Forty-Two Words of Wisdom 1987

CHAPTER FORTY-TWO

Words of Wisdom

Forty hours after being appointed to lead the new board, the chairman, Brian Train, made his first statement to the press. It was simple and to the point:

SHOP AT TARANAKI FARMERS AND PAY YOUR ACCOUNTS

The company can only remain in existence if it is able to continue trading. …

Clients and shareholders are requested to bring stock and wool forward for sale, to trade with the merchandise outlets and to have confidence in their company. …

It’s very much over to the shareholders and the community now, to support the company and the stores and to pay cash, especially for small purchases.

All the directors and management were now fully engaged and committed to the task, despite the fact that as each day ended the problems increased rather than diminished and Brian Train’s waking hours were completely devoted to dealing with a myriad of infinitesimal to huge problems. Most important for the directors was the time needed to restructure, and keeping the wolf from the door was Brian’s highest priority during the early days. An early surprise was when Messrs Matthews and Wood from Elders Pastoral arrived on the doorstep the day after the 30 March 1987 meeting asking for $1 million of reassigned debt relating to the sale of Farmers’ Co-op’s Manawatu business to Elders when the company retrenched and came back to Taranaki. This became an ongoing issue between the two companies, and would finally be resolved at arbitration in Palmerston North some years down the track. This sum of money was a contingent liability and not a recognised liability and was left for Elders to pursue in any way they thought appropriate.

In the main Brian Train was dealing with problems one by one, head on as they arose. Other directors and management were also thrown into unknown territory when Colin Morrison and Roy Lithgow were summoned to meet the management and board members of Fernz Corporation Ltd on Monday 6 April in Auckland to discuss the $3,200,000 owed to them. It fell to the recently appointed acting general manager and new director to deal with this matter. The actual current financial status of the company was still unknown only four working days into the new regime. Colin described what transpired at the meeting: We were picked up at the airport by a very well dressed gentleman and I asked him what his position was in the company and he said he was the company solicitor. We had a very very tense meeting and I said to them at the end – ‘what you are looking for today is a business plan and I have got to tell you that there isn’t one’! We had only been in the job four days. So I said what the board will do is responsibly ascertain the position of the company, ‘we need 14 days anyway’. I remember the GM of

the day actually shaking hands with me as we left, and he looked me straight in the eye and I had the feeling that they were going to be a little tolerant.

At the meeting Messrs Morrison and Lithgow were asked to provide information relating to the history of the organisation and details of Farmers’ Co-op’s current financial position, Roy Lithgow succinctly recalled, and made reference to, an occasion before the Second World War, ‘when Farmers Fertilizer couldn’t pay for a shipment of manure coming into New Plymouth’ and Farmers’ Co-op, under the management of Clem Trotter, came to the rescue of N. Z. Farmers’ Fertilizer Co. Ltd. The reference was quite innocent but it was hoped that this casual reminder might influence their decision. Despite being received with courtesy, they left without any certainly as to the action Fernz would take and with a general feeling of unease. As agreed, on 8 April a letter outlining the company’s known financial position and restructuring plan was forwarded to Mr P. Riddell, managing director of Fernz Corporation Ltd, including details of immediate initiatives being implemented to correct the position. It concluded: Accordingly therefore we request that favourable consideration by your company be given to the above in the knowledge that if we do not have your co-operation and assistance The Farmers’ Co-operative Organisation Society of N.Z. Ltd will be effectively placed in a ‘loss of confidence’ situation with its customers that may well cause the immediate collapse of the Company.

As the new board wrestled not only with kick-starting the company, and with no money and unsecured creditors already knocking on the door, it was Brian Train who fielded most of the calls. ‘It was a rough couple of days and no one would believe anything.’ Two directors came to him in his office and expressed the view that the board should now invite David Simpson of Finance & Advisory Services Ltd to Taranaki to appraise the situation and give advice. It was Tuesday 7 April and the sedulous seven had been in the hot seat for one week when David Simpson received a call from Brian Train, who said, ‘could you come down and see us’? David asked ‘when’? Brian replied ‘tomorrow’!

There was no doubt time was of the essence and David Simpson agreed to travel from Auckland to Hawera the following day. If he was going to be involved, it was critical that he establish himself immediately before the board committed to situations that could not be reversed. The board could already be heading in the wrong direction and this seriously ageing and faltering book of business would need some tender loving care without any further misadventure if it was going to survive. David Simpson recalls: ‘There were two chartered accountants on the Board and I think they were favouring going into receivership.’

