Report of the Securities Commission on aspects of the affairs of Max Resources Limited (in statutory management) volume 1 and 2 [2000] NZSecCom 1 (18 January 2000)

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Report of the Securities Commission on Aspects of the Affairs of Max Resources Limited

Substantial Security Holder Disclosure and Directors' Conduct
in Transactions of
Max Resources Limited
(in Statutory Management)
in 1996, 1997 and 1998


1	INTRODUCTION

1.1	Max Resources Limited (in Statutory Management) ("Max" or "the Company") is a New Zealand public listed company with its registered office at Tauranga. Max is also registered as an overseas company in Australia under the same name and, until recently, had its principal operating office in West Leederville, Perth, Western Australia

1.2	On 23 March 1998, the Market Surveillance Panel ("Panel") of the New Zealand Stock Exchange ("NZSE") suspended the quotation of Max's listed securities.

1.3	On 31 August 1998, by an Order in Council pursuant to section 38 of the Corporations (Investigation and Management) Act 1989, on the recommendation of the Securities Commission ("the Commission"), Max was declared subject to statutory management with effect from that date.

1.4	It is one of the Commission's functions under section 10 (c) of the Securities Act 1978 ("Act") to "keep under review practices relating to securities, and to comment thereon to any appropriate body". The purpose of this report is to publish, for the benefit of the shareholders of Max and any other appropriate body, the Commission's comments on aspects of the affairs of Max during the period 1996 to early 1998 and subsequent related events.

1.5	This report contains the Commission's observations on aspects of Max's affairs. The report has been based on documents made available to the Commission and on submissions from parties to whom confidential consultative draft reports were distributed for comment. The Commission took careful account of all information and comments received.

1.6	The report is prepared in two volumes - Volume 1 - Substantial Security Holder Disclosure and Directors' Conduct in Transactions of the Company Volume 2 - Financial Statements This is Volume 1 of the report.

1.7	The report has been prepared by a quorum of Members of the Commission comprising: Mr E H Abernethy, Chairman Mr F R S Clouston, Member Ms E M Hickey, Member

1.8	When referring to persons in our report we use the customary honorific the first time a person's name is mentioned. Subsequently we may use the surname only. No disrespect is intended by this practice.

1.9	For the purposes of our report we obtained or reviewed a number of documents related to the affairs of Max, including: Affidavit evidence filed in support of, and opposing, a winding up application and motion to appoint a provisional liquidator to the Company, filed in the Federal Court of Australia, Western Australian District, in March 1998 including, but not limited to: affidavits of Mr Robert Ivan Owen McShane sworn on 18 March 1998 and 6 April 1998 together with supporting documents (some 260 pages) which included a report of the Company's operations from Horwath, Chartered Accountants, of Perth, ("the Horwath report") requested by McShane and Mr Thomas William Johnson in their capacity as the Audit Committee of directors of Max; affidavit of Johnson sworn on 18 March 1998; affidavits of Mr Michael James Langoulant sworn on 24 March 1998, 30 March 1998, 2 April 1998, 7 April 1998 and 15 April 1998; affidavits of Mr Josephus Jeffery Verheggen ("Jeff Verheggen") sworn on 24 March 1998 and 2 April 1998; affidavits of Mr Peter Briggs sworn on 24 March 1998 and 2 April 1998; affidavit of Mr Jeffrey Laurence Herbert, chartered accountant, of PBB Ashton Read, Perth, sworn on 1 April 1998, including a report he had prepared on the solvency of Max at the request of Jeff Verheggen and Langoulant for the purposes of the hearing; Sinclair & Wood's audit file relating to the audit of Max's financial statements for the year ended 30 June 1997; papers received under summons relating to an investigation into the affairs of Max carried out for two of the directors, McShane and Johnson, by an Australian private investigator, McLernon Group Limited; papers of the Company held in New Zealand by the statutory managers; written submissions from a number of affected parties in response to versions of the report circulated to those parties in May, October and November 1999.

2	BACKGROUND Max - Incorporation and Nature of Business

2.1	Max is a New Zealand public listed company. It was incorporated in New Zealand on 8 October 1987 with its registered office at the offices of Sinclair & Wood, chartered accountants, 510 Cameron Road, Tauranga. Max has been principally operated from West Leederville, Perth, Western Australia and is registered as an overseas company in Australia under the same name.

2.2	The directors of Max during the period from 1996 to early 1998 (at varying times) were Jeff Verheggen, Langoulant, Johnson, McShane, Mr Josephus Theodorus Herbertus Verheggen ("Verheggen Snr") and Briggs. Mr Edmund Czechowski, an Australian businessman, was subsequently appointed to the board of directors. Langoulant and McShane were also joint Company Secretaries.

2.3	Until 1997 Max's principal business was described in the Company's annual reports as being "mineral operations and exploration and direct investment in other resource based companies". In July 1995, Max, through its wholly-owned subsidiary Robregal Investments Limited ("Robregal"), acquired approximately 29% of the shares in Australian listed mining exploration company, Intrepid Mining Corporation NL ("Intrepid"). Intrepid had a major tenement holding in the second largest gold province in Victoria - Walhalla Woods Point. In addition, Max also held interests in joint venture agreements for mining tenements in the Norseman Dundas North province ("the Norseman Venture") and Leonora, both in Western Australia, and the Bay of Plenty, New Zealand.

2.4	In May 1997, at an Extraordinary General Meeting of the members of Max held in Auckland, it was resolved to change the principal business of Max to the manufacture and distribution of organic fertilizer ("Waste Recovery Systems" or "WRS") and to divest the company of all investments in the resource sector.

2.5	Prior to or around the time of the May 1997 meeting, Max acquired various assets of WRS Pacific Pty Limited ("WRS Pacific"), a company controlled by Briggs. These assets consisted of organic fertilizer production facilities in Indonesia, India, Sri Lanka and the USA and associated intellectual property.

2.6	By this time, Max had already agreed to acquire a right to an 87% interest in Amendements et Fertilisants D'Amorique SA ("AFA"), a French company engaged in a joint venture for the construction of an organic fertilizer plant in France. Max acquired its interest in AFA by agreeing to acquire the issued shares of a company called WRS Europe Limited ("WRS Europe"), which was to directly hold 87% of the shares in AFA. Jeff Verheggen and Verheggen Snr held all the shares in WRS Europe.
2.7	In the period 30 June to October 1997 Max entered into agreements under which: Max sold its interest in the Norseman Venture to Australasian Gold Mines NL ("AusGM"), one half in return for 5 million fully paid shares in AusGM, and the other half for A$2 million, which was only payable upon a positive feasibility study being completed for the project and provided the transaction was completed by June 1999; Max acquired an additional, minority interest in the Norseman Venture from its partner in the project, Darkdale Pty Limited, for A$1.1million and then onsold that interest to AusGM in exchange for 3.75 million fully paid shares in AusGM
2.8	In October 1997 Max (through Robregal) sold its interest in Intrepid to three entities - Village Lake Pty Limited, Garland Investments Limited and Wah Fung International Limited. According to Max's 1997 Annual Report, Max sold this interest for a total consideration of A$2.4 million, an amount described in the financial statements as being "... above the June 1997 book value.." and "... having exceeded the original cost of the investment by A$1,000,000".
2.9	In March 1998 McShane and Johnson applied to the Australian Federal Court for an order that Max be wound up pursuant to the Australian Corporations Law and for the appointment of a provisional liquidator. In support of the application McShane and Johnson commissioned Horwath, Perth Chartered Accountants, to review Max's financial statements and affairs, and a private investigation firm, McLernon Group Limited, to investigate certain transactions of the Company and its substantial shareholders.

