What Do You Think of This


What the Manager Says

Several excuses are always less convincing than one.

- Aldous Huxley

An excuse is worse and more terrible than a lie, for an excuse is a lie guarded.

- Pope John Paul II

Gilbert Swan
Barristers & Solicitors

31 May 2000

Cooper Rapley
Barristers & Solicitors
P O Box 1945

Attention: John Maassen

Dear Partners

Flat Rock Forests Trust

Our Ref: SIMO27/1

  1. As you are aware our clients reject the need for the appointment of an inspector and say the suspicions supporting the application are groundless.  They have never been raised with the Manager or the Trustee which indicates to our clients a lack of good faith or that a sincere attempt to establish the truth is not the motive of the applicants.  The Manager and Trustee have not sighted the relevant transaction and background documents for up to 8 years and so are not at this point able to provide detailed responses to the unit holders or an inspector.  Responses to the matters raised can and should be provided before the substantial additional time and cost associated with an inspection is warranted.  Had documents been available such response could have been provided at the hearing.  In addition, groundless allegations of losses by migrants, scams and fraud have been made in various ways over a long period.  Accordingly defamation proceedings may have to be instigated solely to publicly clear the names of our clients.
  2. There are preliminary matters raised in this letter which require consideration before any inspection should proceed.


  1. The judgment of Durie J and the affidavits of the applicants indicate that the purpose of an inspection is to ascertain the causes of the loss to unitholders and the impact of any action of the Manager on such loss.  The possible causes of the loss are market conditions, actions of Countrywide Bank and the receivers and actions of the Manager.  It has been contended by the Manager, the Trustee and the Trust's forestry consultant that the losses are totally explained by the first two categories, while the applicants assert that they were partially caused by the third category and totally overlook the impact on prices of a sale in the course of a liquidation.

Loss in Value

  1. The scope of the inquiry will involve the contesting of valuations and opinions of the Trust's valuer and forestry consultant, Forme Consultants, which firm is among the most respected in the country.  This will require a thorough assessment of acquisitions and sales by independent experts.  It is nonsense simply to assert as was done, that the market declined only by 20% when a large part of the Trust inventory was C grade which assumed zero value for a long period when that market totally collapsed. The most that could be established would be a limited difference of opinion as to value between experts.

Bank and Receivers

  1. The actions of Countrywide Bank and the Receivers were, in the opinion of our clients, the major cause of the unitholders getting no return.  For a long period leading up to the appointment of receivers, throughout the receivership and thereafter, the Manager (financially supported by NZEB Ltd and its directors and staff) worked to pay out the bank and maximise the value of surplus assets.  The Manager was able to arrange sales (at prices higher than obtained by the Receivers) which covered immediate payment of up to two thirds of the debt with the rest deferred but this was not accepted.  A logging scheme with guaranteed sales to large buyers, such as Fletcher Forests, and with up front payments was declined by the bank.  A provisional agreement was reached with Westpac to refinance but this was put on hold when the market looked uncertain.  Countrywide wanted nothing but a total cash exit and an exit from forestry lending and the clearing of "problem files" pending a sale of the bank.
  2. Similarly we are instructed, the Receivers claimed they had no responsibility to maximise value for unitholders as they were not receivers of the Trust.  Throughout the latter part of the receivership the Receivers stated that a surplus value of $2-3 million in assets would be left intact after sales to cover the Bank.  According to the Receivers the purchaser kept refusing to settle for no apparent reason and eventually demanded more assets arising from a question as to access rights in relation to one forest.  An arrangement as to access had been gained by the Trust and probably reinstituted by the purchaser subsequently after purchase.  Neither the Manager nor the Trustee was allowed to assist in the sales process and both made continuous and strong approaches to the bank on these and other issues.  The financial impact on the Manager and the Trustee during this period was substantial.  The amount of direct costs incurred by NZEB, its staff and directors on behalf of the Manager and unreimbursed approximate $500,000.  The Trustee has also incurred substantial costs and other contractors and consultants not reimbursed by NZEB Ltd on behalf of the Manager remain unsatisfied.