He had already discussed the matter with Doug Hazard, who had said: ‘I am trying to retire David, but yes I could have an interest. Have a look and see what you think and give me a call.’

These words probably contained more hope for Farmers’ Co-op than any proffered so far. The somewhat fortuitous introduction of Messrs Simpson and Hazard so early in the piece would in fact provide the beleaguered board with one of the most experienced strategic financial management duos in the country. Perhaps ‘divine intervention’ was at play.

What crossed David’s mind immediately was that the farmers were equating receivership with liquidation and he felt that going down the receivership path would impact negatively at a time when confidence was paramount. The general understanding would be that the Co-op was falling over, which would have a significantly negative impact on turnover and would ‘not be a good move tactically’. David Simpson flew to New Plymouth the following day and was met by Colin Morrison, who took him back to Hawera to meet Brian Train and Trevor Harrop. He didn’t have long to evaluate the situation and determine if the company could be rescued. David said: The thing that came through to me was that this is a very parochial place. The week before the shareholders had voted against the proposal for Elders to take them over and they did that because

they did not want to see their company in foreign hands. So that was a strength from my observation. I felt that if we can get all the locals, the local farmers on side etc, we would get plenty of support from them. That was the thing that gave me encouragement. I also felt that there were too many branches. A few were formed in the earlier days and I think there were a few that were only ten or fifteen kilometres from each other and I felt that we should be able to make some rationalisation there. They had some fairly valuable property – particularly in New Plymouth.

David asked to tour some branches and stores and called at Stratford, Pungerahu, Manaia and Opunake where he looked at invoice and sales books and generally inspected the various premises. He briefly looked at the financials and asked Brian and Trevor some questions. The books ‘were quite good really; some of the records were a bit historic but they generally had quite a good picture of the company’. Having done all he could to evaluate the situation in such a short time, David telephoned Doug Hazard and advised him of his findings. He spoke about the loyalty and general state of the company and said he thought the business could be rescued. He addressed the board in the afternoon, saying: ‘It could be traded out but it was going to take quite a long time – there was no magic wand but some improvements could be made. He didn’t think receivership was a good idea, and probably the best idea would be a Scheme of Arrangement under the old Companies Act – Section 205.’

David Simpson then returned to Auckland to collate the information and draft a preliminary report on the economic climate, strengths and weaknesses of the company, and possible courses of action along with recommendations.

In the meantime a letter outlining the company’s financial situation as at 28 February 1987 was forwarded to Fernz Corporation on 8 April 1987, with a plan from the directors relating to its financial rearrangements. It included: Livestock Accounts (due for settlement 14 days after purchase) 1 month and more overdue $1.4m

Merchandise Accounts 1 month and more overdue $6.1m Total $7.5m Financial Rearrangement: 1. Additional equity capital $3.0m 2. Sale of NP Properties (valued at $8.0m) $6.0m 3. Reduction in overdue debtors $1.5m 4. Reduction of merchandise stock $1.5m 5. Sale of 50% interest in Finance Company $1.5m 6. Sale of Surplus Fixed Assets-Property etc. $0.5m

14.0m

Less provision for redundancy payments $1.0m Net cash injection $13.0m This $13.0m would be utilised as follows: 1. Repay Term Liabilities $7.5m 2. Repay unsecured creditors $5.4m

$13.0m

A meeting convened on Tuesday 14 April welcomed David Simpson and Doug Hazard to the board and introduced them to the directors. Mr Simpson’s report was tabled. A crucial decision was now required, with the meeting going into committee to thrash out the best available option for the company: whether to carry on with a Section 205 Scheme of Arrangement, or receivership to restructure the company. It was finally resolved that the board pursue an amended Section 205

Scheme of Arrangement and, subject to the costs being acceptable, the board instruct Mr D. Simpson, of Finance & Advisory Services Ltd, to produce a plan for restructuring the company. Mr Hazard stated that he would be available to Mr Simpson as ‘a sounding board’, but ‘tough decisions will need to be made in the next few weeks by the directors’. It was also decided that following the review of David Simpson’s plan, Messrs Hazard and Simpson, with management, would visit all branches and properties and it was made clear that the board should not plan any reconstruction without reviewing Mr Simpson’s blueprint. Following receipt of costs from Finance & Advisory Services Ltd, they were employed to complete the restructuring procedure. The Rubicon had been crossed and it now rested with the board to carry out the plan. They also had other turbulent rivers to cross in continuing with the divestment of properties and internal rationalisation of staff which had been initiated by Derek Evennett and the former board.

