PWC helped firm skirt insolvency while acting as auditor

Wednesday 10 May 2017 09:02 AM

Property Ventures liquidator alleges PWC helped firm skirt insolvency while acting as auditor

By Jonathan Underhill

May 10 (BusinessDesk) - PricewaterhouseCoopers advised Property Ventures (PVL) on ways to continue trading when by some accounts it was insolvent while at the same time giving David Henderson's failed property development company a clean bill of health as statutory auditor, the liquidators allege.

Liquidator Robert Walker alleges that if not for PWC, the company would have been wound up in 2007, allowing loans to be called in, asset sales and a more orderly liquidation. Instead it trundled on until 2010, when it failed owing $69 million and was later put into liquidation. Henderson was bankrupted that year and has since been discharged although he's banned from being a director, which he is appealing. From 2006 until its failure, PWC gave the company clean audits.

"PWC's role went beyond simply creating the opportunity for PVL's losses," Walker says in an April 7 affidavit. "I believe that this is not merely a negligence case. PWC were consciously involved in activities which were intended to assist PVL to continue to trade in the face of likely or actual insolvency."

The affidavit was aired by Walker's lawyer, Justin Smith QC, in a defended security of costs application in the Christchurch High Court that began yesterday. The interlocutory hearing comes ahead of a substantive hearing set for the first quarter of 2018 against company directors, PWC and other parties which the accounting firm has unsuccessfully challenged in the High Court and the Court of Appeal. It is now awaiting the outcome of a Supreme Court challenge.

Smith outlined a series of allegations against PWC managing partner Maurice Noone and other advisers in the firm, the first when it was first appointed auditor for the 2006 year and, according to Walker's affidavit, breached the auditors' code of conduct by failing to liaise with its predecessor.

Smith says Grant Thornton was dumped after the 2005 audit for telling PVL it had doubts about whether it was a going concern. The liquidator alleges PWC didn't check in with its predecessor, as required by the auditors' code of ethics, or review Grant Thornton's working papers. The accounting firm also failed to engage with PVL's "clear and ongoing cash-flow insolvency", failed to challenge big jumps in asset valuations and didn't engage on Henderson's control of the company, the flow of funds between his private interest and PVL's, and the apparent willingness of PVL's other directors to go along with him, according to the affidavit.

"It smacks of lack of professional scepticism and tends to suggest the auditor is assisting to obviate the problems," Smith told the court.

The liquidator says PWC had a close knowledge of some of PVL's controversial behaviour. PWC allegedly advised PVL to set up a separate entity, Kapiti Ventures, to progress a loan when its own ability to borrow was tapped out. PVL borrowed $8 million to buy land on the Kapiti Coast north of Wellington. It was revalued at $32 million three months later, allowing the company to borrow a further $13.4 million that was siphoned off for cash flow to repay other creditors.

But other properties, acquired from Henderson interests, enjoyed much sharper increases in value. PVL's Five Mile Holdings acquired a block known as the Ladies Mile Land for $12.5 million in 2003, before PWC was auditor, and another block known as the Gardez land, for $14 million. Ladies Mile was subsequently valued at $69.5 million in 2006 and Gardez at $42 million.

"It is alleged that PWC failed to properly scrutinise the enormous increases in the land valuations of Ladies Mile and Gardez - the valuation jumps in 2006, at a time when PVL had serious cash flow issues and was insolvent, should have raised significant red flags," Walker says.

The plaintiffs also allege that PWC assisted PVL in avoiding payment of GST penalties on its Te Anau development. The money had been taken as deposits for the development and should have been held in trust until they became unconditional in 2006 but instead PVL used the funds for cash flow.

Smith, for the plaintiffs also said Noone managed to placate the Companies Office over the solvency of the company, saying it would get a clean audit that year.

Lawyers for the nine defendants argued for more than $4 million in costs including expert witnesses, legal preparation, accommodation and travel. They argued that they were not so much up against the liquidator as against the successful litigation funder LPF Group, which has taken up a position as a creditor and stands to pick up about 42.5 percent of any settlement in return for bankrolling the case.

PWC's lawyer Philippa Fee argued that little was known about the finances of the litigation funder and how deep its pockets really were. There was also a risk that it was unsuccessful in other litigation, leaving it unable to cover costs in the PVL case. She cited costs awarded around the Feltex IPO case Saunders vs Houghton, which amounted to $5 million for Harbour Litigation Funding.

Fee said the global financial crisis played "a huge role" in PVL's deterioration and the allegations go beyond the statutory audit PWC was retained to carry out. Insolvency at PVL was firstly the result of compounding rates of penalty interest.

PWC's lawyer said last year that the balance sheet loss of $320 million claimed in the lawsuit was attracting penalty interest of about 21 percent, meaning it was growing "almost exponentially".

Tony Hughes-Johnson QC, for first defendant and former PVL chair Austin Forbes QC, said his client didn't accept the company had been insolvent in 2006 and 2007. But he said Forbes also had a defence of being entitled to rely on documents furnished by company managers.

Property Ventures played a key role in one of New Zealand's most spectacular company failures, as it was the largest asset of Hanover Finance, amounting to more than 20 percent of Hanover's assets, at the time the finance company's investors voted on a moratorium that led eventually to the sale of their debt of Allied Farmers. In 2008, PWC was the auditor of both Property Ventures and another company in the group, Five Mile Holdings, while it was also advising the trustee of Hanover over the moratorium, Walker alleges.

The hearing is continuing.

(BusinessDesk)

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