Feltex directors to defend charges

Feltex directors to defend charges

Five former directors of Feltex Carpets Limited are confident they will successfully defend charges brought against them by the Registrar of Companies under the Financial Reporting Act.

The charges follow an inquiry conducted by the Securities Commission in 2006 and 2007. Although the Commission identified two possible respects in which Feltex’s interim financial statements did not comply with the new accounting standards, the Commission concluded that those matters were not related to Feltex’s subsequent receivership and liquidation. The Commission’s October 2007 report said (para 11):

“It is the Commission’s view that the Feltex collapse was not caused by securities or financial reporting matters.”

The Commission also noted that the accounts were reviewed and approved by Feltex’s independent auditors, Ernst & Young. The Commission said (para 187):

“It is reasonable under section 138 of the Companies Act for the directors of a company to rely on the accounting firm (whether their advice is given pursuant to an audit or a review engagement). The Commission believes that this view is widely shared by company directors in New Zealand.”

The Commission concluded that the advice provided to Feltex by Ernst & Young, and relied on by the directors, was incorrect. The Commission’s report said (para 10):

“The Commission is of the view that the work undertaken by Ernst & Young New Zealand in relation to the review of the December 2005 financial statements failed to meet the standards required for such an engagement.”

The five former directors (Michael Feeney, John Hagen, David Hunter, Tim Saunders and Peter Thomas) believe they acted appropriately by relying on the professional advice they received. The Directors said:

“We do not believe there is any proper basis for the decision to bring these charges, and we will vigorously defend them.”

The charges

The charges relate to Feltex’s interim financial statements for the six month period ended 31 December 2005. These were the first accounts prepared by Feltex under the new accounting standards (“IFRS”). The charges allege that under those new accounting standards Feltex’s accounts should have categorised the company’s bank debt as a “current” liability rather than as a “non current” liability, and that the accounts should have included a note referring to a breach of the debt and interest ratios in Feltex’s banking agreement (this breach was later formally waived by the Bank). The charges are brought under section 36A of the Financial Reporting Act and will be heard in the Auckland District Court. There was an initial procedural hearing today at which the directors pleaded not guilty. The trial is likely to be in the second half of the year.

ENDS

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