Hubbard's cheque-swap habits exposed

Late South Canterbury Finance (SCF) chairman Allan Hubbard had a practice of "cheque-swapping" to conceal related party loans, the High Court has been told.

The trial of former SCF directors Ed Sullivan and Robert White, and former chief executive Lachie McLeod, resumed yesterday before Justice Paul Heath in the High Court at Timaru.

Former SCF group accountant Terrance Hutton gave evidence for the defence yesterday, and focused on the late chairman.

"Mr Hubbard had an aversion to disclosing related party loans. It was common practice for him to pay down any related party loans at reporting date then draw the loan down again. At reporting date the loan would be recorded as zero. The draw down could be as early as the next business day.

"It was not uncommon for Mr Hubbard to acquire loans not performing and put them into Southbury [parent company of SCF] or a personal entity so SCF was not at risk. His interest was to protect the investors."

Justice Heath interpreted this as "cheque-swapping around balance date".

Hutton sent Hubbard a memo on June 25, 2008 explaining the trustees would need to be told SCF exposure to Southbury exceeded 20 per cent of shareholder funds. A maximum of 35 per cent of shareholder funds could be lent to one entity before the trust deed was breached.

"On Friday I gave you a printout of the Southbury account. This showed Southbury owed SCF $46.1million. You have subsequently drawn a cheque for a further $32m, creating a total loan balance of $78.1m.

"We are required to advise the trustees when we have exposure to any party that exceeds 20 per cent of shareholder funds."

Hutton drafted a letter to the trustees explaining the exposure and asked for Hubbard to sign. Instead Hubbard sent back a memo explaining the loans should not be treated as loans and listed a variety of other methods of recording them, including treating them as dividends. Hutton advised the board members. He [Hubbard] would expect the loan balances to be nil at reporting date."

Justice Heath asked how the figures could be relied on.

"If you have not got an account at SCF to see [how much] Southbury owed on a particular date and rely on Mr Hubbard telling you what he thinks the balance is, how can the figure be relied on?"

"A sum of $30m is omitted. How can you rely on the figure in the prospectus?" Justice Heath asked.

Hutton agreed the figures could not be relied on. He continues to give evidence today.

The Timaru Herald