ANZ National Bank

Feltex's board was "inherently against" selling the crippled carpet maker to an Australian rival and "unreasonably biased" towards any prospect of selling to New Zealand interests, Feltex's liquidator claims in a $41 million court case against five former company directors.

In its statement of claim, liquidator McDonald Vague outlines the frustration felt by Feltex's bank, ANZ, in the final months before Feltex's receivership. During this period Feltex, which was spending $167,000 a day, was "operating on a knife edge", according to board minutes.

McDonald Vague asserts the directors' actions, or inactions, ultimately meant the deal Australian rival and "logical buyer" Godfrey Hirst signed with receivers McGrath Nicol to buy Feltex on October 20, 2006 was materially worse for Feltex than a deal struck with Hirst in August 2006 before the receivership.

It goes as far as saying the board had failed since 2001 to annually forecast, project or budget "with any reliability" Feltex's financial performance.

In their statement of defence, the former directors Peter David Hunter, former chief executive Peter Thomas, ex-chairman Tim Saunders, John Michael Feeney and John Hagen deny any wrongdoing.

They say they followed the legal advice of Bell Gully and Alan Galbraith, QC, the advice of auditors Ernst & Young on sharemarket continuous disclosure rules and Deloitte on Feltex's solvency.

ANZ, owed A$119.5 million (NZ$150m), pulled the plug on Feltex on September 22, 2006. It has got A$105.5m back.

The receivership came just 27 months after Feltex's June 2004, $1.70-a-share, $254m initial public offering. When the receivers were called in the shares were worth just 3 cents. McDonald Vague, which filed proceedings against the former directors in April, was appointed liquidator in November 2006.

The board's decision to allow Sleepyhead owners Craig and Graeme Turner to do due diligence on Feltex broke the terms of an agreement with Hirst, the liquidator says.

Melbourne-based Hirst, controlled by the expatriate-Kiwi McKendrick family, withdrew its offer in early September 2006, saying it did not want to enter a bidding war with the Turners.

However, Hirst re-emerged to pluck Feltex from the receivers in a $129m deal. McDonald Vague says changes to the final Hirst deal left ANZ A$14m out of pocket, creditors short of $5.7m, staff being owed $523,204 and shareholders missing out on $17.9m via a 12c-a-share payment.

In 2006 Feltex's board had also encouraged interest from Talley's Group, which walked away after doing due diligence and determining Feltex's operating earnings were overstated.
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Further, the liquidator says the directors' legal advice did not state that the Turners should be allowed to do due diligence or support such a decision. McDonald Vague also says the board failed to disclose ANZ's true position, approaches by the Turners, or potential liabilities from breaching the Securities Markets Act.

The former directors counter that their legal advice meant they were obliged to let the Turners look at Feltex's books if there was a credible prospect of the brothers lodging an offer superior to Hirst's. The Turners, meanwhile, suggested they be paid a fee if their involvement led to an improved offer from Hirst or another party.

McDonald Vague says the Turners' public statements created a false impression of their proposal and negative publicity for Hirst. The lack of certainty around the Turners' proposal saw frustration mount at ANZ, which had no desire to remain as Feltex's bank.

"Turners never made an offer to Feltex," the liquidator says.

Citing a 2007 Securities Commission report, the liquidator says Feltex was in breach of NZX continuous disclosure rules from August 23, 2005 till June 30, 2006 for failing to reveal banking covenant breaches, new ANZ loan terms, a forecast earnings deterioration and planned restructuring costs.

The liquidator's claim includes $9.1 million of shareholders' losses between August 25, 2005 and December 31, 2006 when Feltex was allegedly in breach of continuous disclosure rules.

Since acquiring Feltex, Hirst has shut four Christchurch, Kakariki, Foxton and Feilding of Feltex's six New Zealand factories at the cost of about 415 jobs.

The recent meeting between Finance Minister Michael Cullen and Australian Treasurer Wayne Swann raised the subject of mutual recognition for imputation and franking credits, again.

