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Report of the Securities Commission on Aspects of the Affairs of Max Resources Limited

1
INTRODUCTION

Scope and purpose of our report

1.1

Max Resources Limited (In Statutory Management) ("Max", or "the Company") is a public listed company incorporated in New Zealand on 8 October 1987 with its registered office at Tauranga. Max is also registered as an overseas company in Australia under the same name and, until recently, had its principal operating office in West Leederville, Perth, Western Australia.

1.2

On 23 March 1998, the Market Surveillance Panel ("Panel") of the New Zealand Stock Exchange ("NZSE") suspended the quotation of Max's listed securities.

1.3

On 31 August 1998, by an Order in Council pursuant to section 38 of the Corporations (Investigation and Management) Act 1989, on the recommendation of the Securities Commission ("Commission"), Max was declared subject to statutory management with effect from that date.

1.4

It is one of the Commission's functions under section 10 (c) of the Securities Act 1978 ("Act") to "keep under review practices relating to securities, and to comment thereon to any appropriate body". The purpose of this report is to publish, for the benefit of the shareholders of Max and any other appropriate body, the Commission's comments on aspects of the affairs of Max during the period 1996 to early 1998 and subsequent related events.

1.5

The report contains the Commission's observations on aspects of Max's affairs. The report has been based on documents made available to the Commission and on submissions from parties to whom consultative draft reports were distributed for comment. The Commission took careful account of all information and comments received.

1.6

The report is prepared in two volumes -
Volume 1 - Substantial Security Holder Disclosure and Directors' Conduct in Transactions of the Company
Volume 2 - Financial Statements.

This is Volume 2 of the report. Volume 1 of the report provides greater detail of many of the transactions referred to in this volume.

1.7

The report has been prepared by a quorum of Members of the Commission comprising:
Mr E H Abernethy, Chairman
Mr F R S Clouston, Member
Ms E M Hickey, Member.

1.8

When referring to persons in our report we use the customary honorific the first time a person's name is mentioned. Subsequently we may use the surname only. No disrespect is intended by this practice.

Background to our report on Max's financial statements

1.9

During calendar year 1997 Max had four directors, Messrs Michael James Langoulant, Josephus Jeffrey Verheggen ("Jeff Verheggen"), Thomas William Johnson, and Robert Ivan Owen McShane. Langoulant and McShane were also Company Secretaries.

1.10

Jeff Verheggen and Langoulant live in Perth, Western Australia and were executive directors.

1.11

Johnson and McShane live in New Zealand and were non-executive directors. They had been first appointed to the Board of the Company in October 1994. They were the members of the Company's Audit Committee.

1.12

The principal business of Max was originally gold mining. However on 8 May 1997 the shareholders approved a change in the principal business of the Company to that of organic fertiliser processing. While the gold mining activities were concentrated in Western Australia the new business involved investments in the processing of organic fertiliser in India, Sri Lanka, Indonesia, Hong Kong, the United States of America and France.

1.13

Max's Annual Report and audited financial statements for the year ended 30 June 1997 were signed by Langoulant and Jeff Verheggen as "directors", and described as being "For and on behalf of the Board in accordance with a resolution of Directors this 30th day of October 1997". (Johnson says that he and McShane did not approve the final text of the Annual Report). The financial statements received an unqualified audit report from the Company's auditors, Sinclair & Wood, Chartered Accountants, of Tauranga where the responsible partner was Mr Peter Morris Wood.

1.14

The Annual General Meeting of Max was held in Auckland on 19 December 1997. Jeff Verheggen chaired the meeting. The financial statements were approved. Non-executive director Johnson advised the meeting that the Annual Report contained an incorrect statement. While it was reported in the Annual Report that the auditor had discussed the results for the year with the Audit Committee, Johnson told the meeting that no such discussion had taken place.

1.15

At a meeting of all the directors of Max held in Auckland immediately prior to the Annual General Meeting and chaired by McShane, McShane and Johnson, we are informed, attempted to assume executive control of the Company. McShane was shown in the minutes of that meeting as "Executive Chairman" while Johnson signed the minutes as Deputy Chairman. However there is dispute as to whether the transfer of executive responsibility was effective. Langoulant has told us neither he nor Jeff Verheggen approved these minutes.

1.16

On 4 January 1998 Jeff Verheggen resigned from the board of Max, to be replaced by his father, Mr Josephus Theodorus Herbertus Verheggen ("Verheggen Snr"). Also appointed to the board of Max around this time was Mr Peter Briggs, an Australian businessman. Subsequently another Australian businessman, Mr Edmund Czechowski, was appointed to Max's board.

1.17

In March 1998 McShane and Johnson, because they had serious concerns about the management of the Company, travelled to Perth. They commissioned the McLernon Group to investigate aspects of the Company's activities. While in Perth they initiated court proceedings in Western Australia for the appointment of a provisional liquidator to Max on the grounds of the Company's insolvency. These proceedings were contested by the Australian directors and were ultimately withdrawn. This action attracted publicity in Australia and New Zealand.

1.18

On 23 March 1998 the Panel suspended quotation of Max's listed securities. The Panel said it was concerned about the conflicting announcements made to the NZSE by directors of Max. The Panel also said that it could not be confident that Max had complied with the Listing Rules, or that it would comply in the future. The Panel said it had decided to suspend quotation of Max's shares on the basis that suspension was in the best interests of the market.

1.19

On 1 June 1998 the NZSE was advised that McShane and Johnson had resigned as directors of Max.

1.20

On 19 June 1998 the NZSE was advised that Langoulant and Verheggen Snr had also resigned as directors of Max. This left Briggs and Czechowski as the only directors of the Company. This meant the Company was not complying with the Listing Rules of the NZSE which required that there be two New Zealand directors.

1.21

On 31 August 1998 Max was declared subject to statutory management by Order in Council made under section 38 of the Corporations (Investigation and Management) Act 1989.

1.22

At the date of this report the quotation of Max's securities remains suspended. The statutory managers remain in office and are undertaking a program of controlled sale of the Company's assets.

Procedure

1.23

For the purposes of preparing our report we obtained or reviewed a number of documents related to the affairs of Max, including:

Affidavit evidence filed in support of, and opposing, a winding up application and motion to appoint a provisional liquidator to the Company, filed in the Federal Court of Australia, Western Australian District, in March 1998 including:

affidavits of McShane sworn on 18 March 1998 and 6 April 1998 together with supporting documents (some 260 pages) which included a report of the Company's operations from Horwath, Chartered Accountants, of Perth, ("the Horwath report") requested by McShane and Johnson in their capacity as the Audit Committee of directors of Max;

affidavit of Johnson sworn on 18 March 1998;

affidavits of Langoulant sworn on 24 March 1998, 30 March 1998, 2 April 1998, 7 April 1998 and 15 April 1998;

affidavits of Jeff Verheggen sworn on 24 March 1998 and 2 April 1998;

affidavits of Briggs sworn on 24 March 1998 and 2 April 1998;

affidavit of Mr Jeffrey Laurence Herbert, chartered accountant, of PBB Ashton Read, Perth, sworn on 1 April 1998, including a report he had prepared on the solvency of Max at the request of Jeff Verheggen and Langoulant for the purposes of the hearing;

Sinclair & Wood's audit file relating to the audit of Max's financial statements for the year ended 30 June 1997;

papers received under summons relating to an investigation into the affairs of Max carried out for the independent directors, McShane and Johnson, by an Australian private investigator, McLernon Group Limited;

papers of the Company held in New Zealand by the statutory managers;

written submissions from a number of affected parties in response to versions of the report circulated to affected parties in May, October and November 1999.