2.10	The Federal Court proceedings were contested by the Australian directors and former directors. The action was subsequently withdrawn when McShane, Johnson, and McLernon Group entered into a deed of settlement on 22 May 1998 with Jeff Verheggen, Briggs, Langoulant, Johnson's wife (who was a creditor of Max) and Max.

2.11	On 23 March 1998 the Market Surveillance Panel of the NZSE suspended the quotation of Max shares following the application by McShane and Johnson to the Australian Federal Court.
2.12	On 31 August 1998, by an Order in Council pursuant to section 38 of the Corporations (Investigation and Management) Act 1989, Max was declared subject to statutory management with effect from that date. Max's financial position

2.13	Max's audited consolidated statement of financial position as at 30 June 1997, as set out in the company's 1997 Annual Report, showed that Max had a share capital of NZ$10,602,124, reserves of NZ$8,254,626 and accumulated losses of NZ$6,062,535, giving a total shareholders' equity/net assets of NZ$12,794,215.

2.14	The statutory managers reported to shareholders on 2 March 1999. Their report contained an unaudited management consolidated balance sheet as at 31 October 1998. This balance sheet showed Max with share capital of NZ$10,634,000, reserves of NZ$1,145,000 and accumulated losses of NZ$8,211,000, leaving total shareholders equity/net assets at NZ$3,568,000. The statutory managers' report, however, stated that the statutory managers had reservations about the book values of the assets disclosed in the unaudited balance sheet and that, in their view, the realistic value of Max's assets could be less than its liabilities.
2.15	The Commission reviewed Max's 1997 financial statements and the circumstances in which they were prepared. The Commission's comments are contained in Volume 2 of this Report. Directors of Max

2.16	From October 1994 to 4 January 1998, Max had two Australian directors, Jeff Verheggen and Langoulant, and two New Zealand directors, Johnson and McShane. Jeff Verheggen and Langoulant reside in Perth and were executive directors of Max. Johnson and McShane reside in New Zealand and were non-executive directors. Johnson and McShane have advised us that Perth solicitors, Clayton Utz, initially approached them to act as independent directors of Max. Clayton Utz had acted for Restech International Ltd, a company McShane and Johnson had been directors of for a period of eight years.

2.17	On 4 January 1998 Jeff Verheggen resigned as a director of Max. Verheggen Snr, Jeff Verheggen's father, replaced him on the board. Around the same time, Briggs was appointed to the board of Max.

2.18	On 1 June 1998 the NZSE was advised that McShane and Johnson had resigned as directors of Max. On 19 June 1998 the NZSE was advised that Langoulant and Verheggen Snr had also resigned from the board. We understand that Briggs and his business associate, Czechowski, are presently the only directors of the Company. We understand that Briggs had been operating the Company from his offices at 26 Colin Street, West Perth until the appointment of the statutory managers in August 1998. Shareholdings in Max

2.19	Although presently suspended, Max's shares are listed on the NZSE. Max's 1997 Annual Report stated that, as at 30 October 1997, the Company had on issue: 39,147,499 ordinary fully paid 25¢ shares 22,967,725 options to acquire fully paid 25¢ shares on or before 31 July 1999. The options carried no voting rights.
2.20	According to the 1997 Annual Report, the 20 largest shareholders of the company, as at 30 October 1997, were: SBC Warburg NZ 7,553,400 NZ Central Securities Depository 4,434,286 Gybson Pty Ltd 3,000,000 Hendry Nominees Ltd a/c 486 2,794,815 Forbar Nominees Ltd 2,567,900 Hampton Snow Ltd 2,135,000 Interbac Australasia Pty Ltd 2,000,000 RJ Peters Pty Ltd 1,725,000 Palliser Nominees Ltd 1,171,100 Portfolio Custodian Limited 1,050,000 Fidelity Mutual Funds Management Inc 928,572 Zurich Capital Management 785,715 AJ Cartwright 750,076 Hendry Nominees Ltd a/c 263 681,143 John Cartwright & Co Pty Ltd 600,000 Salim Cassim 542,858 Wilbur Nominees Ltd 511,700 Adubos Company Ltd 500,000 PT Eltro Machino 500,000 Isseka Ltd 400,000 Total 34,631,565 Shareholder distribution

2.21	We have been advised by Computershare Registry Services Limited that, as at 13 January 1999, there were 625 shareholders in Max. The geographical distribution of shareholders was as follows: Country Number of holders Quantity % Australia 114 14,270,726 36.45 Canada 1 572 0.00 Germany 1 500 0.00 Great Britain 8 1,687,460 4.31 Hong Kong 2 542,858 1.39 Channel Islands 1 2,135,000 5.45 Indonesia 3 6,310,000 16.12 Ireland 1 785,715 2.01 Malaysia 2 545,144 1.39 New Zealand 492 12,869,524 32.87 Total 625 39,147,499 100.00

2.22	On the basis of the above analysis, it appears that the majority of Max's small shareholders, as at 13 January 1999, were New Zealand residents. Suspension of the quotation of Max's listed securities

2.23	On 23 March 1998, as noted above (see para 2.11) the Panel of the NZSE suspended the quotation of Max's listed securities following the application by New Zealand directors Johnson and McShane to the Australian Federal Court to have a provisional liquidator appointed with power under the Australian Corporations Law to review transactions recently entered into by Max and the payment of Max's creditors. The basis for the Panel's suspension order were the conflicting reports received by the NZSE from Max's New Zealand and Australian directors concerning the Company's affairs. There was also uncertainty as to whether Max had been complying with the NZSE Listing Rules concerning the issuing of relevant information about the Company's activities, including the change in the principal business of the Company.

3	EXECUTIVE SUMMARY OF VOLUME 1

3.1	This volume of the report considers aspects of the affairs of Max in the period 1996 to early 1998, in particular, the disclosure of substantial security holdings in Max and the conduct of Max's directors during this period.

3.2	The directors of Max during this period (at varying times) were Jeff Verheggen, Langoulant, Johnson, McShane, Verheggen Snr and Briggs. Czechowski, an Australian businessman, was subsequently appointed to the board of directors. Langoulant and McShane were also joint Company Secretaries.