For some perverse reason this topic has been raised several times by New Zealand ministers and officials based on the quaint and frankly naive belief that the Australians are going to give New Zealand investors and companies an even break.

Give me a break There is more chance of an Aboriginal becoming Australian Prime Minister than there is of the Australian Government agreeing to mutual recognition. The fact is that mutual recognition would cost the Australian Tax Office billions in lost tax revenue – money it would rather spend on things like schools and health that would win votes.

How this works is beyond the scope of this column, but the brutal facts are that mutual recognition has far more going for it for New Zealand than it does for Australia, and in turn that means the idea getting the Australians to agree to it is a pipe dream.

A few weeks back I noted a recent paper by Casey Plunket from Bell Gully discussing potential reform to the imputation credit regime in New Zealand. Things have moved pretty fast since early June. In the past few weeks the Institute of Finance Professionals New Zealand has held forums in Auckland and Wellington to discuss a proposal to allow streaming of imputation credits generated by Australian companies to be given to New Zealand investors.

Separately, NZX has also come out with a proposal to adjust the imputation credit regime to make it more attractive for Australian companies to dual-list in New Zealand, via a tax credit. There is also a third proposal doing the rounds.

All this activity is happening because of a coming review of the imputation credit regime being conducted by the Treasury. From a purely domestic standpoint there is nothing wrong with the imputation credit regime; it is very efficient and ensures that New Zealand shareholders do not suffer the problem of double taxation on dividends paid by New Zealand firms. This would be fine if New Zealand were a "walled garden" and there were no foreign investment or New Zealand companies investing overseas. But New Zealand isn't a walled garden and cannot afford the luxury of being one.

AUSSIE INCENTIVES
As a country we are absolutely dependent on foreign investment to run our economy. The problem New Zealand faces is that there is a big incentive for Australian companies to make full takeovers of New Zealand companies and cut local shareholders out of the picture.

The strategy is for any Australian acquirer to load up on debt to the maximum amount allowed under the thin capitalisation rules and drive down the taxable profit of its New Zealand subsidiary to the lowest level possible. This maximises the profit earned in Australia (and the amount of franking credits to be paid to Australian investors) and minimises the imputation credits earned/tax paid in New Zealand.

If you look at the example of the ANZ Bank, which has many New Zealand shareholders, the dividend paid to an Australian tax resident is much higher than that received by a New Zealand tax resident because of the impost of double taxation.

The idea of change is to allow New Zealand investors access to the imputation credits generated from tax paid by ANZ in New Zealand. The NZX proposal is a variation on this idea and proposes a tax credit regime to offset some of the double tax hit for New Zealand shareholders of Australian firms.

Either proposal aims to achieve the same goal – a reduction in the grab for New Zealand companies by Australian-listed companies because the tax outcomes are so favourable to them. The hope is that imputation credit streaming or a tax credit will encourage Aussie firms to set up proper New Zealand listings and provide some much-needed depth to our capital markets. This is one idea among many being touted as solutions to the lack of growth in the New Zealand market.

Despite all the work on improving regulation, and efforts of NZX and the strong economy, the sharemarket is now smaller in relative terms than it was five years ago. As we move closer to an election the "hollowing out" of the sharemarket is being set as an election issue.

Whether it becomes one is hard to say, but with the advent of KiwiSaver and the PIE regime there is more focus on investment issues than previously. Fact is that what has been driving a lot of investment decisions both locally and in Australia has been New Zealand tax policy.

This is the big elephant in the room no one is really talking about. New Zealand's tax policy in respect of investment and wealth creation is still very flawed. We have seen some signs of improvement with changes to the rules for controlled foreign companies and the introduction of the PIE regime, but these are only first steps in what has to be a major overhaul of tax policy in this area.

SNATCHING DEFEAT
Improving the operation of the imputation credit regime as far as Australian companies goes is a step in the right direction, but it still feels like snatching defeat from the jaws of victory. Why? Because solving the issue of double taxation for one country still leaves many others where it is a problem.

