Hawkins sale to Downer under scrutiny by liquidator untangling $453M web of related party loans

Friday 13th July 2018

The liquidators of former Hawkins businesses that were ringfenced when Australia's Downer EDI acquired the New Zealand construction company are trying to unpick $453 million of related party loans, a move that will show if there's any money left for sub-contractors owed almost $44 million.

The former owners of Hawkins, the McConnell family, retained 31 entitied that Downer didn't want and subsequently, as a secured creditor, tipped some into receivership. By July 5, 14 were in the hands of liquidators Andrew Bethell and Andrew McKay of BDO. In their latest report they repeated their intention to probe the group's "related party balances including those giving rise to a security interest, the Downer New Zealand Ltd transaction and its proceeds, the various claims faced by the company, any voidable transactions and the conduct of the company and its officers."

H Construction North Island was one of the first to be tipped into liquidation when the McConnell's appointed Andrew Grenfell and Conor McElhinney of McGrath Nicol as receivers. They told the liquidators that "substantial amounts are currently owing to McConnell Ltd which are secured by group security arrangements".

The receivership and liquidation came just 10 days after the High Court ordered H Construction North Island to pay $13.4 million to fix nine leaky buildings at Auckland's Botany Downs Secondary School, and the Ministry of Education has another suit against the former Hawkins entity currently before the courts.

The liquidators' report for H Construction North Island showed that unit was owed $46.6 million from other related parties, while the H Construction Schools 2 PPP was owed $6.1 million from related parties and owed other related entities $25.9 million.

A separate report for 12 of the entities, also released today, shows the full extent of related party transactions, with an additional $399.7 million of related party receivables across the companies as at April 30, the biggest being $239.4 million of receivables held by parent Orange H Group, which acted as the group's treasury, followed by $49.8 million owed to H Construction NI and $44.6 million owed to Orange H Management, which was contracted by Insurance Australia Group to manage projects in Christchurch following the 2011 earthquakes.

The level of related party payables was smaller, totalling $342.7 million across the latest 12 entities, plus a further $25.9 million from the PPP unit.

Bethell and McKay don't intend calling a regular creditors' meeting for the wider group unless they receive a request to, saying they instead intend to call a meeting within two months to appoint a committee.

"The liquidators consider a liquidation committee appropriate given both the complexity of the Orange H Group, the related party security, significant related party balances and the large number of creditors involved," they said. "In our view, it will be more beneficial to have that meeting after completion of initial investigations."

It was too early to say if there will be any funds available for the unsecured creditors, they say. Their report names 905 parties as creditors, with trade creditors owed $34.4 million and subcontractors owed $9.2 million of retentions. Some $2.3 million in cash is ring-fenced for the McConnell interests as secured creditor, while $6.3 million of retentions receivables and $6.6 million of contracts in progress will be available for preferential creditors.

The H Construction unit owes tradespeople another $70,000 and subcontractors $173,000 in retentions and is owed $277,000 from accounts receivable. The PPP entity owed trade creditors $2.8 million with $746,000 of retentions payable and held $600,000 of contract receivables. The PPP entity paid a $10.5 million performance bond to the Future Schools Partners LP after its liquidation as set out in their contract.

A further cloud for the ex-Hawkins companies is a lawsuit brought by IAG New Zealand adding the construction company as a third party in several proceedings it faces over claims of defective work. In March, before the receivership and liquidation, IAG sought a court order for disclosure from the companies to protect its position after the sale to Downer.

In his April 18 ruling, Chief High Court judge Geoffrey Venning said Downer paid $80 million for the Hawkins assets, of which $57.5 million was paid upfront with the balance to be paid later. Of the initial payment, some was paid to financial adviser Grant Samuel, a dividend was paid for bonding, and the balance was either given to McConnell to provide further collateral for bonding, put in a deposit, or held for the group to use.

The judgment said evidence from the-then managing director David McConnell showed that the H Construction North Island Ltd and Orange H Management Ltd entities only held some receivables subject to secured loans and had no assets available to unsecured creditors, something Justice Venning described as "a frank admission".

The judge rejected IAG's application, saying "in the absence of a breach by the directors of (Orange H) Group Ltd of their duties there is no basis to suggest that Group Ltd's assets will be disposed otherwise than in the course of business" and that "there is no reason to suggest that the assets are being diminished in any particular way by such (related party) advances."

The judge also said McConnell offered an undertaking that it wouldn't pay a dividend to shareholders without giving IAG 30 working days notice, provided there was no constraint for a "disposal or dimunition of the funds" for the group's needs.

Bethell and McKay had one fewer of the companies to worry about as of this week when creditors for H Construction North Island Ltd elected to replace them as liquidators with Grant Thornton's Tim Downes and Stephanie Jeffreys.

(BusinessDesk)

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