Clothing firm collapse leaves questions

The Ponsonby Rd store in Auckland is one of 20 around the country. Photo / Richard Robinson

Most New Zealand women's wardrobes will have included something from Jean Jones over the years.

The stores, selling stylish cotton T-shirts, jeans, merino tops and the like, have graced the nation's high streets for decades.

The business was built up by the Ward family and is one of those rare Kiwi clothing brands that has remained locally owned and manufactured.

While the label has had its high-fashion moments these days its customer base is more the trendy babyboomer generation.

However, being a well-known brand has not been enough to protect against the bitter winds of the recession.

The list of rag trade casualties is well known: Line 7, Canterbury, and Lane Walker Rudkin have all hit the skids through various factors such as unforgiving trading conditions and bad management decisions.

Jean Jones has been no exception. On May 7, owner Michael Ward - who bought the business from his family in the early 1980s - was forced to put the three companies associated with it into liquidation.

But this story of how an established name reached the brink of extinction is not one of simple tough trading, or even of foolish management.

A "snap, grab and take", as liquidator Bernard Montgomerie likes to call it, of the business's assets on April 24 uncovered a chain of events that has piqued the interest of authorities from the Inland Revenue Department to the Companies Office to the trustee of a small Gisborne-based finance company.

The 20 Jean Jones retail outlets and manufacturing operation are now owned and run by Gisborne businessman John Gardner, leaving behind a bewildered Michael Ward and creditors owed at least $4 million - including $1 million to the IRD.

Ward is bewildered not least because of the souring of a long-term relationship.

He and Gisborne chartered accountant Nigel O'Leary had been friends since the 1980s when O'Leary's wife ran the Jean Jones shop in the city.

O'Leary is the business partner, longtime friend and distant cousin of John Gardner. The two are co-directors in numerous companies, including the small finance company Rockforte Finance in which they both have an interest.

But up until the April 24 seizure of assets, O'Leary was an adviser to Michael Ward - so much so, Montgomerie says, that O'Leary ran Jean Jones.

Montgomerie says Ward trusted O'Leary completely. The Gisborne practitioner was Jean Jones' accountant from 2006 when he got rid of the in-house person. He controlled all the financial records and internet banking, and signed documents. He moved the administration function from Auckland to Gisborne.

That makes him a shadow director, liquidators Montgomerie & Associates say. They have served O'Leary with notices under Section 261 of the Companies Act requiring him to hand over the companies' records.

"We sent out our usual notices and just met with resistance left, right and centre from O'Leary, Gardner and their lawyers," Montgomerie says.

With the slowing retail sector Jean Jones had hit trouble.

Attempts were made to restructure. But "negotiations between the shareholder, management and financiers broke down when parties involved in the negotiations seized all the assets of the company and relocated the office and the warehouse", Montgomerie says in his first liquidators' report.

The 130 staff were told they were being employed by a new company and the Eftpos machines in the stores were changed so that bankings were diverted. All of this happened without Michael Ward's knowledge, much less consent.

Montgomerie says the April 24 move was the culmination of a series of unexplained events surrounding Michael Ward 1969 Ltd, Ward's company through which he traded all his interests including Jean Jones.

IN LATE 2008 a Gisborne surfboard and surfwear business called New Wave, which Ward had purchased from O'Leary several years before, was sold to O'Leary's daughter and son-in-law for $770,000.

Montgomerie & Associates can find no record of those funds being paid or credited to Michael Ward 1969 Ltd.

They can also find no record of revenue from New Wave being banked into any Michael Ward 1969 account during the whole period the company owned it.

Even stranger still, bank statements show that chunks of money flowed between Michael Ward 1969 and Rockforte Finance.

On June 18 Rockforte manager Colin Simpson told Montgomerie & Associates that there had never been "any advance made to this company by Rockforte Finance".

However records show that in May and June 2008 amounts of $265,000 and $224,000 were transferred from Michael Ward 1969 to Rockforte.

Montgomerie says in turn Rockforte made numerous deposits into the Michael Ward 1969 account. The transfers were in amounts such as $47,000, $45,000 and $18,000. There has been no explanation for this flow of funds.