3.3	The report considers the following issues: Was there significant non-compliance with the requirements of Part II of the Securities Amendment Act 1988 ("the Amendment Act") in respect of the disclosure of relevant interests in Max's listed securities? In particular, was there significant non-compliance with these requirements by any of the directors of Max, or any persons associated with them? Did Max's directors, in procuring Max to enter into certain transactions in 1996 and 1997, have proper regard to their duties to the Company and the interests of Max's shareholders and creditors, in particular: the duty to act in good faith and in what they believe to be the best interests of the Company; and the duty to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances? Disclosure of Relevant Interests in the Listed Securities of Max

3.4	Under Part II of the Amendment Act, every person who becomes a substantial security holder in a public issuer is required to give notice of that fact (in the prescribed form) to the NZSE and the public issuer. The Amendment Act defines a "substantial security holder" as a person who has a "relevant interest" in 5% or more of the voting securities of the public issuer. The notice must be given as soon as the person knows, or ought to know, that the person is a substantial security holder. "Relevant interest" is widely defined and includes any form of beneficial ownership, the power to acquire or dispose of the securities, the power to control the acquisition or disposition of the securities, the power to exercise the voting rights or the power to control the exercise of the voting rights of the securities.
3.5	The disclosure provisions of the Amendment Act also apply when a substantial security holder changes its holdings by each 1% or more of the voting securities of the issuer.

3.6	The Amendment Act provides that, where there are reasonable grounds to suspect that a substantial security holder has not complied with the Act, the High Court may, on application, make a number of orders relating to the issuer, the substantial security holder and the securities, including orders directing forfeiture of securities. Appendix A to this report sets out the relevant definitions from the Amendment Act.

3.7	As at 30 October 1997, Max had on issue: 39,147,499 ordinary fully paid 25 cent shares 22,967,725 options to acquire fully paid 25 cent shares on or before 31 July 1999. The options carried no voting rights.

3.8	We believe there are reasonable grounds to suspect that Briggs, during 1997 and subsequently, had a relevant interest in 4,500,000 Max shares (11.49% of the voting securities of Max) held by various companies owned by him. Briggs has subsequently acknowledged he has an interest in some of these shares. Briggs did not disclose any of these interests to the NZSE or the Company as required by Part II of the Amendment Act. The Company did not publish information about these interests in its Annual Report.
3.9	We believe there are reasonable grounds to suspect that Jeff Verheggen had, at various times in 1997 and subsequently, a relevant interest in 11,619,898 Max shares (29.68% of the voting securities of Max). The Company reported a relevant interest of Jeff Verheggen in 5,650,142 shares (14.43%) in its 1997 Annual Report and Jeff Verheggen filed a substantial security holder notice with the NZSE on 8 August 1997 in respect of a similar number of shares (5,650,000). This leaves 5,969,756 shares (15.25%) concerning which we believe there are reasonable grounds to suspect Jeff Verheggen had a relevant interest and in respect of which there was no disclosure to the NZSE or, to our knowledge, to the Company, as required by Part II of the Amendment Act. (For further explanation see para 5.15 onwards and Appendix B.)

3.10	We also believe there are reasonable grounds to suspect that Jeff Verheggen changed his relevant interests in the voting securities of Max by more than 1% in 1997. In May 1997 Jeff Verheggen entered into a put option with TPIC Limited, a wholly-owned subsidiary of Wyllie Group Pty Limited, under which he agreed to buy back 1,397,000 Max shares during a one month period late in 1997 if they were put to him. We do not know whether TPIC Limited acquired these shares from Jeff Verheggen subject to the put option, or whether Jeff Verheggen agreed to give a put option in respect of shares to be acquired by TPIC Limited on the market. We believe Jeff Verheggen changed his relevant interest in Max shares for a period late in 1997 when the put option for 1,397,000 shares (3.6% of voting securities) he had granted to TPIC Limited was put back to him, without disclosing this change as required by the Amendment Act.

3.11	When the respective interests attributed to fellow directors Briggs and Jeff Verheggen referred to in paragraphs 3.8, 3.9 and 3.10 are combined, the overall total of Max shares in which we believe there are reasonable grounds to suspect that they had, in aggregate, a relevant interest in late 1997, was in the order of 16,119,898 (41.17%).

3.12	In addition, it appears that Pica (M) Corporation Berhad ("Pica Corporation"), a company listed on the Kuala Lumpur Stock Exchange, held, as at 30 October 1997, a relevant interest in 5,810,000 Max shares (14.84% of the voting securities). These holdings were held through Myles Nominees Pte Limited ("Myles Nominees"), a wholly owned subsidiary of Pica Corporation as to 5,000,000 (12.77% of the voting securities) and through PS Holdings Limited, also a wholly-owned subsidiary of Pica Corporation, as to the balance of 810,000 Max shares. Although Myles Nominees gave notice of its 12.77% interest, Pica Corporation did not disclose its interest in 14.84% of Max shares to the NZSE nor, to our knowledge, to the Company, as required by Part II of the Amendment Act. In addition, Mr Salim Cassim, a substantial security holder of Pica Corporation, held some 800,006 Max shares personally. Cassim has informed the Commission that at the time of purchase he was not aware that Myles Nominees had bought Max shares.

3.13	We have also been told by Jeff Verheggen that 4,400,000 shares (11.24% of the voting shares of Max at 30 October 1997), registered in the names of two nominees, are held on behalf of an organisation called Global Portfolio Management, at the time based in London, England. Global Portfolio Management's interest in these shares was not disclosed to the NZSE and nor was it disclosed, as far as we are aware, to the Company in accordance with the law. We understand that Global Portfolio Management is managed or controlled by a Mr Connor Maloney.

3.14	Based on our observations in paragraphs 3.8 to 3.13 above, we consider that there has been significant non-compliance with the disclosure requirements of Part II of the Amendment Act by Jeff Verheggen, Briggs and Global Portfolio Management. We also consider that Pica Corporation has not complied with the law. As a result, information about the extent of the shareholding interests by these people, and about changes to some of those interests, was denied to Max's other shareholders and to the markets of Australia and New Zealand. Conduct of Max's Directors in Relation to Transactions Entered into by Max in 1996/1997 *Change of business direction*

3.15	Around November 1996 Max's directors decided to change the nature of the Company's business from the holding of interests in mining tenements to the processing of organic fertilizer. This change of business direction was referred to in a statement released to the NZSE on 13 December 1996. On 8 May 1997 the directors obtained shareholder approval to this in accordance with NZSE Listing Rules. This decision of directors was material to a number of important transactions. *Purchase of fertiliser processing plants in the United States and Asia*

3.16	In December 1996 Max's directors decided to purchase a WRS plant in Ohio in the United States. The purchase price was US$0.7 million, with payment of US$100,000 in the form of a non-refundable deposit before the end of December 1996 and the balance payable at the end of January 1997. An announcement of the purchase, including a statement that it was subject to shareholder approval, was included in the statement to the NZSE of 13 December 1996 referred to above.

