Southern investors in failed private investment company Hurricane House are relying on Dunedin liquidators to collect debts by "negotiated settlement" from debtors - a long and drawn out process of obtaining funds.
Almost 11 months since the Hurricane liquidation, Gus Jenkins, of Dunedin-based Insolvency Management Ltd, remains adamant he is still targeting a return of 20c in the dollar for the southern investors from $4.2 million owed.
Of the 25 Hurricane investors involved, more than 60% are from Dunedin and about half the original 25 creditors are Dunedin-based.
Although a private company and unrelated, Hurricane's demise came at the same time the finance company sector was crashing and burning, with billions of dollars in investors' funds eventually lost or tied up under moratorium.
The finance companies' property-reliant portfolios lost value, borrowers reneged on payments and investors fled the sector with reinvestment rates plummeting.
While Hurricane's's liquidators have not written off the possibility of obtaining some funds from another soured Hurricane loan of $4.5 million to a failed Christchurch finance company, it will be up to those separate liquidators to decide whether there are surplus funds to pass over to Hurricane's liquidators.
Hurricane House was owned by Paul Nicholson of Dunedin and in March last year he placed it in voluntary liquidation owing investors $4.2 million - with much of the capital tied up with investments and loans, which he had promoted to a small circle of friends, family and other investors.
Messages were left for Mr Nicholson but he did not return calls.
While houses were used as collateral to raise investment funds, it was understood no homes had been lost because of the Hurricane House liquidation, but many investors had lost some of their life savings, some sources said.
Of the millions owed at the time of collapse, Hurricane's major debt was a surprisingly unsecured loan of $4.5 million to a Christchurch boutique finance company, Fendal Finance, which itself was later placed in separate liquidation proceedings owing $17.1 million.
The $4.5 million Fendal loan was revealed to be unsecured two weeks after Hurricane's collapse, with staggering consequences for the southern investors, who were dealt a double blow after Fendal's collapse about two months later: because the Fendal loan was unsecured, they now stood behind Fendal's creditors.
Fendal's liquidators blamed its collapse on the high proportion of writedowns for its portfolio size and on the number of distressed loans, which affected its ability to pay its own debts on time, including the debt to Hurricane.
Insolvency Management, representing the Hurricane investors, successfully petitioned the High Court in Christchurch for the $4.5 million.
After the collapse of an 11-hour deal, Fendal's owner, Gray Ussher, a former Dunedin finance company director, was declared bankrupt.
The liquidation of Fendal, a second-tier financier of commercial and residential borrowers, was placed in the hands of the Official Assignee last September.
Mr Jenkins said Hurricane came unstuck mainly because it had lent money and some borrowers had defaulted on payments, meaning there was no interest to pass back to its investors, and subsequently their capital (the loans) became tied up in other companies.
Fendal, despite a personal guarantee from Mr Ussher, defaulted on repayment of the $4.5 million loan from Hurricane.
Why Mr Nicholson opted for an unsecured loan agreement with Fendal was unknown, but there was speculation in southern business circles Hurricane and Fendal had been considering a merger.
Without securities on the $4.5 million loan, Hurricane's investors unwittingly became low priority unsecured creditors in the liquidation process.
Their liquidator had little or no legal leverage to force the sale of land, properties or mortgages to recoup the investment money.
"The collection from debtors could take as long as 12 to 18 months to come to a negotiated settlement. A lot of those debtors are in financial stress themselves," Mr Jenkins said.
During the early stages of the liquidation, Mr Jenkins said there were several assets, described as investments, including shareholdings in a publicly listed company on the secondary market and loans to entities associated with Mr Nicholson.
Investigations included the value of the company shareholding and loans to the associated entities as part of the restructuring of companies associated with Mr Nicholson, where funds were channelled through Hurricane House.
Also being looked into was a loan of $3.01 million to the Mornington Family Trust, of which Mr Nicholson is a trustee, which was used as a conduit to purchase Hurricane shares by various earlier shareholders and all the money had been repaid.
There was an account receivable, which had not been paid, for what appeared to be management fees of $1.12 million to companies associated with Mr Nicholson as part of more restructuring, but the companies concerned were either not trading or in liquidation, Mr Jenkins said.
Mr Jenkins was also looking into a loan of $214,929 made to Mr Nicholson over a period of time.
Of investor funds, more than $830,000 had been invested in Hurricane House by an entity associated with Mr Nicholson.
This issue was still being investigated, Mr Jenkins said. At the time of liquidation there was $1.65 million in paid-up share capital, $245,000 cash in banks, and long-term liabilities of $2.9 million in loans to Hurricane by companies associated with Mr Nicholson, Mr Jenkins said in March last year.
Mr Nicholson himself became a substantial creditor in the Hurricane collapse, having put some of his his own money into the venture, and while it could not be confirmed, it was understood he had not made a claim.
Unlike proceedings against Mr Ussher, which bankrupted him, there is no move to bankrupt Mr Nicholson, and at present no claim had been made on his Dunedin property or assets - assets which are understood, but not confirmed, to be in various trusts.
Mr Jenkins declined to comment on these specific issues because investigations were continuing, but said, "He [Mr Nicholson] has been helpful, providing information that he only has personal knowledge of; such as relating to some of the debtors."
He was unable to say how much could potentially be realised from the unsecured $4.5 million loan to Fendal Finance, but he had not written off the loan entirely as there was a property in the Canterbury high country being sold by Fendal's liquidators.
"That's a case of wait and see. It's yet to be sold and we could get a dividend, depending on what the [Fendal] liquidators decide."
Mr Jenkins has chased paper trails, properties and mortgages throughout New Zealand, and investigated a loan to a ASX-listed gold-mining company in Australia, the balance of whose partially paid debt was later assigned to a New Zealand finance company.
While the Hurricane liquidation may take until mid-2011 to be wound up, the outcome of just a 20% return of capital, in many cases life savings, will be a bitter pill for investors to swallow.
The Investment
$8.7 million - The total funds from investors, and the major loan, involved at the liquidation date in March, 2009.
$4.5 million - An unsecured loan to Fendal Finance; not written off but awaiting outcome of Canterbury property sale. Technically an asset.
$4.2 million - Balance owed to Hurricane investors of which liquidators hope to return total 20%; $840,000.
2.7c - Interim dividend paid to investors in December, totalling $120,000.
3c-4c - Proposed second interim dividend to investors in March - totalling potentially $200,000.
Timeline of collapse and claims
March 9, 2009: Hurricane placed in voluntary liquidation by owner Paul Nicholson.
March 20: Investors discover $4.5 million loan to Fendal Finance unsecured.
May 13: Fendal Finance collapses and placed in liquidation; debts of more than $17 million.
September: Fendal owner Gray Ussher bankrupted by Hurricane's liquidators over non-payment of $4.5 million loan.
December: Liquidator's inaugural first dividend distribution of $120,00 to Hurricane investors.
March 2010: - Proposed second interim dividend to Hurricane investors; up to $200,000.