All of this has caused Montgomerie and Associates to begin action on a range of fronts. It has passed information to the Companies Office, laid a complaint against O'Leary with the Institute of Chartered Accountants, and raised issues with Rockforte's trustee, Covenant Trust. It is also considering its options in the civil courts.

"In my opinion this has been an orchestrated campaign over at least three years, starting with the repurchase of the New Wave franchises and then progressing on to money washing through the company, and with the final seizure of all the assets and failing to account," Montgomerie says.

Covenant Trust managing director Graham Miller confirms there are concerns over Rockforte, which is covered by the Government's deposit guarantee scheme. "We are aware of the issue, we have asked the auditors to investigate and we are awaiting their confirmation," he says.

Meanwhile John Gardner has control over what Montgomerie estimates is a $5 million business.

Ten days before the seizure Gardner set up a new company and purchased a $680,000 general security agreement which had been held over some of Jean Jones' assets by another financier.

In addition Rockforte Finance had lent $422,000 to one of Michael Ward's now-liquidated companies, even though this particular entity had never traded and didn't even have a bank account. The Weekend Herald understands this loan was secured over the intellectual property of the Jean Jones business.

On the basis of these securities, totalling $1.1 million, Gardner's interests have taken control of Jean Jones.

But this leaves behind all the preferential creditors - including staff owed $170,000 in unpaid wages, and the IRD owed $866,000 plus penalties - and a host of other out-of-pocket suppliers.

MONTGOMERIE estimates there will be total claims of well over $4 million. He says he is even receiving proofs of debt from suppliers whose goods are being sold in New Wave's Newmarket retail outlet.

What's more he says the 2008 balance sheet shows Jean Jones has current assets of $5 million - far more than the $1.1 million Gardner has picked the business up for.

Nigel O'Leary dismisses that valuation out of hand.

"Making a valuation of a clothing company that couldn't pay its debts in today's market at $5 million to $6 million, one would have to say [that] is a relatively bold statement by anybody," he says.

He maintains he and Gardner have acted within their rights as directors of Rockforte.

"We exercised our rights that we were certain we had, that were confirmed by detailed legal advice.

"We welcome any challenge to that."

Even though Rockforte's management says no funds were ever advanced to the trading company, Michael Ward 1969, "the transactions involving Rockforte Finance were settled through the seizure of the assets, and Rockforte was fully repaid, suffering no losses", O'Leary says.

And he flatly denies he ran Jean Jones.

He says he only came to Auckland a few days a month and wasn't the company accountant.

"I refute any orchestrated campaign fully and totally."

He says in fact Gardner has saved the business.

"Mr Gardner was bold enough to exercise his rights under security documentation that he personally had in conjunction with myself.

"And instead of just placing it in receivership and letting the company fall over ... [he] kept the stores open and saved 127 jobs in the process."

Bernard Montgomerie says the Inland Revenue Department for one is unlikely to see it this way. He says the tax man has evidence that O'Leary acted as a shadow director of Jean Jones and could go down the route of holding the directors personally liable for the $1 million tax bill.

He maintains that the only claim Gardner and O'Leary have to Jean Jones is the $680,000 worth of assets picked up with the security agreement, and even then this interest comes way down the pecking order behind the preferential creditors.

The Weekend Herald understands that Gardner and O'Leary also claim to have personally lent Michael Ward money. Montgomerie has seen no evidence of it.

"Give us the books and records and let the liquidators verify that."

THE PLAYERS

Jean Jones
Chain of 20 retail stores and clothing-manufacturing operation.

Michael Ward
Bought the business from his family in the early 1980s.

Michael Ward 1969 Ltd
The trading company of Jean Jones (two other Jean Jones entities never traded).

Nigel O'Leary
Gisborne chartered accountant. Director and shareholder of Rockforte Finance. Ward says he was a close adviser and effectively ran Jean Jones.

John Gardner
Gisborne businessman. Director and shareholder of Rockforte Finance. Longtime friend and business partner of O'Leary. Now controls Jean Jones.

Rockforte Finance
Small finance company with loan book of $6.8 million. Government guaranteed. Lent non-trading Jean Jones company $422,000 secured on intellectual property of business.