Actions of Manager

  1. On behalf our clients, it is noted that all significant transactions involved the Manager, Trustee, forestry consultants, auditors, financial and legal advisers and in many cases, representatives of substantial groups of unitholders or others, as appropriate.  Nothing was done without careful consideration and in a professional and transparent manner.  The experience of directors was described in the prospectus and newsletters.  Two directors involved in the forestry industry were added after the prospectus was issued.
  2. The background to the formation of the Trust may be helpful.  New Zealand Enterprise Board Ltd (NZEB) was formed to conduct commercial operations and provide advisory services as an adjunct to the Wellington Regional Enterprise Board.  Consent to its establishment and the establishment of a management subsidiary (the Manager) was given by the regional and central government officials responsible for its creation.
  3. NZEB is not a related party of the Manager nor an agent and is not subject to any inspection.  NZEB was involved in community and other projects.  NZEB formed New Zealand Trade and Investment Ltd (NZTIL) to manage investments on behalf of New Zealand and overseas persons in New Zealand based emerging businesses, where some assistance could be given to developing new regional business with export potential.  NZTIL provided active management in businesses involved in forestry, tourism, aquaculture and television and structured migration investment in association with the Bank of New Zealand Ltd and Yorkshire General Insurance Ltd and on its own account.
  4. NZEB also had an association with Timber Holdings Ltd, a forestry owner and management company.  It was not a broker but had established a network of potential sellers and rights representing the goodwill of its business.  Timber Holdings Ltd formed an association with NZEB through New Zealand Forest Holdings Ltd to acquire and manage forests.  Much work was done with a view to acquiring rights to hardwood (rimu and beech) and making submissions on sustainable management policies on behalf of itself and a Japanese company.  These interests had no association with and predated the Flat Rock Forests Trust.
  5. As a new player in forestry, the Manager had no established network for acquisitions and relied on the above companies to source its early acquisitions.  Any association was noted in the Prospectus.
  6. The Trustee established certain criteria for acquisitions.  In addition to satisfying itself as to the reasons for the acquisition and the valuation, the Trustee was required to be satisfied that a discount rate of 10.19% was reflected in the price.  This was generous to the Trust in a heated market where suitable forests were almost impossible to acquire and normally priced at between 7-9% discount rate.  No transaction was entered into which did not satisfy these criteria and a particular purchasing objective of the Trust.
  7. Two acquisitions involved directors of the Manager.  One, Kai Iwi, was acquired by a company owned by two investors, planted and eventually offered to the Trust at market value.  This property was purchased by the Trust at a time when it was purchasing land for planting and new plantings.  It was a small but excellent holding and was readily saleable to other parties.  The Trustee applied a positive test in deciding the purchase was for the benefit of the Trust even though the vendor was not a related party of the Manager under the Companies Act.  The receivership sale did not reflect its true value.  The second transaction involved an acquisition by the Trust from a company which acquired a group of forests from Carter Holt Ltd following an approach by Timber Holdings Ltd in May 1991 and at a price offered at that time.  Directors of the Manager held a combined 20% interest.  The Trust in 1993/94 expressed an interest in acquiring part of the holding.  It was seen as a unique opportunity to expand the Trust portfolio which the Manager, Trustee, forestry and financial advisers all regarded as highly desirable to secure better returns.  At the suggestion of the Trustee, an experienced person who had no interest, negotiated the transaction at independent valuation and a price reflecting a 10.19% discount rate resulting in a discount to asking price for the benefit of the Trust.  The original sale documents overlooked a parcel of 94 hectares but this was subsequently resolved.  The Trust was never in a position to acquire the forests at the lower price for which the vendor, Manuka Holdings Ltd had secured a position over several years through Timber Holdings Ltd.  There is nothing unusual about sales by a manager or promoter to a forestry syndicate much less parties other than the manager or promoter.

Key Policy Decisions

  1. Questions have been justifiably asked about certain apparent changes in policy.  The answers are provided by our clients.
  2. Q. Why did the Trust accept subscriptions beyond $3 million?

A. Because it was thought by the Manager and advisers and key unitholder representatives that a larger holding would provide for a more balanced portfolio of forests with greater security and greater return.  The subscriptions were stopped at $10 million even though brokers wished to subscribe more.  This was in strict accordance with the Trust Deed.  Some of the Manuka forests were identified as suitable.  Given the huge demand for forestry investment the Trust could not easily have secured forests other than from Manuka Holdings Ltd, and certainly not at 10.19% discount rate, but Manuka could easily have sold elsewhere as it eventually sold most of the holding to another party.

