Property Ventures liquidator must put up $2.6m security of costs in suit against PwC, directors

The liquidator of Property Ventures Ltd (PLV) must put up $2.6 million as security of costs in its $302 million lawsuit against PricewaterhouseCoopers and former directors of the failed property development company.

Judge Graham Lang issued his ruling in a judgment from the High Court in Christchurch yesterday. The costs are less than the $3.6 million sought by the seven defendants, who include former chair Austin Forbes QC, discharged bankrupt David Henderson, and PWC.

The substantive lawsuit brought by liquidators Robert Walker and John Scutter is set down for a 12-week trial starting in February 2018 and ahead of that, the defendants applied for security of costs, arguing that the case for such security was strengthened by the existence of litigation funder LPF Group, which is bankrolling the suit in return for 42.5 percent of any settlement. The liquidators allege that if not for PWC giving clean audits and advising PVL how to skirt insolvency, the company would have been wound up sooner by its creditors with more value able to be recovered.

Lang takes the presence of a litigation funder into account in ordering security of costs, noting observations in a New South Wales Court of Appeal case that a court should be particularly concerned "that persons whose involvement in litigation is purely for commercial profit should not avoid responsibility for costs if the litigation fails." Lang said this was the approach adopted by Judge Robert Dobson in Houghton v Saunders, in which former Feltex shareholders sought to sue directors over the failed carpetmaker's prospectus.

"I take a similar approach. The existence of a litigation funder in the present case is an important factor that influences the exercise of the discretion...," Lang says in his judgment. "Commercial ventures generally require an investor to take risks and to incur expenditure as the price to be paid for the chance of success."

The liquidators' lawyer, Justin Smith QC, had argued against security of costs on the basis of the merits of the case and the amount of documentation already available to the defendants about the lawsuit. In reference to PWC, he said its behaviour as auditor and as a financial adviser to PVL "smacks of lack of professional scepticism and tends to suggest the auditor is assisting to obviate the problems." Smith argued that PWC "assisted the group to mask its underlying problems 'through the cross-selling of other services'," according to Lang's judgment.

But Lang said the material before the court didn't allow him to make a meaningful assessment on the merits of the case, such as whether PWC ought to have responded differently "if and when it became aware that the PVL group was experiencing cashflow problems." To do that he would need to know PVL's overall position and the options it had to address its financial problems.

Still, he said his "overall impression" was that PWC had "two areas of potential vulnerability", which were its alleged failure to ensure valuations ascribed to PVL's key assets "were robust and could be relied upon," especially in the case of undeveloped land.

"If PWC was placed on notice that PVL's valuations were questionable, it may be at risk of liability in some form for not drawing attention to this issue in its audit opinion," Lang says in his judgment.

The liquidator had cited the example of PVL's Five Mile Holdings, which acquired a block known as the Ladies Mile Land for $12.5 million in 2003, before PWC was auditor, and another block known as the Gardez land, for $14 million. Ladies Mile was subsequently valued at $69.5 million in 2006 and Gardez at $42 million.

Another area of risk for the accounting firm was PWC's scrutiny of PVL's exposure to Henderson's own companies, which was about $7.5 million by early 2008, given it was clear Henderson "was a very influential, if not dominant, figure within the PVL group".

While the merits of the claims against the defendants were largely neutral in the context of security of costs, "I propose to make a small adjustment to reflect the areas in respect of which I have gained an impression that the plaintiffs' claims may have some strength," Lang says.

Lang also took into account the other litigation that LPF Group is currently funding, saying that even though executive director Jonathan Woodhams gave an affidavit that LPF had "more than sufficient net assets and has access to funding more than sufficient to meet any likely costs order against the plaintiffs and to meet any adverse award of costs" he didn't provide much information to support that. Lang said Woodhams also didn't detail other cases LPF was funding.

Lang said he took into account the $2 million security of costs in Houghton v Saunders, while noting that "it ultimately transpired that the amount for which security was ordered was one-third less than the costs ultimately awarded to the successful defendants following trial."

In Houghton v Saunders, costs were awarded for the defendants, which amounted to $5 million for the litigation funder in that case, Harbour Litigation Funding.

Property Ventures Ltd was the largest asset of Hanover Finance, amounting to more than 20 percent of Hanover's assets, at the time the finance company's investors voted on a moratorium that led eventually to the sale of their debt of Allied Farmers. In 2008, PWC was the auditor of both PVL and another company in the group, Five Mile Holdings, while it was also advising the trustee of Hanover over the moratorium, the liquidator has alleged.

After the judgment was released, Walker said in an emailed statement that he was "disappointed at the decision to award any security of costs to the defendants."

"PWC is a well-resourced defendant, with professional indemnity insurance, and the security of costs application was yet another example of them testing our financial resolve in bringing this case on behalf of the out of pocket creditors and investors of PVL," Walker said. ""The allegations made during the security of costs hearing in the High Court raise serious questions about the behaviour of PWC and the directors - neither PWC nor the directors of PVL have addressed the substantive allegations made in Court in any meaningful way."

In a separate judgment given on May 24, liquidator Robert Walker was found to be in contempt of court for disclosing personal information on a laptop seized from Henderson. However, in that case, Justice Lang says the breach was inadvertent and he made no order for costs.

(BusinessDesk)