3.17	In February 1997 Max advised the NZSE that it had acquired interests in WRS plants in Indonesia, Sri Lanka and India. These were acquired for consideration of 5 million Max shares issued to companies nominated by Briggs.
3.18	Significant funds were committed to the Ohio transaction before the Max shareholders approved a change in the nature of Max's business in accordance with the NZSE Listing Rules at their meeting on 8 May 1997. *The French Venture*

3.19	WRS Europe, which was owned by Max director Jeff Verheggen and his father, Verheggen Snr, had a right to acquire an 87% interest in AFA, a French company developing a WRS plant at St Thois, France ("the French Venture")1 . The Verheggens arranged for Max to acquire this right by the Company purchasing all the shares in WRS Europe. As consideration for the shares in WRS Europe Max agreed, at a meeting of directors on 12 December 19962 , to: Issue 20 million 31 July 1999 Max share options to Jeff Verheggen and Verheggen Snr; Inject FF1.96 million of long term loan funds into WRS Europe to enable that company to meet financial obligations it had entered into in respect of the French Venture; and Obtain a loan of FF13 million from a French bank over a period of 10 months at a rate of 6% p.a. interest and to make money available to assist with development of the French plant. Jeff Verheggen has told us that the issue of Max options to himself and his father did not take place.

3.20	Max's directors would have been well aware that the purchase by Max of shares in WRS Europe was a material transaction with a related party and that the Company needed to comply with Rule 9.2.1 of the Listing Rules. Rule 9.2.1 provides that an issuer shall not enter into a material transaction with a related party unless it has been approved by an ordinary resolution of the issuer in general meeting. Further, an appraisal report prepared by an independent expert is required to accompany the notice of meeting called to consider the resolution.

3.21	Indeed, the need to obtain shareholder approval and an independent appraisal report is referred to in various Company papers, including the 1997 Annual Report and the initial announcement to the NZSE. Max's directors were also well aware that the directors needed to secure shareholder consent to any change in business for the Company (see paragraph 3.15 above).
3.22	In mid-December 1996 Max's directors commissioned KPMG Corporate Pty Limited (Perth) ("KPMG") to prepare an independent appraisal report to put to the meeting of shareholders necessary to approve the purchase of WRS Europe shares. KPMG in turn commissioned its French counterpart firm to prepare a report on the French Venture. However, the appraisal report was not formally released by KPMG (France) to Max because of a dispute over non-payment of a fee owed by Max to KPMG (France). Shareholder approval to the transaction was not obtained and it appears the transactions between Max and WRS Europe, or by Max on behalf of WRS Europe, were in breach of the NZSE Listing Rules.

3.23	Despite this, Max forwarded a total of around NZ$1.18 million to France in respect of the French Venture. In December 1996 Max sent approximately NZ$0.5 million (FF2.56 million) to Conception Realisations Industrielles et Immobilieres ("CR2I"), the company constructing the French plant for AFA, a payment said by Langoulant in affidavit evidence to be "... on behalf of WRS Europe". Further sums were paid in respect of the French Venture in June 1997 and in October 1997, when A$0.24 million from the sale of Robregal's interest in Intrepid was loaned to CR2I.

3.24	Since agreeing to acquire WRS Europe Max has had difficulty in meeting the financial requirements of the French Venture. At the date of this report, the statutory managers had entered into an agreement to sell Max's fertiliser assets (including the remaining interest in AFA). Max's investment of around NZ$1.18 million in the French Venture has not been fully recovered.

3.25	The NZSE Listing Rules require any transaction needing shareholder approval to be made conditional on obtaining such approval. Moreover the Listing Rules state that the transaction shall not be completed until the approval is obtained and, if approval is not obtained, the public issuer shall terminate its obligations. In this case, Max's shareholders did not have the opportunity to vote on the French Venture or have the benefit of an independent appraisal report which would have enabled them to decide whether the transaction price and terms were fair. Around NZ$1.18 million was loaned to CR2I under the transaction, even though it had not been approved by Max's shareholders and the acquisition of WRS Europe was never actually formally completed. *Comment*

3.26	The Commission considers that there are reasons to conclude that one or more of the directors did not show sufficient regard for: their duties to Max; and their obligation to use their best endeavours to procure Max's compliance with the NZSE Listing Rules; and the interests of Max's shareholders; with respect to these transactions involving the French venture.

1 We understand that, because certain share transfers had not been effected in AFA, WRS Europe was not in fact entitled to 87% of AFA. This matter was unresolved at the time of the statutory management of Max. - BACK

2 The minutes of the meeting noted the interest of Jeff Verheggen and his father in the transaction and that it was a material related party transaction. There is no indication in the minutes of the meeting that Jeff Verheggen did not participate in discussion on this matter. There is also no statement in the minutes identifying the directors who voted for the resolution, although Langoulant and Jeff Verheggen have told us Jeff Verheggen did not vote on the resolution. - BACK

5	DISCLOSURE OF RELEVANT INTERESTS IN MAX'S LISTED SECURITIES Legal requirements for disclosure of relevant interests

5.1	Under Part II of the Amendment Act, every person who becomes a substantial security holder in a public issuer is required to give notice of that fact (in the prescribed form) to the NZSE and the public issuer. "Substantial security holder" is defined as a person who has a "relevant interest" in 5 % or more of the voting securities of the public issuer. The notice must be given as soon as the person knows, or ought to know, that the person is a substantial security holder. Notice must also be given where a substantial security holder's relevant interest has changed by 1% or more of the issuer's voting securities.

5.2	"Relevant interest" is defined widely in the Amendment Act and includes any form of beneficial ownership, the power to acquire or dispose of, or control the acquisition or disposition of, the securities, and the power to exercise the voting rights or the power to control the exercise of the voting rights. The power may be express or implied, direct or indirect, legally enforceable or not, exercisable presently or in the future, or exercisable singly or jointly with another person.

5.3	The High Court may, on application, where there are "... reasonable grounds to suspect that a substantial security holder has not complied..." with the law, make orders as prescribed in the Amendment Act. These orders include: prohibition on the exercise of voting rights; directions to the public issuer not to register the transfer of securities; restraint on the security holder from disposing of the securities; direction to the security holder to dispose of the securities; order directing the forfeiture of the securities; or a declaration that the exercise of voting rights attaching to the securities is void and of no effect. Appendix A to this report sets out the relevant definitions from the Amendment Act. Relevant substantial security holder notices filed with NZSE in the period 1 April 1996 to 30 October 1997

5.4	As at 30 October 1997, Max had on issue: 39,147,499 ordinary fully paid 25 cent shares 22,967,725 options to acquire fully paid 25 cent shares on or before 31 July 1999. The options carried no voting rights.

