Forsyth Barr broker Peter Young said Allied took the view that Hanover, controlled by Eric Watson and Mark Hotchin, misrepresented the assets in Hanover Finance and United Finance before the purchase.
"Allied has decided that its obligation to pay the $5 million no longer applies and it is now up to Watson and Hotchin to put their case forward. This will cause a bit of a stoush and could end up in court. It will drag on for a while."
It was unfortunate for investors who, in some cases, had doubled their Allied holdings when the shares fell to 11c. Yesterday, they were trading at 3.6c, Mr Young said.
Allied managing director Rob Alloway said the payment had been refused because claims Allied had against Hanover exceeded the $5 million.
In December, Allied Farmers concluded and settled the acquisition of Hanover Finance and United Finance assets and has since written down their value substantially.
Allied Farmers signed an agreement with Hanover and United for assignment of finance assets in exchange for debenture obligations in November.
Mr Alloway said that in the view of Allied, Hanover's conduct in relation to transactions that Hanover executed before Allied Farmers completed the purchase of the finance assets under the agreement constituted serious breaches of Hanover's obligations.
"We want to make it clear that this cancellation does not affect the parts of the transaction that we completed in December 2009 when the former Hanover debenture holders swapped their debentures for shares in Allied Farmers.
"Allied has the assets and the Hanover investors retain their Allied shares."
The cancellation underscored Allied's entitlement to set off its claims against the obligation it would otherwise have had to pay $5 million to Hanover on June 30, he said.
The claims arose in relation to Hanover's breaches of its obligations under the agreement and included. -
To administer its assets in the usual and ordinary course.
To consult Allied Farmers in relation to proposed transactions.
Not to dispose of any finance asset without the consent of Allied Farmers.
Not to terminate or adversely vary or fail to enforce the terms of any Hanover contract assumed by Allied Farmers.
Not to enter into any abnormal or unusual transaction which adversely affected its assets.
To apply cash generated after June 30, 2009, only to specified costs or pay it to Allied Farmers.
Those claims related to several transactions where Allied had been unable to ascertain any sufficient commercial rationale or benefit to Hanover, Mr Alloway said.
That included the release of personal guarantees and the sale of assets at a price which Allied considered to be less than market value.
"It appears to Allied Farmers that the overriding reason that Hanover entered into such transactions was in order to generate the cash funds required to meet its repayment obligations to investors under the moratorium agreement," he said.
