John Schulz and his Huon Corporation have wheeled in lawyers Strongman & Crouch and are suing a clutch of parties. They are Nylex, along with a Nylex subsidiary, former Nylex managing director Glen Casey, numbers man Peter White and accounting firm Pitcher Partners.
Schulz claimed that it was a condition of the sales agreements that Nylex would promptly disclose anything that had a material adverse effect on the businesses. Another term was that as far as Nylex was aware, no existing customer or supplier would, or was likely to, cease dealing or materially reduce its dealing with the businesses.
The writ said that Nylex represented to Schulz that earnings of the three businesses for the current financial year would be $6.3 million.
On December 2, Nylex told Schulz that circumstances in the automotive industry had changed and that the businesses' earnings would be reduced by $1.4 million. Schulz claimed that the various representations about earnings were false, misleading and deceptive. He said that, according to February accounts, the businesses would generate zero earnings for the current year and not the $6.3 million as forecast in July or the amended $4.9 million as forecast in December.
It was claimed that the earnings predicament was due to factors that were known by Nylex before July 2005. The statement of claim stated that earnings forecasts concerning Empire Rubber were overstated because more than $8 million of sales revenue from Holden and Toyota would be lost as a result of model changes in 2006 and Empire not having the contract for the supply of rubber seals for the new Holden Commodore to be released in July-August this year.
It said the margin loss from the lost sales to Holden and Toyota would be $5.1 million and to offset that loss it would be necessary to retrench about 85 employees. "In order to retrench those 85 employees, Huon will need to find approximately $4.5 million as at June 30, 2006 to fund those redundancies. "In the event that the redundancies cannot be funded, Empire Rubber cannot continue to trade," the statement of claim said.
The claim said that when Nylex made its amended earnings forecast to Huon in December, the downturn in the automotive industry was so severe that 2006 earnings would not be reduced by only $1.4 million, but by $5 million or more, so reducing earnings forecasts for 2006, 2007 and 2008 to zero or a loss. The claim accused Nylex of accelerating the collection of receivables from the businesses' debtors without paying all of the creditors in accordance with their regular trading terms.
"This practice had the effect of artificially inflating the difference between the cash received and paid by Nylex Industrial", it alleged. "Nylex . . . well knew that if (it) disclosed the Empire Rubber matters to Schulz and Huon (that) GE would not agree to fund the acquisition of the businesses (and) Schulz and Huon would not proceed with acquisition of the businesses," the statement of claim said.
Nylex was accused of failing to disclose things that would have had a material effect on the business and being aware that an existing customer was likely to cease dealing or materially reduce its dealing with the businesses. Meanwhile, Schulz stated that Pitcher Partners agreed to do a due diligence review for a $180,000 fee.
The writ claimed that the accountants failed to conduct the due diligence with reasonable skill, care and diligence expected of competent and prudent accountants, auditors and advisers "or with any reasonable skill, care and diligence at all". It said the firm failed to properly review the historical and forecast trading and financial position of the businesses and failed to advise of material risks.
"Pitcher Partners failed to analyse and/or review, properly or at all, the earnings trends, contracts and other matters affecting or likely to affect the future earnings of the businesses and failed to ascertain with reasonable accuracy or at all the maintainable earnings of the businesses for at least two years into the future," the writ stated.
It claimed that there was about $2 million of worthless stock held by Empire that was not identified by Pitcher Partners.
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