  1. Q. Why did the Trust purchase land for planting or recently planted forests?

A. In terms of value the investment in land or recent plantings was approximately 10% of total value.  When the market began to fall the Manager and its advisers looked for methods of maximising value and enhancing security.  It was observed that while log prices were moving downwards, land maintained value so that some land holding was regarded as insurance.

Additionally, a fall in log prices did not affect the value of new plantings which were valued for up to 5-7 years on the basis of cost plus an interest rate.  At that point valuation methodology valued standing trees as at current value x years to maturity (with a range depending on the forest) multiplied by x discount rate (normally between 7 - 9% in the relevant years).  At the crossover point forests would often experience a one-off gain in value, a matter which was the subject of debate by valuers.

  1. Q. Did the Trust take other measures to enhance value?

A. In conjunction with its financial advisers and with the agreement of the Trustee tax structuring techniques, commonly applied in the industry were used such as the use of a third party loss company to acquire rights and on-sell shares or vice versa.  This occurred prior to acquisition by the Trust and as usual in the industry the benefit was shared with the contributing parties as appropriate in lieu of fees, and within the purchase criteria established by the Trustee.  NZEB benefited from some of these margins which for the most part were applied to covering Trust management costs.

  1. Q. Why did the Trust borrow for acquisition?

A. To extend the trust portfolio in order to secure a better balance, more security and to try and enhance return.  The extended asset base was also necessary to reduce the costs to the Manager of managing the Trust and the forestry business.

All borrowings were within the 35% debt to value of assets ratio which was regarded as conservative particularly against the discounted valuations used by the bank.

  1. Q. Why was New Zealand Forest Trust formed?

A. To satisfy demands from the representatives of large groups of the Trusts' unitholders to provide further investment opportunity beyond the termination date of 2002 and to enhance income for the Flat Rock Forests Trust.  A unitholders' meeting approved the extension of the Flat Rock Forests Trust and the acquisition of further assets.  Subsequently the auditor and Trustee stated to the Manager that the intention of the resolutions would be more cheaply and efficiently accomplished by forming a new trust which it was advised complied with the resolutions and the Trust Deed.  Forests in the new trust were transferred from Flat Rock for units so that the new trust was effectively a sub-trust of Flat Rock.  Subscription from an expected source ($5 million) did not eventuate and the New Zealand Trust was folded back into Flat Rock on the advice of the Trustee and the auditor.  No loss was incurred by Flat Rock with NZEB absorbing most of the costs.

  1. Q. What does the Manager consider caused the loss?

A. A unique market situation in which forests were largely acquired at the top of the market with the expectation of continuing prices at that level with forced sale at the bottom by a mortgagee which only looked after its own position.  The Manager believed it could have traded out of the situation if penalty interest rates were not applied.

  1. Q. Was the loss to by any benefit to a director?

A. No.  NZEB and the directors have given total support to the Trust from the beginning to the end at great personal and financial cost, as has the Trustee.  NZEB and directors (who were major unitholders) have financially lost more than any other party.

  1. Q. Was communication with shareholders satisfactory?

A. The Manager tried to keep unitholders informed.  All newsletters were vetted and approved by the Trustee.  Leading up to and during the receivership no information was available.  Subsequently the Trustee controlled communication and the Manager had no active status.  During this period the Manager continued to respond to individual unitholders to the best of its knowledge.  In spite of requests by the Manager and the Trustee no unitholder has inquired as to the matters raised in the application to the Court.  Whatever the reason, there was a general failure of communication or many of the present issues would not be of concern which in addition to the overall loss for unitholders, our clients sincerely regret.

  1. Person to be appointed inspector

Our clients suggest that one of the larger accountancy firms be appointed.  It is not a forensic accountant that is required.  The facts are not difficult to establish.  It is a person with a wide experience of business and in particular, forestry business who can identify the individual components of the loss and assess the impact of each.  There are also significant legal issues which will need to be addressed.  The larger accountancy firms have collectively more resources available to them, including legal advice.  Further, quite extensive professional and administrative support will be likely to harness and analyse the documentary evidence and conduct interviews.


  1. We record the statement by Counsel for the applicants to the effect that the applicants recognise that other parties will face costs and they, the applicants, would not oppose an application by other parties for costs.  In our view the time and costs involved will be substantial.

