Why Inflict Conflict
Flat Rock Forests Trust Receivership Raises Conflict of Interest Issue
The virtues are lost in self-interest as rivers are lost in the sea.
- François Duc de La Rochefoucauld
We have always known that heedless self-interest was bad morals; we now know that it is bad economics.
- Franklin Delano Roosevelt
by Anthony Davies
In January, Auckland accountants Jane Muir and John Cregten were appointed receivers of Flat Rock Forests Trust by Countrywide Bank. (The Independent 4 & 18 February 1998). Muir was previously involved with the trust's manager and promoter. Her appointment raises the issue of conflict of interest.
Muir told The Independent that, being aware of the issue, she took legal advice before accepting the receivership contract to confirm the propriety of doing so. She says she has no conflict and the bank agrees.
To recap, the trust was launched by New Zealand Enterprise board (NZEB) in 1992. NZEB went back to the market in 1993 to raise additional funds. The trust was then closed to further subscriptions.
Since then NZEB, the trust's promoter, appears to have had little direct involvement in running the trust. This job was left to investment manager, New Zealand Trade & Investment (NZT & I). According to Companies Office records, NZEB owns 75 out of the 100 NZEB Nominees ordinary shares on issue. NZEB Nominees, in turn, owns 294,994 out of 250,000 NZT & I ordinary shares.
Muir was an NZEB director from 21 June 1996 until 29 January 1997. From 1994 through to late 1995 she undertook two brief consulting contracts with NZT & I regarding two possible forestry purchases. Only one of the purchases went ahead.
The Companies Office file shows that Muir signed the consent form for her NZEB director's appointment on 14 July 1995. However, the Companies Office did not add it to the NZEB file until 24 June 1996. Her date of appointment is listed as 21 June 1996. She later resigned her directorship on 29 January 1997. But the Companies Office did not file her notice of resignation until 22 December 1997. She informed NZEB managing director Don Simcock of her resignation in a letter of 5 February 1997. However the earliest NZEB notification to the Companies Office is a letter from NZEB's lawyers dated 22 August 1997. On 17 December 1997 Muir wrote to the Companies Office asking it to update its records as the NZEB file still listed her as a director.
Muir stresses that NZEB was not involved in the running of Flat Rock Forests Trust - that she joined the board because of the firm's involvement with a Tauranga prawn-farming operation. "It (NZEB) really didn't have anything to do with the management company... I really had no part in any of the decisions of the Flat Rock Forests Trust," she says.
Unfortunately for Muir, unitholders did not share that impression. In 1995 she says NZT & I managing director Don Simcock asked her to join the NZT & I board. At the time she was on the NZ Forest Products board and didn't think it appropriate to be a director of two companies in the same sector. A discussion with NZFP chairman Rosanne Meo confirmed her decision, she says. She therefore declined the invitation.
The Companies Office file has no record of her ever being an NZT & I director. However NZT & I jumped the gun. The Flat Rock Forests Trust's annual report for the year ended 31 March 1995 lists her as a NZT & I director.
Muir says she was on maternity leave when the report was sent out and didn't find out until several months later. Then it was too late. "If I'd known about that report, I would have insisted they retract it in a letter to unitholders," she says.
By then the damage was done. The Independent was recently contacted by a Flat Rock Forests unitholder who reckoned that as Muir had been a NZT & I director, she shouldn't be a receiver. Muir is adamant she has no conflict of interest. "I know it probably doesn't look good on paper, but I can assure you there really was no involvement... I have tried to be quite meticulous about conflicts of interest."
Rod Templeton, corporate trust manager of Perpetual Trust, the trust's trustee, told The Independent he is aware of Muir's previous involvement with NZEB. Asked if he was concerned about a possible conflict of interest, he said: "The bank certainly isn't." Muir and Cregten were appointed because of their acknowledged expertise in forestry areas, he suggested.
One insolvency expert told The Independent he thought Muir might have been imprudent to have accepted the appointment, given her past association with the group. He didn't think Muir's forestry expertise alone would justify her appointment. Every receivership is different, he said. The most important consideration should be receivership expertise. A competent receiver should know how to access the likes of forestry specialists.
Noted insolvency expert and KPMG national chairman Alan Isaac agrees. To a point. While declining to comment specifically on the Muir issue, he did say the primary consideration in making an appointment must be receivership/insolvency expertise. But it is normal practice for a person with expertise in a particular industry to be appointed a receiver in that area.
He said he'd had little experience of the meat industry prior to being appointed receiver of Fortex in 1994, so the first thing he did was to appoint a meat industry expert as his associate. As a result of the experience he gained, he subsequently won the Weddell receivership.
The Institute of Chartered Accountants is concerned about questions of conflict of interest. The issue is covered in its Code of Ethics. Late last year the institute updated its rules on insolvency work with a 60-page document, Service Engagement Standard No.1 1997 - Performance of Insolvency Engagements. The standard (SES-l), which takes effect today, covers conflicts of interest in sections 11-18 under the heading Professional Independence. Section 11 expresses the nub of the institute's views: members should not only be free - but be seen to be free - from conflicts of interest.
For guidance on what that means - particularly as to what could constitute being free from a perceived, as opposed to an actual, conflict of interest - section 15 quotes paragraphs 25 and 26 of the institute's Ethical Guideline No.1 Guideline on Integrity, Objectivity and Independence.
Paragraph 25 covers insolvency contracts and paragraph 26 receiverships. Paragraph 26 says: "Where any member or anyone in the member's firm has, or has had, during the previous two years, a continuing professional relationship with an entity, neither the member, nor the member's firm should accept appointment as receiver or as receiver and manager of that entity... For the purposes of this paragraph and paragraph 25, a conflict of interest does not arise where the relationship is one which springs from the appointment of the member by, or at the instigation of, a creditor or other party having an actual or potential financial interest in the entity to investigate, monitor or advise on its affairs."
Source: The Independent 1 April 1998
If you haven't yet seen them, you might want to read Sources of Information, especially Muir's curious resignation letter, the information about Price Waterhouse (1, 2, 3, 4) and hot buttons, concerning what may or may not be happening here. Further, the liquidators incurred almost $600,000 in "expenses."
I believe the company called NZT & I above was normally called NZTIL - New Zealand Trade and Investment Limited.
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