Liam Dann: Investors the losers in Hanover battle

Rob Alloway made tough allegations. Photo / Dean Purcell

The public statement made by Allied Farmers this week was astonishing for the aggressive accusations it made about the behaviour of those in charge of failed finance company Hanover.

All sorts of angry opinions have been expressed about the behaviour of Mark Hotchin and Eric Watson in the past year-and-a-half since Hanover put a moratorium on repayment of investment money.

But expressing a personal distaste for the building of big mansions or the taking of luxury holidays in Hawaii is quite different from making claims that Hanover directors and/or management acted improperly in their financial management.

Allied told the NZX on Wednesday that it would not be paying the final $5 million that it is contractually obliged to because Hanover had breached that contract.

It said its claims against Hanover would amount to more than $5 million and listed among them failure to administer its assets in the usual and ordinary course and to consult Allied Farmers over proposed transactions.

It alleged breaches of agreement not to dispose of any finance asset without the prior consent of Allied Farmers; not to terminate or adversely vary or fail to enforce the terms of any Hanover contract assumed by Allied Farmers; not to enter into any abnormal or unusual transaction which adversely affected its assets; and to apply cash generated after June 30, 2009, only to specified costs or pay it to Allied Farmers.

Allied chief executive Rob Alloway was explicit in his comments:

"These claims relate to a number of transactions where we have been unable to ascertain any sufficient commercial rationale or benefit to Hanover, including the release of personal guarantees and the sale of assets at what Allied considers to be less than market value," he said.

"In some instances, it appears to Allied Farmers that the overriding reason that Hanover entered into such transactions was in order to generate the cash funds required to meet its repayment obligations to investors under the moratorium agreement."

Those are very serious accusations which if true would surely require attention from regulators.

While any truth remains very much unproven, the fact that the deal has been a bad one for Allied Farmers is beyond question.

When the deal was done it put a 20.7c value on Allied shares - in order to give Hanover investors the equivalent of 72c in the dollar for their debenture stock.

That wasn't a bad return compared with other troubled finance companies where receivership has seen returns dip a lot lower.

But now the shares are worth just 3.7c.

And if Hanover investors feel like it's been a bad deal then it's hard to imagine how the original Allied Farmers shareholders must be feeling having watched their share price dwindle from 38c last August.

Taking on a full-scale legal fight with Hanover Group would be costly for Allied. The threat of legal action may offer them a bargaining chip for some negotiated settlement over perceived grievances. But to declare it all so bluntly and publicly this week was an act of all-out war. It suggests they are running out of options.

Hanover has said nothing yet in response but you can bet they dispute these claims and that lawyers on both sides are already talking.

In fact it is Hanover that is likely to make the next legal move - to pursue Allied for the $5 million owed.

Indications are that Hanover Group believes these accusations are stalling tactics and that Allied may not actually have the money to pay.

Alloway has denied that is the case. But it is no secret that Allied is under some financial stress. A deadline for $16 million worth of term debt facilities with Westpac was extended this week after the arrangements could not be settled. Allied Farmers said yesterday that it has, with Westpac, also been considering a number of debt retirement and restructuring initiatives.

Wherever this fight goes from here it doesn't look promising for investors.

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