Legal Issues

Section 26 Unit Trusts Act 1960 & Clause 7.04 of the Trust Deed

  1. It is plain from clause 7.04 of the Trust Deed that a manager and related companies may make profits and are not liable to account for them to the trustee.  Unitholders have actual or constructive notice of the trust deed.  They could not complain about any legitimate profits made by a manager.  Assets are commonly sold by promoters and managers to investors.  This provides opportunities for the investor.  And if a manager could make profits, then as a matter of common sense, those profits must be allowed to flow to the shareholders of that manager.  Nor could it sensibly matter if shareholders were also directors.  In the present case neither the Manager nor any related company was involved in any such transaction.  Any benefit received by a director was as a shareholder of an unrelated company and clearly is not caught by clause 7.04.
  2. The intent of section 26 is clear.  It is aimed at a situation where a director of the manager has made something like a secret profit having taken improper advantage of his position in his or her capacity as a director of the manager.  The section could not be invoked to claw back legitimate profits made by a director of the manager especially as a shareholder of an unrelated company and not in his capacity as a director of the Manager.
  3. Nor do we believe section 26 could be used to require accounting for profits of any director if a particular transaction had been fully disclosed first to the Trustee.  In the present case there was nothing done without full involvement of and full disclosure to the Trustee and in accordance with the Trustee's criteria and approval.  Further, it is inconceivable that the section is intended to prevent transactions being entered into for the benefit of the Trust as in the present case.
  4. We note under section 26(2) that any personal profits referred to in subsection (1) may be recovered by the trustee.  If the Trustee were to demand back any profits made by directors from transactions to which it had earlier given its approval, it would be met by a legitimate claim of estoppel.
  5. If section 26 does conflict with clause 7.04 of the trust deed, our response would then be that section 26 can be contracted out of (despite Durie J's obiter comment to the contrary).  Section 24 of the Unit Trusts Act provides that the trust deed must not exempt the trustee or manager from liability for infringing the trust deed.  But that is the only restriction.  By implication other parts of the Act could be contracted out of and we believe it follows that section 26 can be contracted out of. It if couldn't, then one would have expected Parliament to have expressed such prohibition as it did in section 24.
  6. It is our view that the scope of section 26 needs to be clarified by the High Court before any inspector could legitimately attempt to apply it in this case, but in any event clearly has no present application.

Creditors of the Trust:

  1. Even if there were profits made by directors that the Trustee succeeded in getting back in, we have no doubt that those funds could only be paid out to unitholders once all creditors of the Flat Rock Forests Trust were paid.  We understand the Trustee is still owed significant amounts of money and to our knowledge so is the Manager.  The Manager in turn is indebted to NZEB to an amount of approximately $450,000 in respect of Flat Rock alone.  We understand various consultants and contractors were not paid.  Actual or potential creditors of the Trust are estimated at between $500,000 to $1 million.  Creditors cannot be ignored and would exceed any possible contribution by the Manager or former directors.

New Zealand Trade & Investment Limited:

  1. There is a prospect of money being available to shareholders of NZTIL.  The migrants, representing about 98% of the shareholding, stand to benefit.  The other shareholders will release any claim.  Any funds due to them are held in trust or due to them in their capacity as shareholders of NZTIL.  The effect of a claim would be to erode the amount available through additional accounting and legal expenses.  The funds represent the proceeds of sale of other investments and are available only at the forbearance of creditors such as NZEB.  None of that money is available to unitholders of FRFT.


  1. Our clients, in their capacity as former directors of the Manager, will comply with any direction of the Court in relation to an inspection.  Their intention is to ensure that unitholders have a correct knowledge and explanation of losses and surrounding circumstances and to dispel the totally incorrect assertions made regarding management of the Trust.  In order to achieve this the inspection must be comprehensive and based on relevant legal criteria.  The unfortunate effect is that substantial time, money and other resources will be incurred with no benefit to unitholders.
  2. We repeat that our clients have not sighted most of the relevant documents for up to 8 years and have no access to any records.  The provision of copies of all documentation and reasonable time for consideration would be required prior to any discussions with an inspector.
  3. We strongly urge you to consult with unitholders before the appointment of an inspector.

Yours faithfully




Susan J Peacock


E-mail: peacock@gilbertswan.co.nz

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