5.5	On 8 August 1997, Jeff Verheggen notified the NZSE of a relevant interest in 5.65 million shares held either in his own name or in the name of Gybson Pty Limited. At the time, this constituted 16.61 % of the voting securities on issue. This percentage would have reduced to 14.43% of the voting securities in Max after an increase in Max's share capital carried out in October 1997.

5.6	On 15 August 1997, Myles Nominees gave notice to the NZSE of a relevant interest in 5 million Max shares it had acquired on 7 August 1997, constituting 14.7% of the voting securities on issue. After the increase in Max's share capital in October 1997, this would have reduced to 12.77% of the voting securities in Max. The McLernon Group report to NZSE

5.7	On 28 April 1998, the McLernon Group provided the NZSE with a report they had prepared concerning the apparent non-disclosure of interests by substantial security holders in Max. The McLernon Group report concluded that shareholdings or interests through related or controlled offshore entities were not fully disclosed and this had enabled Jeff Verheggen and Briggs to covertly control Max. Our Enquiries

5.8	The Commission has undertaken enquiries in order to identify all the persons who may hold, or may have held, interests in the largest 20 shareholdings listed in the 1997 Annual Report. For the purposes of this enquiry, we have sought the assistance of various overseas regulatory authorities. The Commission also referred to the files of McLernon Group concerning their enquiry into Max's affairs, which were provided to us pursuant to a summons issued under section 18(3) of the Act. (Langoulant said in submissions to us that "The validity of information provided by the McLernon Group is flawed in that it contains a large amount of conjecture and hearsay. ...".)

5.9	In conducting this investigation, we have encountered a labyrinth of nominees. The Commission, in conducting enquiries of this nature, is well acquainted with the use of nominees. In our experience, we typically find that the use of multiple layers of nominees in relation to substantial security holdings is indicative of a design to hamper enquiries to determine the identities of individuals interested in shareholdings. This is particularly the case where enquiries reveal that a nominee does not appear to exist or has supplied incorrect information about itself.

5.10	In the course of our enquiries into the disclosure of relevant interests in Max, we have had regard to the threshold for action under the substantial security holder provisions of Part II of the Amendment Act. For the Court to be able to make orders under section 32 of the Amendment Act, it needs to be shown (section 30) that there "are reasonable grounds to suspect that a substantial security holder has not complied".

5.11	For the purposes of this report, we have assumed that the 22,967,725 Max options on issue, being options to acquire yet-to-be issued Max shares, did not constitute "voting securities". While acknowledging that there is some uncertainty in the law in this area, the Commission is of the view that options do not constitute "voting securities" for the purposes of the law unless they confer a right in respect of a security already on issue. We do not have detailed information in our possession regarding the beneficial ownership of the Max options. This report assumes that the Max ordinary shares are the only "voting securities" for the purposes of substantial security holder disclosure.

5.12	A table setting out the relevant parcels of Max shares and the association of the registered holders with related parties as at 30 October 1997 is set out below. The "registered holder" is the person named in Max's 1997 Annual Report. A more detailed description of the basis for our conclusions about the associations between the various parties is set out in Appendix B.

	REGISTERED HOLDER (and number of shares) HELD ON BEHALF OF (and number of shares) PERSONS WITH RELEVANT INTEREST SBC Warburg NZ (7,553,400) PS Holdings Limited (810,000) Pica Corporation Myles Nominees Pte Limited (5,000,000) Pica Corporation Jeff Verheggen - put and call option arrangement with Pica in respect of 2,500,000 Max shares TPIC Limited (1,397,000) Wyllie Group -Jeff Verheggen granted TPIC Limited a put option for these shares which was exercised in late 1997. NZ Central Securities Depository (4,434,286 Citibank Nominees (New Zealand) Limited (3,400,000) Citibank London Held for Global Portfolio Management, London (Maloney) National Nominees (NZ) Limited (1,000,000) Royal Bank of Scotland plc Held for Global Portfolio Management, London (Maloney). Total interest 4.4 million = 11.24%. Gybson Pty Ltd (3,000,000) Jeff Verheggen Jeff Verheggen Hendry Nominees Ltd a/c 486 (2,794,815) Bohemia Pty Limited (45,700) S Cassim (257,148) No ASIC Record of company S Cassim City Merchants P/L (24,739) Unable to locate entity European Fund Perth (185,000) Suspect Jeff Verheggen Grosvenor Securities Limited (682,652) Suspect Jeff Verheggen Gybson Pty Limited (177,074) Jeff Verheggen Isseka PL (171,429) Paul Blackman (Partner, Clayton Utz, Solicitors, Perth) Pine Valley Enterprises Pty Limited (244,285) Verheggen Snr, also suspect Jeff Verheggen R Verheggen (50,000) Jeff Verheggen's sister. Forbar Nominees Ltd (2,567,900) Hartley Poynton Limited (Perth) Grosvenor Securities Limited (179,900) - Suspect Jeff Verheggen Gybson Pty Limited (225,000) - Jeff Verheggen Pine Valley Enterprises Pty Limited (853,000) - Verheggen Snr, also suspect Jeff Verheggen TPIC Limited (1,000,000) (Wyllie)-Jeff Verheggen granted a put option to Wyllie. Option exercised in late 1997 Hampton Snow Ltd (2,135,000) Suspect Briggs Interbac Australasia Pty Ltd (2,000,000) Briggs Briggs Fidelity Mutual Funds Management Inc (928,572) Suspect Jeff Verheggen Zurich Capital Management (785,715) Suspect Jeff Verheggen Hendry Nominees Ltd a/c 263 (681,143) Leeward Trading Limited (405,000) Salim Cassim (542,858) Salim Cassim Salim Cassim Wilbur Nominees Ltd (511,700) Patterson Ord Minnett (Perth) (80,000) Grosvenor Securities Limited - Suspect Jeff Verheggen Montagu Stock Brokers (Perth) (431,700) Grosvenor Securities Limited (381,700)- Suspect Jeff Verheggen Isseka Ltd (400,000) Isseka Pty Limited Paul Blackman informs us that he had these shares but sold them in November 1996, notwithstanding Isseka remaining listed as a shareholder in the 1997 Annual Report. The relevant interests of Mr Briggs

5.13	On the basis of the information in our possession, and having regard to submissions made by Briggs, the holdings in which we know, or in which we believe there are reasonable grounds to suspect, that Briggs had a relevant interest in 1997 and subsequently are as follows: Hampton Snow Ltd 2,135,000 Interbac Australasia Pty Ltd 2,000,000 Capital Resources Pty Limited 325,000 Natural Resources Finance Pty Limited 40,000 4,500,000 11.49% None of these relevant interests were disclosed to the NZSE or the Company in accordance with the law

