Investors off the hook

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Investors in a failed Queenstown apartment company have foiled a receiver’s bid to make them throw good money after bad. 

The five investors and others were roped into $72,000 share stakes in Station Properties, set up to develop 28 Queenstown Hill apartments, eventually built on Kent Street. 

Behind the scheme was the now-defunct McEwan Group and its so-called Investors Forum. 

In September 2005, when Station had trouble raising development finance, promoter Dan McEwan emailed its investors urging they “buy outright or underwrite units” on $1 deposits to secure funding – 11 pre-sales would get funds flowing from Bank of Scotland International (BOSI). 

Buyers of apartments would make $162,000 profit and “underwriters” $109,000. 

However come July 2008, investors refused to settle – their apartments were now worth only about half of the $880,000 to $1.3 million that they’d signed up for. 

Station collapsed in April 2009 owing BOSI $20.25m and receivers KordaMentha began chasing the five “underwriters” for the difference between original apartment prices and resale sums – plus 15 per cent interest. 

Each investor stood to lose several hundred thousand dollars, on top of their $72,000 share stake. 

In his High Court judgment, Justice Toogood sums up their plight: “None had intended, initially, to be owners of apartments in Queenstown. 

“They’d purchased shares in what was essentially an investment company, intending to make profits out of the development rather than in actually acquiring property. 

“They were urged to enter into the sale and purchase agreements, not because it was believed owning a unit would be a sound investment, but because their [$72,000] investment was under threat through the relatively low sales and the inability of the McEwan Group to secure adequate funding in the absence of a higher level of sales,” he says. 

McEwan Group also “deceived” BOSI, the judge says, by not revealing the insider sales to Station shareholders were “incentivised” with a one per cent discount – $8000 to $13,000 per apartment – and a $30,000 furniture package. 

One investor gave evidence of a McEwan executive telling him “he’d never be obliged to settle the purchase of an apartment if he signed an underwrite agreement”. 

The former executive admitted giving that guarantee – because Dan McEwan had given him the same assurance.
Justice Toogood nevertheless ruled out claims that “underwrite” investors weren’t legally required to buy apartments. 

However, he notes the $30,000 furniture packages never eventuated – Station had no money and BOSI wouldn’t put up any more. 

Justice Toogood says the case ultimately turns on Station not completing the apartments in line with the sale and purchase agreements. 

“That is fatal to [the receiver’s] claim,” he says. 

“[Station] breaches were material and substantial – they justified the [investors’] refusal to settle,” Justice Toogood says.