Financial case against Feltex directors resumes

Feltex directors (from left to right) Tim Saunders, Peter Thomas, John Feeney, John Hagen and Peter David Hunter in court. Photo / Paul Estcourt

The former directors of fallen carpet company Feltex will be back in court today after a two-month break, facing charges of breaching the Financial Reporting Act.

Feltex collapsed in September 2006, two years after it first floated in May 2004, owing $40 million to 8000 investors.

Directors Tim Saunders, John Feeney, Peter David Hunter, Peter Thomas and John Hagen have denied charges that the company's half-year accounts to December 31, 2005, did not disclose it was in breach of its loan agreement with ANZ, and that it did not correctly classify its debt as current, meaning it was on call.

The directors have conceded the interim financial statements to December 31, 2005, failed to disclose Feltex was in breach of its loan agreement and that its debt was on call, but they maintain that at the time the statements were filed, they believed the company's accounts did comply with reporting requirements.

The second part of the trial is expected to finish on Friday.

Each director is charged with two breaches of the Financial Reporting Act. If convicted they face fines of up to $100,000.

The defence argues that the directors were not guilty of the offences because they hired accounting firm Ernst & Young at considerable expense to conduct a review of financial statements to December 31, 2005.

Ernst & Young told the court during the first part of the trial that it did all that was required under a review, and that its work on Feltex's financial statements was not an audit - a far more thorough analysis - because the company did not ask for one.

When Feltex listed in 2004 it raised $254 million and went on to post a half-year profit of $12.2 million, with a target for the full year of $23.9 million.

However, in 2005, the company slashed its profit forecast twice - first to $15 million to $16 million on April 1, and then less than three months later to $11.5 million to $12 million.

Five weeks before the April 1 profit warning, chief executive Sam Magill had assured analysts Feltex was on track to hit its full-year forecast.

But in August, the board announced that rival company Godfrey Hirst was putting together a $14.8 million offer to buy Feltex after telling the market it had breached its banking covenants and its future depended on raising capital.

In September, the company was placed into receivership, owing ANZ $135 million.

In a separate case, 1700 Feltex investors have filed a class action against Saunders, Feeney, Hunter, Sam Magill (chief executive before Thomas), Craig Horrocks and Joan Withers.

The action alleges the company's prospectus at the time Feltex floated in May 2004 contained information that was misleading or wrong, or omitted to make information available that could have affected an investor's decision to invest in the company.