Terralink's receivers under fire in court

By CHRIS BARTON, IT Editor

Receivers for failed state owned enterprise Terralink have come under fire in the High Court - accused of not getting the best price for the Government, acting improperly in the sale process, and of being unlawfully appointed.

In an interim injunction sought against first defendants Gary Traveller and Richard Agnew of PricewaterhouseCoopers to stop the sale of Terralink, the court heard on Friday that unsuccessful bidder Ocilla Investments was given no opportunity to increase its indicative offer of $5.5 million for the mapping business.

There was also evidence of a $7.5 million bid by a Hamilton-based Sterling Mortgage and Finance Company which was higher than the price paid by the successful bidder, a consortium of New Zealand Aerial Mapping (NZAM) and Animation Research.

The consortium's unconditional bid comprised two parts - the bulk for the SOE's assets and a smaller amount for good will. The indicative offer for good will was reduced after the consortium conducted due diligence.

Justice John Priestley, who reserved his decision, temporarily suppressed publication of the agreed purchase price.

Like Sterling Mortgage, Ocilla was led to believe by PricewaterhouseCoopers it had reached a shortlist of six or seven out of the 90 parties bidding and would be able to proceed to due diligence. Ocilla, bidding in a joint venture with South African mapping firm GeoSpace International, is also seeking damages in excess of $4 million.

Sterling Mortgage managing director David Braithwaite is not yet making a claim against the receivers but advised by letter on May 10 his dissatisfaction with the sale.

Act MP Stephen Franks has also jumped into the fray. Writing to the Primary Production select committee, which has previously considered matters relating to Terralink, Mr Franks calls for an investigation into the circumstances of the sale and conduct of the receivership.

"Parliament should be seen to be vigilant in relation to allegations of preference or favouritism or any substantial transaction which is not clearly competitive or contestable," said Mr Franks in his letter.

"It seems to me that the committee should give disappointed potential buyers an opportunity at least to explain their concerns, and to test the contention that the value of Terralink would have been damaged by due diligence."

Terry Sissons, acting for the receivers, said Ocilla had signed a confidentiality agreement with Terralink on March 31 which stated the receivers could negotiate with other parties and "sell any or all of those assets to another person" or withdraw them from sale.

An information memorandum on April 9 stated: "The receivers may at any time negotiate with one or more parties and enter into a contract without prior notice to any or all interested parties. Furthermore, the receivers reserve the right to terminate at any time further participation in the process."

Mr Sissons pointed out that both Ocilla's $5.5 million bid and Mr Braithwaite's $7.5 million bid were non-binding and subject to conditions.

He said on May 4 that the receivers entered into an unconditional agreement to sell Terralink's geospatial business to NZAM and Animation Research.

But on May 8 receiver Gary Traveller told the Business Herald no sale had been made. On May 11, he notified all interested parties of the sale and issued a press release saying the consortium's offer was the best offer they were likely to receive.

The receivers also gave notice that Terralink's remaining 195 employees had had their contracts terminated and been offered jobs by the new owners in a company to be called Terralink International.

Ocilla's statement of claim said the receivers were in breach of the Fair Trading Act by unilaterally changing the sale process without notice and selling without using the competitive bid procedure.

Mr Sissons said the fact the receivers did not tell Ocilla they were in separate negotiations with the consortium was not misleading or deceptive in law.

He also pointed to case law which said parties to commercial negotiations are not barred from the use of silence or a refusal to disclose matters as part of their bargaining process.

Richard Phillips, acting for Ocilla, argued Terralink was insolvent when it granted a debenture to the Minister of Finance on November 28.

Evidence, originally obtained by the Herald under the Official Information Act, showed officials several weeks prior had advised the shareholding ministers that no more money should be advanced to the ailing SOE and that liquidation was the preferred option.

At the time, Terralink was struggling to complete a subcontract with EDS which was part of the Land Information New Zealand (LINZ) Landonline project - a computerisation of survey plans and titles, itself behind schedule and over budget.

The minutes noted: "that if the company was to be put into receivership, it would be in order to protect the valuable part of the business and isolate the EDS contract, which is continuing to incur losses and create risks for the company."

Despite the advice, the Government advanced $1.5 million to Terralink on November 30 - the first instalments of a $2.5 million short term credit facility the SOE said it needed to keep it trading.

But by December 18, less than three weeks later, minutes of cabinet committee meetings show ministers had received a draft report from Mr Traveller - at the time a special manager appointed to monitor the company - advising them not to provide any additional funds and to put the company into receivership.

Mr Philips argued that because Terralink was insolvent, a debenture should never have been granted and because only part of the $2.5 million was advanced the company remained insolvent. The statement of claim said "the debenture should be regarded as a sham and a device by which the receivers could be appointed rather than a liquidator."

Mr Philips said as the debenture was invalid, so too was the appointment of the receivers and therefore the sale to by the receivers to the consortium.

Mr Sissons said a requirement of the debenture was a certificate of solvency which was supplied by Terralink directors to the Crown on November 30. He said the court should not entertain any allegation that the debenture was a sham when neither Terralink directors nor the shareholding ministers were present.

Lucy Riddiford, acting for the second defendants NZAM and Animation Research, said any injunction preventing the sale due for settlement on May 31 would leave employees of Terralink would be left with contracts of employment but no jobs. She said there was a risk too the employees would seek alternative employment, which would diminish the value of the assets.