Within a few days a series of reports from David Simpson showed that he was confident that a successful reconstruction of the company could be carried out ‘given reasonable time’ to allow full repayment to all creditors and in some instances rearrangement of debt on a trading basis that would ultimately result in the company being profitable and viable. The main thrust to facilitate the turnaround was to implement a plan in stages involving the realisation of assets not profitably employed and the closure of obvious unprofitable operations, and trimming down head office overheads. Further stages would involve an analysis of operating departments and actions to either improve profitability or close loss-making operations. Top of the agenda were the operations singled out as unprofitable, the New Plymouth store, and the collection of overdue accounts totalling $7.5m. These quite enormous issues did not, however, over-ride the deep parochial sentiment amongst the directorate when it came to their own districts, which was flushed out when David Simpson presented his first report and schedule of divestments and a plan for reconstruction: CLOSURES: Waitara Patea Manaia Hardware Ohura or sell to Manageress Eltham/Kaponga – Negotiate with Wrightson/Dalgety to close one or both New Plymouth Inglewood Garage Stratford Garage – sell buildings Hawera Garage building – sell building Tidy up stocks and departments at other stores Sell all other surplus buildings Inglewood – close Drapery Pungarehu – close Drapery POSITIVE: Open new Farm Centre at New Plymouth Refocus efforts of merchandise executives Strengthen Stock Agents Conduct review of what can be done to improve Hawera operations Stratford – review possible improvements. All branch managers were briefed on the ‘seriousness of the situation’ and provided with a schedule of debtors pertaining to their area and asked to contact all clients who were in arrears and provide a report on each situation. However, there was a distinct feeling of unease in some quarters of the directorate regarding the possibility of some districts losing their main trading store. There was criticism of the lack of specifics in the report and some directors were concerned about over-

optimistic figures it contained, particularly expectations in regard to the sale of the Patea operation. Joe Laird made particularly strong representations in respect of keeping Patea branch open for a trial period ‘cash only’ for six months. ‘If it does not prove successful the branch should close’. A motion put by Mr Pedersen and seconded by Mr Train, that the Patea branch be closed, aroused a flurry of debate for and against and resulted in an amendment that the Patea branch be drastically restructured: ‘reduce stock by $220,000 and staff by ten to improve profitability and unless it shows a dramatic increase in profit within six months then it be closed’. Mr Simpson expressed his awareness of the support and sentiment, but made the point that Taranaki Farmers had 14 branches in an area where other stock and station operations only had four.

Over the following weeks plans were submitted by employee Gary Edgecombe to make Patea a sub-branch, with all stores except groceries supplied from Hawera. Many letters of support from Patea shareholders, including a petition from farmers in the area, were received by the board, which resulted in a stay of execution for the unprofitable branch. Press reports concerning the possible closure and letters to the editors urgently requesting the directors to ‘release more information’ were now in circulation. Visits by Messrs Hazard and Simpson and a meeting of local Patea shareholders did not entirely convince them that the operation could be turned around into a profitable situation. The meeting at Patea attracted 130 people, ‘who threatened to withdraw their support if the store was closed’. David Simpson described the outcome: I can remember addressing the meeting and saying that ‘there is not adequate return on investment from Patea branch and our whole modus operandi is to make sure that everything we’ve got earns a return on the investment’. So there were a number of questions asked. The local pharmacist said, ‘what’s an acceptable return on investment’? I had to go into an explanation as to what it was. … I said ‘we will keep it open till Christmas. In December we will look at the results. If you people all support it, and that means along with other business, with your wool – our wool man’s here and he is ready to take your name etc – and if you guys support it we will consider not closing, but if it does not earn an adequate return by December then it will be closed.’ As it turned out … suddenly Patea’s performance improved.

