PwC appeal says stoush with liquidator of Henderson vehicle amounts to 'trafficking of litigation'

Tuesday 21st June 2016

A litigation funder that became first-ranking creditor to one of property developer Dave Henderson's failed companies was "trafficking" in litigation in the hope of extracting excessive profits from default interest rates on the debt, PriceWaterhouseCoopers told the Court of Appeal today.

PwC, which was the auditor for Henderson's Property Ventures, and the company's directors are being sued by the company's liquidator, with the case scheduled for the first quarter of 2018. The accounting firm failed in the High Court to get the action quashed or to get the transfer of the debt to litigation funder SPF No 10 declared invalid.

In the Court of Appeal today, PwC's counsel Bruce Gray QC said the compounding interest rate, at around 21 percent per year, on the claimed balance sheet loss of $320 million meant the value of the loan was growing "almost exponentially" and by the time the case got to trial in 2018 the amount of secured debt would be "simply enormous".

Making the debt trail more complex, the security had been sold more than once before SPF No 10 acquired it for a small upfront cost and the promise of a cut of anything recovered.

"If this case is not inappropriate trafficking, what is?" Gray said. "It is hard to think of anything more extreme - a stranger, a complete volunteer, comes to a secured creditor of a company which effectively has been liquidated, its assets have been sold and distributed. For a small amount of money, it buys an opportunity to sue someone with financing interest rates, default rates out of control, out of kilter with the market. There's this fantastic opportunity to acquire the claim and sit behind a liquidator and ask the liquidator to bring it forward."

The debt originated in 2006 with a $56.7 million loan that the now-defunct Hanover Finance advanced to Five Mile Holdings, a subsidiary of Property Ventures, secured by a general security agreement with Property Ventures. Hanover sold that security to Allied Farms Investments in 2009. Five Mile went into receivership in November 2009, and after selling off its land in Queenstown was left owing Allied $39 million. Property Ventures went into liquidation in July 2010 with Robert Walker appointed as the liquidator.

In November 2012, Walker, as liquidator of Property Ventures, started proceedings against the company's directors and PwC as its auditors. But before that lawsuit was started, SPF No 10 entered into a litigation funding agreement with Property Ventures which gave it a first ranking security interest over the assets.

In March 2013, Allied Farms sold SPF No 10 its security agreement and the debts owed by Five Mile, and securities including rights of action. SPF paid Allied $100,000 and agreed to pay it 5 percent of the net amount recovered in proceedings, according to the High Court judgment last year on PwC's failed attempt to prevent the liquidator suing it over a bankrupt company it had audited.

In July last year, the High Court ruled that the litigation could proceed, denying PwC's application for an order to stay proceedings.

PwC had argued that SPF No 10 had no interest in the subject matter before litigation and its only interest was "to make excessive and disproportionate profit" through an arrangement SPF had made with Allied that amounted to "a misuse of the liquidator's powers under the Companies Act."

However, Justice Brown found that PwC failed the Waterhouse test, which is named after a case in New Zealand's Supreme Court in 2013. The judge said PwC failed to establish either that the arrangement was a manifestation of abuse of process, or that the cause of action being assigned to SPF No 10 was not permitted.

In the Court of Appeal today, PwC's Gray said the case was a clear example of trafficking of litigation as SPF No 10 "seems to do nothing else other than hold this security."

SPF No 10 is owned by LPF Group, a litigation funder whose directors include former Shareholders' Association boss Bruce Sheppard, William Wilson and Phillip Newland. LPF is in turn owned by BG Litigation, which is owned by Newland. Last December, Newland argued in an NZ Herald column that litigation funders levelled the playing field against defendants who may have caused financial injury but who could be well resourced with commercial liability insurance to fight a court battle.

According to Companies Office records SPF No 10 is one of at least 19 similarly named companies ultimately owned by Newland.

BusinessDesk.co.nz

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