5.14	Our reasons for coming to this conclusion concerning Briggs's relevant interests are as follows: Briggs has acknowledged he has a relevant interest in the shares of Max held by Interbac Australasia, Capital Resources and Natural Resources; Although Briggs has told us that he has "never owned or controlled" Hampton Snow: There was correspondence between Briggs and Hampton Snow in November 1996 from which it appears Briggs may have had the ability to direct the affairs of Hampton Snow; There was a letter of 20 June 1997 to Max, from WRS Pacific, and signed by Briggs, in which Briggs directed how the Max shares received in consideration for the sale of WRS assets were to be issued and in which he referred to "receiving our share certificates"; There are statements made by Lunt, in correspondence with McShane in February and March 1998, in which he refers to Hampton Snow as a company "owned" or being a "nominee [company]" of Briggs. See Appendix B for reference to this and other relevant material. The relevant interests of Mr Jeff Verheggen

5.15	On the basis of information in our possession, and having regard to the submissions made to us by Jeff Verheggen and Langoulant, the holdings in which we know, or in which we believe there are reasonable grounds to suspect, that Jeff Verheggen had a relevant interest at times during 1997 were as follows: Disclosed to the NZSE in August 1997: 5,650,142 14.43% Relevant interests Gybson Pty Limited 3,402,074 Pica option 2,500,000 Wyllie (TPIC) option 1,397,000 Grosvenor Securities Ltd 1,324,252 Fidelity Mutual Funds Management Inc 928,572 Zurich Capital Management Ltd 785,715 European Fund, Perth 185,000 Pine Valley Enterprises Pty Ltd 1,097,285 Total actual and suspected relevant interests 11,619,898 29.68%

5.16	Our reasons for coming to this conclusion in relation to Jeff Verheggen's relevant interests or suspected relevant interests are as follows: Jeff Verheggen gave notice of relevant interests in 5.65 million Max shares in August 1997 and has acknowledged his interests currently comprise the holdings held by or for Gybson Pty Limited and the remaining Pica option; Jeff Verheggen entered into a put option arrangement with Wyllie of TPIC Limited in May 1997 in respect of 1.397 million Max shares. This option was exercised by TPIC late in 1997, although we understand Jeff Verheggen was unable to pay for the shares and they remain in the ownership of TPIC. In the period from the time the shares were put back to Jeff Verheggen until a settlement arrangement was reached with TPIC we believe Jeff Verheggen had a relevant interest in these shares. These shares comprised some 3.4% of Max's voting shares. In addition to the requirement to disclose overall interests that exceed 5% of the voting securities of a company, notification to the NZSE is also required when a substantial security holder changes its interest by 1% or more of the voting securities. At no time were Jeff Verheggen's relevant interest in these shares, or the changes in his relevant interests, disclosed to the NZSE or, we believe, to the Company, as required by law; We believe there are reasonable grounds to suspect that Jeff Verheggen had and has relevant interests in shares held by or for Grosvenor Securities, Fidelity Funds Management, Zurich Capital Management and European Fund. The basis for this view is set out in the material referred to in the last three pages of Appendix B. We believe Jeff Verheggen demonstrated an ability to control the disposition of holdings registered in the names of Grosvenor Securities, Fidelity Funds Management, Zurich Capital Management and European Fund. Jeff Verheggen, in his first submissions to us, said he had no interest in shares held by these named entities. Jeff Verheggen later told us, in further submissions, that he had hoped to utilise scrip from clients of Mr Richard Rowe of Mercator Trust Company Limited, Guernsey, Channel Islands ("Mercator"), for which he was to pay a fee, to use as security for a loan to purchase other shares, but the parties had been unable to resolve the fee payable. As a result "... the shares and transfers were never provided and that security was neither lodged nor took effect." However we have copies of a facsimile message from Mercator to a Mr Barry Panos of Transcontinental Resources Limited of 27 March 1995 forwarding to Panos executed transfers out of the names of Zurich Capital Management, Fidelity Mutual Funds Management, Grosvenor Securities and Standard Investments and of a similar message of 22 March 1995 with an executed transfer in the name of European Fund Managers. A message of 21 March 1995 from Rowe of Mercator to Panos referred to Mercator completing five stock transfer forms "On Mr Verheggen's instructions"; We understand that Pine Valley Enterprises is owned by Verheggen Snr. On the basis of material provided to us and referred to in Appendix B, particularly that related to the "Inovax" settlement, we believe there are reasonable grounds to suspect that Jeff Verheggen has a relevant interest in shares held by Pine Valley Enterprises. We think, on the basis of the Inovax material, that this interest could arise from an ability to control the acquisition or disposition of voting securities held by Pine Valley Enterprises. Jeff Verheggen has told us he has no interest in these shares. Verheggen Snr has also "categorically [denied]" that Jeff Verheggen has any interest in shares held by Pine Valley, although he says he (Verheggen Snr) has sometimes acted as guarantor for Jeff Verheggen. Our conclusions are supported by a handwritten note from Jeff Verheggen to Maloney referred to in the McLernon Group report. This handwritten note stated that in October 1997 the following entities held major shareholdings in Max: "JJV (personally) 5.65 m JJV + FAMILY 5.2 m WRS (to be issued) 5.0 m Connor 4.0 m (PLUS) BOB PETERS 3.0 m PICA (Malaysians) 3.5 m JOHN CARTWRIGHT 1.30 m Bill Wyllie 1.9 m Argosy Asset Mgt 1.1 m Joe THROSBY 1.0 m 31.65m *OUT OF TOTAL* *39,012,185m" Jeff Verheggen, in his first submissions to us, acknowledged that he "...had a relationship with all the major shareholders." He has told us that he "know[s]" "Richard Rowe" (Mercator), "Mr Aziz Hussein" (Pica), "Dr Salim Cassim" (Pica), "Joe Throsby, Bob Peters, John Cartwright, Connor Moloney[sic]" (Global Portfolio Management), "Bill Wyllie, Peter Briggs,[and] Ian Williams", and said that "... at various times I have borrowed money or had other commercial relationships with some of these people, but I do not own or control their holdings." In his later submissions Jeff Verheggen, referring to the handwritten note set out in the preceding paragraph, said that "The shares in 'JJV Personally' and 'JJV family' overlap by 3 million shares which were beneficially held by Gybson Pty Ltd on behalf of my father. ...". According to our analysis Gybson Pty Limited only has 3.4 million shares in Max. In his earlier submissions Jeff Verheggen said his holdings consisted only of those in Gybson Pty Ltd and the remains of the Pica option. We do not understand his later submission. The relevant interests of Pica Corporation*

5.17	On the basis of the information in our possession we believe that the holdings in which Pica Corporation had a relevant interest in 1997 were: PS Holdings Limited 810,000 2.06% Myles Nominees PTE Ltd 5,000,000 12.77% Total relevant interest 5,810,000 14.84% (Of which Myles Nominees' holding was disclosed)

5.18	PS Holdings and Myles Nominees are subsidiaries of Pica Corporation. We believe that Pica Corporation had, as at 30 October 1997, a relevant interest in 5,810,000 Max shares (14.84% of the voting securities in Max). While Myles Nominees gave notice to the NZSE on 15 August 1997 of a relevant interest in 5,000,000 shares, it appears that Pica Corporation also had a relevant interest in the shares held by Myles Nominees through its ability to control Myles Nominees. Pica Corporation has not filed a substantial security holder notice with the NZSE. The relevant interests of Global Portfolio Management

5.19	In the course of our enquiries we observed holdings of 3,400,000 Max shares held by Citibank Nominees New Zealand Limited and 1,000,000 shares held by National Nominees (N.Z.) Limited. Our research indicated that these holdings were held on behalf of an entity called Global Portfolio Management based in London, England. This information has been confirmed by Jeff Verheggen. Jeff Verheggen identifies Global Portfolio Management with a "Connor Maloney".