Critical to the initial overall strategy was the acquiescence of creditors, without which nothing could be achieved and the company would collapse. Shareholders had already received a copy of a Scheme of Arrangement from the former board. Meetings planned for disposal of the company’s assets at that time had been adjourned and now, in order to carry out the wishes of the shareholders and save it, there was a need for a moratorium period with all creditors to allow the Company to trade out of its present financial difficulties. To facilitate this, the High Court approved that the adjourned meetings be held at 9:30am on Friday 29 May 1987 at the Community Centre, Hawera, with an amended Scheme of Arrangement that, if approved, would be binding on all shareholders and creditors. The board resolved that Messrs Simpson, Hazard and Train be appointed Scheme managers. As at 31 March 1987 there were 8,494 shareholders, with secured creditors: A.N.Z. Banking Group (New Zealand) Limited $3,695,458 Westpac Finance Limited and Westpac Securities Limited 8,355,000 F.C.O.S. Finance Limited 1,000,000 F.C.O. Superannuation Limited 240,000 1,500 unsecured trade creditors included: Fernz Corporation Limited $3,247,955 Mobil Oil (NZ) Limited 430,009 Foodstuffs (Wgtn) Co-op Limited 684,466 East Coast Fertilizer Limited 98,198 Hurricane Wire Products 119,131 NRM Feeds Limited 119,712

Ivon Watkins-Dow Limited

146,331 Elders Pastoral Limited 317,092

$5,162,894

In addition there were 150 unsecured creditors with deposits at call and a further 1,050 clients with credit balances with the company. If approved, a Committee of Creditors and Members would be appointed to assist and advise the Scheme managers, who would be provided with a monthly progress report and would meet every three months.

During the days leading up to the meeting of creditors on 29 May, the company successfully opposed an application in the High Court by Elders Pastoral to place their rejected proposal to purchase Taranaki Farmers stock and station business before shareholders and creditors again. Mr Justice Eichelbaum who presided over the hearing found that he had no jurisdiction to hear the application without the consent of Taranaki Farmers, ‘which was not forthcoming’. He also noted that notices calling for the 29 May meeting had already been sent out and any further notices would cause confusion. Probably and most importantly, however, was that if the Elders proposals were accepted, they would gain preference over other unsecured creditors, which was unacceptable.

Immediately before the meeting strategies were developed by the board and advertisements placed in newspapers to ensure there was a good representation of shareholders in attendance and creditors were also lobbied to gain support for the Scheme of Arrangement. As well steps were taken to prevent opposition company representatives being voted onto the management committee. With all the planning in place, the day arrived and some 600 shareholders and creditors of Farmers’ Coop turned out to vote at the Hawera Community Centre. Brian Train opened the meeting, stating that ‘the company’s trading had lifted in the past few weeks’ and that stock and station sales were proving the loyalty of clients and he ‘was confident that the funds required would be provided’. He also outlined some of the divestments and plans being implemented to streamline operations.

In order for the Scheme to be binding, it must first be agreed to by a majority in number representing three-fourths in value of the members, secured creditors and the three classes of unsecured creditors (trade creditors paid interest, client creditors and other unsecured creditors) as the case may be voting in person or by proxy at separate meetings convened to consider the Scheme. When the votes were counted, although the majority were in favour of the Scheme of Arrangement, some creditors, including Elders Pastoral, opposed it and the required majority of three fourths of that class could not be met if their votes were allowed. It had already been decided that votes cast in dispute would be challenged in the High Court and in particular the validity of Elders Pastoral Ltd’s and Wrightson’s votes, as it was considered they had a conflict of interest and voted in self-interest and not in the interests of the creditors’ pool in which they cast their vote. Although not entirely unexpected, it was disappointing they were now required to go back to the High Court yet again. Brian Train recalls a comment made by Elders Pastoral’s lawyer, Paul Heath (who later became a High Court Judge) during the creditors’ meeting, suggesting that Farmers’ Co-op was insolvent, to which he responded, ‘the assets exceeded our liabilities’,knowing that this was in fact only one of the acid tests, the other being the ability of the organization to pay accounts when due!

In a conversation after the meeting Paul Heath said, ‘Brian, if you succeed in turning the Company around I shall be the first to congratulate you’.

The High Court hearing on 24 July 1987 resulted in a reserved decision, with the judgment of Justice Quillian being delivered to the company on 29 July 1987: For the reasons which I will give as soon as time permits the Scheme of Arrangement considered at the meetings held on 29 May 1987 is sanctioned, and the commencement date referred to in the Scheme is to be the date upon which a sealed copy of this order is delivered to the Registrar of Companies for registration.