or her part.

As is clear from the above, this time frame has probably now lapsed, letting all the directors of the company off the hook of this section for these irregular allotments. The Crown, as guarantor of the subscribers, was in a position on 31st August 2010 to step into the subscribers' shoes and exercise these rights over the portion of the debenture stock that was issued within the last 6 months and was alloted when disclosure was bad enough. As the amounts the Crown would be likely to recover from the directors would be limited to their personal assets, even if they only avoided subscriptions of, say, $20m, at least the Crown would recover something more, and the directors would have been held accountable for their breaches to the extent of their personal assets, and future directors of financial institutions would have some additional reason to comply with these laws.

Another recovery avenue that the Crown does not appear to be going down is appointing a liquidator to the company who can chase the directors and shareholders (including preference shareholders) under the Companies Act 1993. Again time limits apply to the best courses of action: for example, within 6 months of the commencement of liquidation transactions are presumed to have happened when the company was unable to pay its debts, opening the door to remedies that could benefit the Crown.

Likewise, recovery of distributions, including preference dividends paid to preference shareholders, while the company did not satisfy the solvency test, also recoverable from shareholders and directors, have not been challenged by the Crown.

So, in summary, we've heard no word on the Crown doing anything whatsoever to recover funds from:

1. The directors of the comapny
2. The shareholders of the company, including preference shareholders
3. The USPP noteholders who were advantaged by the company

The words of the Crown are that investors in financial institutions are not to be sheltered from losses, and directors to be held responsible for the government of the financial institution. The Crown's actions in the case of South Canterbury Finance make its words ring hollow.