$10m paper loan 'a sham' SCF trial told

A $10 million paper loan has been outlined as a sham circular funding arrangement to stop the trustee of South Canterbury Finance (SCF) from "busting our balls".

The evidence came as the SCF trial resumed at the High Court at Timaru yesterday after adjourning at Easter.

Former SCF chief executive Lachie McLeod, and former directors Edward Sullivan and Robert White, are on trial before Justice Paul Heath, facing a combined 18 charges laid by the Serious Fraud Office.

SCF collapsed in August 2010, with $1.58 billion of taxpayers' money paid to investors under the government retail deposit guarantee scheme.

Craig Taylor was the financial controller of SCF's subsidiaries from March 2005 to April 2010. He was emailed on July 20, 2009, to create a journal entry to show a loan of $10m from Kelt Finance to Southbury, SCF's parent company.

It was to be backdated to June 30, 2009. The same day an existing loan between SCF and Southbury was reduced by $10m. SCF owned 75 per cent of Kelt.

SCF's exposure to its parent company Southbury could be no more than 35 per cent of shareholder funds, which then equalled $78m. Before the Kelt loan, Southbury owed $82m.

"I understood it [the debt] was going to exceed the trust covenant," Taylor said. "It was juggling debt, making the debt from one related party to two related parties. It was fairly obvious at the time what the transaction was for."

In an email he noted, "the loan is to Southbury, no cash is to change hands".

Kelt general manager Sean Poulton also gave evidence. He was employed between July 2007 to December 2009.

Poulton gave evidence that Sam Kelt, who owned 25 per cent of Felt Finance, knew nothing of the $10m loan which was one third of its loan book. Normally applications were assessed in relation to security. He queried if the loan was "clean" with no security, which it was.

Before he resigned Poulton left a file note stating he initially had no "knowledge of the application or transfer of the $10m loan from Southbury onto Kelt Finance from SCF".

"In response I requested Lachie McLeod and Graeme Brown provide details around the transaction and none were forthcoming."

In an email from Taylor at SCF, Poulton was advised it was "a juggle of related party debt to keep the trustee from busting our balls".

The initial loan document was signed by the late SCF chairman Allan Hubbard and his wife Jean on June 30, 2009.

McLeod faces a charge of false accounting in relation to the journal entries made in the transaction.

The trial continues today with further evidence from Poulton.