What of New Zealand companies that earn income in Europe or North America? Much bigger markets than Australia but the impost of double tax on these dividends and income is not being addressed. The usual complaint of impact on tax revenue is given as a reason for not making changes to taxes on investments – but that is taking a short-term view when longer-term strategic decisions should be made.

Allowing streaming of imputation credits or having a tax credit seem like only half answers to a bigger problem. If that is all we want then that is all we are going to get. And is that really enough?

* Bruce McKay is an Auckland investment banker.

Feltex liquidators are demanding more than $20 million from directors, alleging various breaches of the Companies Act and Financial Transactions Reporting Act.  A liquidators' report reveals the total claims and outlines six possible causes of action against the directors.

McDonald Vague consultant and liquidator John Vague said yesterday there were "obviously" questions over whether the carpet maker traded while insolvent.  However, proceedings might not be filed for months and the process would be drawn out, he said.  "At present we think the total claims are $20 million plus., but that, of course, can change. It can grow, it's certainly not going to get less."

Feltex's shares were sold for $1.70 each in a June 2004 float by Credit Suisse First Boston Asian Merchant Partners, a private equity group.  The company was placed in receivership by its bank, ANZ, in September last year.  The company's assets have since been sold to rival Godfrey Hirst, which has shut two of Feltex's New Zealand factories at the cost of more than 250 jobs.

Mr Vague said the directors included three who resigned months before the receivership.  They are Craig Horricks, former chief executive Sam Magill and Fairfax Media NZ chief executive Joan Withers.  The others were Feltex directors at the time of the receivership: John Feeney, John Hagen, David Hunter, chairman Tim Saunders and Peter Thomas.

McDonald Vague's report outlines six potential breaches of the Companies Act and Financial Transactions Reporting Act.

Mr Hagen said the former directors were "quite confident" they took legal advice at appropriate times and disclosed everything that needed to be disclosed.  "(We) think any action by the liquidator would be unfounded."  Mr Saunders is overseas and did not respond to interview requests yesterday.  He is also a Contact Energy director and told its annual meeting in October last year that he was confident he acted properly at all times and in the best interests of Feltex shareholders.

"Clearly the Feltex board, and by implication myself as chairman, carry a responsibility for contributing to the demise of the company. It has been a horrible experience and not one I'd wish on anyone."  Mr Thomas, chief executive in the run-up to the liquidation, and Ms Withers had no comment.

Wage growth gathered speed in the last three months of last year, good news for retailers but not for a Reserve Bank looking for consumer spending to cool down.

The bank's preferred measure of wage inflation, the Labour Cost Index's private sector all salary and wage rates, rose 0.9 per cent in the December quarter, lifting the annual increase to 3 per cent from 2.9 per cent in September.

With overtime rates excluded, the increase was 1 per cent, up from 0.8 per cent in September, which pushed the annual increase to a record 3.2 per cent.

The public sector continues to outstrip the private sector, with central government salaries rising 3.8 per cent over 2006.

The labour cost index attempts to measure changes in pay rates for the same quantity and quality of work. It excludes promotions, service increments, bonuses or other recognition of increased productivity.

The unadjusted measure, which leaves those in, is a better indicator of what is happening to payroll costs. It rose 1.3 per cent in the December quarter and 4.9 per cent over the year.

The annual rate peaked at 5.7 per cent last March and has been slowing since then.

In the December quarter, the average increase was 5.2 per cent and the median 4.2 per cent.

Meanwhile another labour market indicator, Statistics NZ's quarterly employment survey, also released yesterday, also recorded robust growth.

Wage and salary earners' incomes rose 9 per cent over 2006, reflecting more people in jobs, longer hours worked and higher hourly pay.

Filled jobs rose 1.8 per cent in the quarter. Statistics New Zealand does not seasonally adjust that data.

Total paid hours rose 0.9 per cent (seasonally adjusted) making 3.8 per cent for the year.

