Todd Motors awarded $394,000 against Timaru man

Press, 16 October 1981, Page 5

Todd Motors awarded $394,000 against Timaru man

Judgment for $393,834 plus interest has been awarded to Todd Motors, Ltd, against Donald . John Hepburn, of Timaru, by Mr Justice Casey in a reserved decision given in the High Court. .

Todd Motors sued Mr Hepburn under a guarantee given in 1959 in respect of Hepburn Motors, Ltd, which Todds bought after it had been put in receivership. Mr I. R. Millard appeared for Todd Motors and Mr A. A. P. Willy for Mr Hepburn, who denied liability. The case was heard at Timaru and Christchurch over nine days and further submissions were made in writing. His Honoor said in the judgment that Mr Hepburn r had long experience in the motor trade, being engaged from 1954 as a principal in Hepburn and Sides, Ltd, which ran a garage . and motor dealers’ business in Timaru.

The company acquired the Todd dealership for the area in 1959 and entered into a standard dealer agreement with Todd Motors on July 21 of that year. Annexed to the agreement was a guarantee by Messrs Hepburn and Sides of payment of all amounts owing by their company. In 1964 Mr Hepburn bought out Mr Sides’s interest in the company, which changed its name to Hepburn Motors, Ltd, and since then Mr Donald Hepburn and his brother, Mr Noel Hepburn, a farmer, had been the shareholders with Mr Donald Hepburn in effective control.

The company prospered and in addition to its premises in Barnard Street, it opened two branches and enjoyed a substantial turnover of private and commercial vehicles, tractors and farm machinery. On May 16, 1967, Hepburn Motors gave a debenture -to Todd Motors and that and the dealer agreement were subject to a number of variations over the ensuing years. Barnard Holdings, Ltd, was formed in 1972 with Mr Hepburn as the principal shareholder,, to act as a wholesaler for the purchase of new vehicles from Todds, thereby deferring.the impact of.sales tax until they, were ultimately sold by Hepburn Motors. On January 11, 1973, the new company gave a debenture to. Todds. Todds took an interest in the performance of its dealers and sales and accounting representatives made frequent visits and exercised close supervision of the business, his Honour said. During the 1970 s there were liquidity problems which were discussed and solved with the injection of some capital from Mr’ Hepburn’s brother and the mortgaging of land. By 1977 the problems had become acute and eventually Mr Hepburn consulted the Timaru accountants of Messrs Hubbard and Churcher, because he suspected his trading figures were inaccurate. Mr Lynch of that firm conducted an’ investigation and in early 1978 produced revised accounts which showed a loss of $72,148 for 10 months operation, against his 4 own estimate of a modest profit.

That demonstrated a serious reversal from the profit of $27,047 for the year ended March 31, 1977. A budget was

prepared and plans were discussed to bring the company back into profitability, but before anything could be done Todds put the companies in receivership on May 11, 1978.

As . the business of the two companies grew they employed staff accountants, a Mr Goddard from 1976. A computer was installed in 1977 and Mr Hepburn said that it caused problems but Mr Goddard made no similar complaint. But Mr Goddard had said that so much of his time was taken up with day-to-day cash flow problems that in August, 1977, he discussed his problems at length with Mr Hepburn and it was arranged for him to take over the preparation of the month’s operating statements for Todds, based mainly on estimates.

They continued' to show a small profit but Todds became concerned with delays in payments for new cars sold. Unsold new vehicles were financed through the Todd organisation while Marac financed used vehicles in stock and discounted hirepurchase agreements. The two Hepburn companies were getting increasingly into arrears in 1977 and the delays were the subject of many complaints by Todds and unfulfilled promises by Mr Hepburn, said his Honour.

In August, 1977, Mr Hepburn and Todds senior accounts staff met, both undertakings given then were not met, leading to an extremely blunt personal letter from Todd’s director of finance in which he made no secret of his failing confidence in Mr Hepburn’s credibility. In November outstanding accounts totalling $182,000 were frozen to be repaid over 10 years.

