Feltex's board was "inherently against" selling the crippled carpet maker to an Australian rival and "unreasonably biased" towards any prospect of selling to New Zealand interests, Feltex's liquidator claims in a $41 million court case against five former company directors.
In its statement of claim, liquidator McDonald Vague outlines the frustration felt by Feltex's bank, ANZ, in the final months before Feltex's receivership. During this period Feltex, which was spending $167,000 a day, was "operating on a knife edge", according to board minutes.
McDonald Vague asserts the directors' actions, or inactions, ultimately meant the deal Australian rival and "logical buyer" Godfrey Hirst signed with receivers McGrath Nicol to buy Feltex on October 20, 2006 was materially worse for Feltex than a deal struck with Hirst in August 2006 before the receivership.
It goes as far as saying the board had failed since 2001 to annually forecast, project or budget "with any reliability" Feltex's financial performance.
In their statement of defence, the former directors Peter David Hunter, former chief executive Peter Thomas, ex-chairman Tim Saunders, John Michael Feeney and John Hagen deny any wrongdoing.
They say they followed the legal advice of Bell Gully and Alan Galbraith, QC, the advice of auditors Ernst & Young on sharemarket continuous disclosure rules and Deloitte on Feltex's solvency.
ANZ, owed A$119.5 million (NZ$150m), pulled the plug on Feltex on September 22, 2006. It has got A$105.5m back.
The receivership came just 27 months after Feltex's June 2004, $1.70-a-share, $254m initial public offering. When the receivers were called in the shares were worth just 3 cents. McDonald Vague, which filed proceedings against the former directors in April, was appointed liquidator in November 2006.
The board's decision to allow Sleepyhead owners Craig and Graeme Turner to do due diligence on Feltex broke the terms of an agreement with Hirst, the liquidator says.
Melbourne-based Hirst, controlled by the expatriate-Kiwi McKendrick family, withdrew its offer in early September 2006, saying it did not want to enter a bidding war with the Turners.
However, Hirst re-emerged to pluck Feltex from the receivers in a $129m deal. McDonald Vague says changes to the final Hirst deal left ANZ A$14m out of pocket, creditors short of $5.7m, staff being owed $523,204 and shareholders missing out on $17.9m via a 12c-a-share payment.
In 2006 Feltex's board had also encouraged interest from Talley's Group, which walked away after doing due diligence and determining Feltex's operating earnings were overstated.
Further, the liquidator says the directors' legal advice did not state that the Turners should be allowed to do due diligence or support such a decision. McDonald Vague also says the board failed to disclose ANZ's true position, approaches by the Turners, or potential liabilities from breaching the Securities Markets Act.
The former directors counter that their legal advice meant they were obliged to let the Turners look at Feltex's books if there was a credible prospect of the brothers lodging an offer superior to Hirst's. The Turners, meanwhile, suggested they be paid a fee if their involvement led to an improved offer from Hirst or another party.
McDonald Vague says the Turners' public statements created a false impression of their proposal and negative publicity for Hirst. The lack of certainty around the Turners' proposal saw frustration mount at ANZ, which had no desire to remain as Feltex's bank.
"Turners never made an offer to Feltex," the liquidator says.
Citing a 2007 Securities Commission report, the liquidator says Feltex was in breach of NZX continuous disclosure rules from August 23, 2005 till June 30, 2006 for failing to reveal banking covenant breaches, new ANZ loan terms, a forecast earnings deterioration and planned restructuring costs.
The liquidator's claim includes $9.1 million of shareholders' losses between August 25, 2005 and December 31, 2006 when Feltex was allegedly in breach of continuous disclosure rules.
Since acquiring Feltex, Hirst has shut four Christchurch, Kakariki, Foxton and Feilding of Feltex's six New Zealand factories at the cost of about 415 jobs.