5.20	4,400,000 shares in Max constitute 11.24% of the voting securities. This interest has not been disclosed to the NZSE, or, we understand, to the Company, as required by law. Conclusion

5.21	Based on the above, and taking into account Jeff Verheggen's and Briggs' submissions, we consider that there has been significant non-compliance with the disclosure requirements of Part II of the Amendment Act by Jeff Verheggen, Briggs and Global Portfolio Management.3 We also consider that Pica Corporation has not complied with the law. As a result information about the extent of the respective shareholding interests of these people was denied to Max's other shareholders and to the markets of Australia and New Zealand.
	³Conclusion. We have communicated by facsimile to a facsimile number obtained from our files, and by letter delivered by courier to a street address in London obtained from the same source. Return

6	Conduct of Max's directors in relation to transactions entered into by Max in 1996/1997 Change in the nature of Max's principal business in May 1997

6.1	Around November 1996 Max's directors decided to change the nature of the Company's business from the holding of interests in mining tenements to the processing of organic fertilizer. Minutes of a telephone conference meeting of the four Max directors on 27 November 1996 recorded that: Directors had been unable to complete acceptable negotiations to acquire Asian WRS plants; A WRS plant in Ohio, United States of America was available for purchase for US$700,000 but a non-refundable deposit of US$100,000 was required within the next week; Max had the opportunity to buy directly into the French WRS plant with an issue of options in Max to be made to Max's then director Jeff Verheggen and his father Verheggen Snr in consideration for their interest in WRS Europe 4 , but that A$460,000 needed to be lodged with AFA's bankers within the next week; Further short term borrowings or asset sales would be needed to finance these purchases.

6.2	On 8 May 1997 Max's directors obtained the required shareholder approval to change the Company's principal business from the holding of interests in mining tenements to the manufacture and distribution of organic fertilizer. The purchase of the Ohio WRS Plant by Max

6.3	We have copies of correspondence indicating that in late 1996 WRS Pacific (Briggs) was negotiating, via Hampton Snow, with an American company, J G Turner Inc, for the purchase of a WRS plant in Ohio. It would appear from this correspondence that WRS Pacific decided not to proceed with the acquisition and that it was arranged that Max would purchase the Ohio plant instead.

6.4	The correspondence supporting this interpretation of events includes: A copy of a letter from a W S Cairns (a director of Hampton Snow) to Mr Trevor Lunt (then managing director of WRS Pacific), dated 19 November 1996, enclosing a copy of an executed agreement for the sale of the Ohio plant. This states that the agreement is to be held in escrow by Lunt. A copy of a joint letter from Briggs and Lunt to Cairns, dated 28 November 1996, instructing Cairns to write a letter (in the same form as a draft attached to the joint letter) to J G Turner Inc's New York lawyers, advising that Hampton Snow had decided not to proceed with the acquisition of the Ohio plant but understood that another party (Max) was immediately ready to proceed with the purchase. A copy of an agreement for sale and purchase, dated 3 December 1996, between Max and J G Turner Inc for the purchase of the Ohio plant by Max. See Appendix B for a fuller account of the purchase of the Ohio plant.

6.5	A teleconference meeting of all of Max's directors was held on 12 December 1996. The minutes of this meeting record that the purchase of the Ohio plant had been secured by payment of a non-refundable deposit of US$100,000 with the balance of US$600,000 to be paid by 31 January 1997. The purchase agreement was acknowledged to be subject to shareholder approval, to be obtained by 17 January 1997. However, Langoulant advised the meeting that it was not feasible to hold a shareholders' meeting by that date. The teleconference meeting concluded "that shareholder approval...was not required as the Board took the view that the (plant) can be purchased as an investment (initially not for trading activities)." It was noted that "verbal advice from Lowndes Jordan [solicitors] had confirmed this position". Lowndes Jordan has said in submissions to us that they gave advice to Langoulant in relation to this transaction but deny giving advice of this nature.

6.6	As Briggs (a major shareholder in WRS Pacific) did not become a director of Max until 4 January 1998, there does not appear to have been a conflict of interest on Brigg's part at the time this transaction was arranged. Nor do we have evidence of any other of the directors having a conflict of interest in respect of this transaction. However it appears from the Company's records that significant remittances of funds, amounting to more than NZ$1.35 million, were made to the venture from late January 1997 to April 1997, indicating that Max may have been committed to the purchase of the Ohio plant before the shareholders had approved the change in the Company's principal business. The French Venture

6.7	In 1996 WRS Pacific held an 87% interest in AFA, a French company engaged in a joint venture for the construction of a WRS plant at St Thois, France. WRS Pacific was owned by Briggs, and employees Lunt and Mr Robert Skidmore. Briggs had applied to be appointed a director of AFA on the basis of WRS Pacific's 87% interest.

6.8	It appears that, as part of the joint venture, WRS Pacific had assumed a number of financial obligations to a French company, CR2I, in connection with the construction of the French WRS plant. By mid 1996 the venture was in financial difficulty, with losses of approximately FF1.974 million. WRS Pacific was having difficulty meeting its funding obligations to the venture, thereby hindering CR2I's ability to complete the development of the plant. A cash injection was needed to sustain the venture. We understand that WRS Pacific approached Jeff Verheggen in this regard.

6.9	Against this background, it appears that in August 1996 an arrangement was made whereby AFA reduced the face value of its shares from FF100 to FF10. This left AFA with a share capital of around FF176,500. AFA agreed to increase its share capital by issuing 256,000 new shares (87% of the expanded capital) to WRS Europe, a company owned by the Verheggens, and a further 21,350 new shares to CR2I. It is evident, however, that the required actions by AFA were not completed and WRS Europe did not formally acquire an 87% interest in AFA.

6.10	WRS Europe agreed to purchase the shares for a total consideration of FF2.56 million. Verheggen Snr made an initial payment of FF600,000 and agreed to pay the balance (FF1.96 million) in instalments.