That would substantially outstrip the increase in economic output over the year, implying declining labour productivity and employers hoarding workers.

"The acceleration in wage inflation will be a concern to the Reserve Bank," ANZ National Bank chief economist Cameron Bagrie said.

It had expected the drop in CPI inflation and the corresponding fall in inflation expectations to keep wage inflation contained. Its December forecasts had wage inflation remaining close to 2.9 per cent until the middle of this year, then easing.

"Today's wage inflation numbers will give them a large sense of discomfort as it suggests the combination of a tight labour market, past high headline inflation and possibly some spillover from higher public sector wage growth is seeping into wage-setting behaviour. Given the Reserve Bank's concerns about medium-term inflation pressure, they will be wary that the acceleration in wage inflation will find its way into general consumer prices."

The money market now sees an 80 per cent probability the bank will raise the official cash rate 25 basis points on March 8.

Council of Trade Unions economist Peter Conway said wage increases were modest for a labour market with widespread shortages.

The market has been tight for six years but there was little evidence that wage rises were having a major impact on inflation.

"For instance, the Labour Cost Index shows that ordinary time wages have gone up by 6.3 per cent in the past two years compared with a 25.3 per cent increase in median house prices in that period," he said.

"Consumer prices rose by 2.6 per cent in 2006 but with lower inflation forecast this year, hopefully workers can see wage rises that provide a more significant boost to real incomes."

Many unions would also be seeking employer contributions to superannuation.

"To close the 30 per cent gap with Australian wage levels, we need decent wage rises every year for the foreseeable future," Conway said.

"That will require continuous improvements in labour productivity alongside more widespread collective bargaining."

Bankrupt Christchurch businessman Mark Taylor has been forced to wind up another company.  Franchise Operations Ltd - formerly Stirling Sports Franchises - was put into liquidation in the High Court at Auckland last week, in the ongoing fallout from last year's Building Depot collapse, which had amassed debts of more than $8.6 million.  Franchise Operations, formerly known as Stirling Sports Franchises, was put into receivership in December. The liquidation has left all unsecured creditors out of pocket.

Receivers had earlier sold the Stirling side of the business, including the brands and logos, in July for $850,000 to Lane Walker Rudkin Industries, whose directors are Ken and Patricia Anderson. The company's shareholder is Stirling Corporation Ltd, of which the Andersons are also shareholders and directors.  The Stirling franchise had been managed through NZX-listed company RetailX, whose shell became British telecommunications company Plus SMS in March this year.  Franchise Operations and its 88% shareholder, Lennox Corporation, were placed in receivership last December when ANZ called in a $2.9 million debenture after Lennox defaulted on a loan. Lennox is also now in liquidation.

Taylor is the sole director and shareholder of Franchise Operations, Lennox and RetailX. Taylor's wife, Janine, is a shareholder in Lennox Corp and RetailX, according to Companies Office records.  Mark Taylor was bankrupted in May. RetailX owned 10% of the Building Depot and Taylor and his wife owned the rest. Building Depot paid RetailX a management fee.

Receivers Ferrier Hodgson said Franchise Operations' and Lennox's only asset was the intellectual property, including the trademarks, emblems and logos, associated with the Stirling Sports brand.

The receivership hasn't affected the ongoing operations of the Stirling Sports chain.  The proceeds of the sale of the business were paid to debenture-holder ANZ and there was no money for other creditors, according to the receivers' final report.  A settlement was reached between security interest holders Colin Taylor, Merilyn Taylor and Timothy Goulding.

Taylor's father, Colin, founded the Stirling Sports chain and ran it for more than 40 years before selling it to his son in 2003. By then, it was a 43-store chain. Mark Taylor soon afterwards bought the Building Depot from Fletcher Building.

The DIY chain's collapse came in the wake of increased competition with the introduction of Australia's Bunnings Warehouse stores, the expansion of Mitre 10 megastores and existing competitors such as DIY chain PlaceMakers and ITM. The Building Depot offered goods at the lower end of the general retail market, where competition had become more fierce.