It was clear from the many reports and letters that Hepburn Motors and Barnard Holdings were badly under-capitalised and to finance mounting costs they relied increasingly- on finance from Todds, Marac and the bank. Unfortunately, Mr Hepburn did not accept the sound advice to retrench given eaVfy in 1977’’6y his brother when a fall in profitability was first suspected.

Matters came to a head in March, 1978. The account position had deteriorated rapidly, being the culmination of more than two years increasing liquidity problems compounded by inflation, increased competition and tight credit.

By the middle of April difficulties had arisen with Marac which refused’.to discount further hire-purchase agreements, his Honour said. Todd’s board resolved to wind up the companies, and after discussions with Marac, company officials travelled to Timaru on May 11, 1978. Notices of demand were served on the two companies for payment of overdue accounts totalling $170,000. Those were followed later that day by notices of Mr Spark’s appointment as receiver under the debentures.

The Todd group of companies had been involved in the motor trade for many years and for most of the time had a policy of fostering independent dealers which generally had been, successful until the mid-

seventies when mounting costs and under-capitalisa-tion caused liquity problems for a number of them similar to those encountered by Hepburn Motors. In addition, finance companies were becoming wary of their involvement in the industry and Todds learned of plans to close down or sell two of its main outlets in the Auckland areas owned by finance companies. Hepburn Motors was considered a successful dealership in terms of market penetration, due to Mr Hepburn’s sales ability and the ■support of his staff, but Todds were obviously unhappy with companies’ finance and some areas of administration.

The crises with dealerships throughout New Zealand prompted Todds management to reappraise its policy towards independent retail outlets.

A study produced by a company team dealt with two Auckland dealerships and Hepburn Motors. The report to Todd’s board said that their failure would mean the loss of important outlets for Todd products.

It was concluded that the only course was to buy “strategic retail outlets.” A retail division was set up by Todds. Only the two Auckland companies and Hepburn Motors were acquired.

His Honour said that he was impressed by Mr Sparks, the receiver, in the witness box. If officials of the Todd group had expected him to fall readily into line with their ideas they were quickly disillusioned.

Mr Sparks had his own idea of proper sales prices and conditions. An outraged letter from the representative of Todd Brothers, Ltd, complaining about the “ridiculous” prices he was getting for the stock of used vehicles told its own story about his independence and business competence. Mr Sparks initiated a “perpetual inventory-taking” to check the computer, statements against the actual stock. The total arrived at was $157,963 from which, he. deducted 25 per cent to cover obsolesence, yielding $118,500 for parts, which was substantially below $235,000 odd contained in the company’s accounts. “In my view Mr Sparks acted responsibly in this area. Indeed, he believed the company had seriously overstated its stock figure in the previous year’s accounts and attempted to get a tax refund, but could not find the stock records for that period,” said his Honour. Todd’s first offer for the business was regarded by Mr Sparks as too low. There were queries about adjustments to the valuations of vehicles which Mr Sparks answered to his satisfaction, said his Honour. Todd’s offer included $237,000 for the land and buildings it acquired from both companies. Mr Sparks had obtained an independent valuation of $253,500 but he considered that offered price was fair.

His Honour rejected the defence submission that the whole operation had been nothing more than a plot to take over Mr Hepburn’s companies in furtherance of Todd’s policy to take over retail outlets.

The real problem, in the case was Todd’s public intervention as a potential buyer from the receiver — effectively signalling a shut-out bid to the rest of the world and leading the receiver to negotiate the best terms he could get from it as the only buyer left.

“I find it difficult to escape the conclusion that Todds were so intent upon securing this outlet fqr their products that they sacrificed the debit companies’ interest on the sale,” said his Honour.

There - was no evidence which persuaded him that the assets were sold at an under value. He was satisfied that the prices obtained by the receiver were sufficiently close to those on the open market that the. possibility of any significant loss could be ruled out on the transaction, which counsel informed him involved more than $900,000, said his Honour.