The Seventh Aorangi Statutory Manager's report states that Aorangi will be making a major claim on assets that were contributed as capital to South Canterbury Finance. I believe the principal means by which this transaction took place as the issue of $67.2m in preference shares in South Island Farm Holdings Ltd (SIFHL). The transaction was reported as follows in the 12th April 2010 SCF prospectus in notes 25 (i) and 26 (v).
There appears to be two ways this transaction could have been done improperly, and the results in terms of remedies are opposite.
Before explaining the posible course of the transactions, the history of the company and its shareholdings and directors will be explained. The company was incorporated on 9th March 2009, with 10,000 shares held by Forresters Nominee Company Ltd and Mr and Mrs Hubbard as directors. Forresters Nominee Company Ltd was directed by Mr Hubbard and 2 other directors at the time. This shareholding was then transferred to Mr Allan Hubbard on an unknown date before 15th June 2009. On the 4th May 2009, 67,200,000 preference shares were issued to SCF (see the second page of this for the share register copy).
The first way is as follows: SIFHL was set up as an entity to hold 21 farms, and Mr Hubbard or Forresters Nominees Ltd held the shares in the company as nominee or trustee for Aorangi or other outside investors. Mr and Mrs Hubbard, as directors, we'll assume in this illustration, then stripped out the ordinary share equity by way of an issue of preference shares for nil consideration, and either did not comply with section 44 of the Companies Act or more likely this section didn't apply (the company either has no constitution or it failed to comply with section 32). Alternatively, Mr Hubbard may have signed the approval as shareholder despite this being a breach of trust.
The first way gives the investors, as far as I can find, only one remedy under the Companies Act: a claim under section 298 (2) against SCF. However, this would amount to an unsecured claim on an insolvent company that is going to pay unsecured creditors 0c in the dollar. The investors would also have a claim against Mr Hubbard personally for any losses caused by breach of trust or other wrongs, which claim would be paid possibly some dividends from Mr Hubbard's personal insolvency. (Mr Hubbard could also be criminally liable for breach of trust or fraud.)
The second way is this: SIFHL held the farms as nominee or trustee on behalf of Aorangi or other investors. This would mean that SIFHL would not have any substantial equity in these farms. Mr and Mrs Hubbard, under this scenario, may have nevertheless included the assets and liabilities as company assets and liabilities, and not disclosed the trust or nominee relationship with the investors, and thereby booked the equity in the farms as belonging to SIFHL. The issue of the preference shares to SCF could therefore be a valid transaction except that the company didn't have the equity purportedly injected into SCF, i.e. SCF got apparently worthless preference shares. In this scenario, the investors still have beneficial ownership of the farms and SCF has nothing. SCF would have a claim on Mr Hubbard for deceit, and Mr Hubbard could also be criminally liable for fraud, and so SCF would share in any dividends from Mr Hubbard's insolvency.
It is hard to say which of these scenarios, if any, are the more likely. I'd guess some lawyers will be busy for a while getting us some answers.
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