6.11	Around November 1996, arrangements were made for Max to acquire the Verheggens' interest in the French WRS plant by Max purchasing all their shares in WRS Europe. As consideration for the shares, Max agreed at a teleconference meeting of the four Max directors on 12 December 1996, to: Issue 20 million 31 July 1999 Max share options to Jeff Verheggen and Verheggen Snr; Inject FF1.96 million of long term loan funds into WRS Europe so that it could meet its financial obligations to the French venture; and Obtain a loan of FF13 million from a French bank over a period of 10 months at a rate of 6% p.a. interest and make that available to fund AFA's development of the French plant. Jeff Verheggen has told us that the issue of Max options to himself and his father did not take place.

6.12	The minutes of the meeting held on 12 December 1996 recorded the interest of both Jeff Verheggen and Verheggen Snr in the French Venture. The minutes recorded: It was noted that this transaction was a Material related party transaction and KPMG of Perth had been commissioned to prepare the required Appraisal Report. This report would ascertain whether the transaction was fair to all shareholders.

6.13	The minutes also recorded "that FF1,600,000 had been loaned to WRSEL [WRS Europe] to meet certain of its obligations on the basis that these funds will be refunded if Max did not proceed with the WRSEL transaction", and that "a further FF360,000 was required to be advanced to WRSEL by 16 December 1996 to meet its additional obligations" [to the company constructing the French plant, CR2I].

6.14	The directors of Max 5 resolved at the meeting "... to enter into a contract of sale with the Verheggens whereby Max acquires 100% of WRSEL in consideration for the issue of 20 million unlisted 31 July 1999 options and the provision of long term loan funds of FF1,960,000 to WRSEL." (The minutes do not record any conditions attaching to the acquisition. The FF1.96 million appears to be the sum of the two loan amounts referred to in the preceding paragraph.)

6.15	In mid-December 1996, Max's directors commissioned KPMG to prepare an independent appraisal report to put to the meeting of shareholders necessary to approve the purchase of WRS Europe and related transactions. However, we understand that the appraisal report was not formally released by KPMG to Max due to a dispute over non-payment of a fee owed by Max to KPMG.

6.16	It appears, from an unsigned copy of an agreement between Jeff Verheggen and a Jean- Claude Fritsch of CR2I (a document attached to McShane's first affidavit), that Max gave an undertaking (apparently signed by Jeff Verheggen on 27 March 1997) to raise FF13 million (A$2.827 million) from a French bank over a period of about 10 months to fund the development of the French WRS plant by CR2I. This obligation did not appear to have been agreed to by the directors of Max. (McShane said in his affidavit that he had not seen the 27 March 1997 document until November 1997.) In the same document Verheggen agreed, in order "...to meet the working capital requirement of the A.F.A. company.." to "procure the Max Resources company to pay the minimum sum of FF3 million."

6.17	Langoulant said in his affidavit evidence that this document was "a summary of many additional discussions and negotiations Jeff Verheggen had with officers of CR2I in the French Project with no conclusive binding effect on Max." In a submission to us Langoulant said that this was not a contractual document to which Max was a party and did not place any funding commitments upon Max. However we note from files in our possession a copy of the first page of a facsimile message of 24 November 1997, addressed to "Tom and Owen", apparently from Langoulant, and sent in response to a message from McShane to Langoulant dated 21 November 1997. McShane had expressed his concerns about funds being sent by Max to France. The author of the 24 November message said "You seem to forget that Max has a contract to buy the French project, subject to shareholder approval, which means we have a [legal] obligation, not to mention a financial reason, for protecting the French project."

6.18	The French Venture involved transactions with or on behalf of a related party of Max. In terms of the Listing Rules of the NZSE (Rule 9.2.1) an issuer should not enter into a material transaction with a related party unless the transaction had been approved by an ordinary resolution of the company. An Appraisal Report by an independent expert has to be provided to members of the issuer at the time they vote on the resolution.

6.19	Max's directors were well aware of this requirement. It was referred to both in an appendix to the Information Memorandum provided to shareholders of Max for their Extraordinary General Meeting on 8 May 1997 (held to approve the change in the Company's principal business), in the 1997 Annual Report, and in the announcement to the NZSE in December 1996.

6.20	In the Information Memorandum it was stated, under the heading "Potential Purchase of Organic Fertiliser Interests St Thois, France" that Max had "agreed to purchase" 100% of the issued capital of WRS Europe. The text referred to the related party nature of the transaction and of the need for an Appraisal Report. It noted that Max was encountering difficulties in completing due diligence and that KPMG could not complete its Appraisal Report. The Memorandum said that it was expected that the meeting of shareholders to approve the transaction would be held in June 1997.

6.21	The 1997 Annual Report referred at page 6 to the St Thois plant. Again reference was made to the need for shareholder approval but no reference was made as to when this would be sought.

6.22	To date Max's involvement with the French Venture has not been approved by the Company's shareholders. This would appear to be a breach of the Listing Rules.

6.23	The NZSE Listing Rules require any transaction needing shareholder approval to be made conditional upon obtaining such approval. Moreover, the Listing Rules state that the transaction shall not be completed until the approval is obtained and, if the approval is not obtained, the public issuer shall terminate its obligations. In this case, Max's shareholders were deprived of the opportunity to vote on the French transaction with the benefit of an independent appraisal report which would have stated, among other things, whether the terms and conditions of the proposed transaction were fair to the remaining shareholders.

6.24	Despite not having obtained shareholder approval, and the transaction with the Verheggens not having been completed, Max forwarded around NZ$1.18 million to the French venture in the form of loans to CR2I on behalf of WRS Europe. In December 1996 Max sent approximately NZ$500,000 to CR2I. Further sums were advanced to the French venture in June 1997 (to CR2I via WRS Europe) and in October 1997, when A$240,000 from the sale of Robregal's interest in Intrepid was forwarded to CR2I.

6.25	Since agreeing to acquire WRS Europe, Max has had difficulty in meeting the financial requirements of the venture.

6.26	At the date of this report, the statutory managers had entered into an agreement to sell Max's fertiliser assets (including the remaining interest in AFA). On the price to be paid by the purchasers, Max's investment of around NZ$1.2 million will not be fully recovered. Conclusions relating to the French Venture

6.27	The Commission considers that there are reasons to conclude that one or more of the directors did not show sufficient regard for: their duties to Max; and their obligation to the NZSE to use their best endeavours to procure Max's compliance with the Listing Rules; and the interests of Max's shareholders; with respect to these transactions involving the French venture. ⁴ Our information suggests that in 1996 WRS Pacific, a company owned by current Max director Briggs, and employees Skidmore and Lunt, had an 87% interest in AFA. This interest involved financial commitments to the venture that WRS Pacific could not meet. Subsequently AFA resolved to increase its issued capital by issuing new shares to WRS Europe, Jeff Verheggen and Verheggen Snr's company, which would result in WRS Europe having an 87% interest in AFA. (We understand this issue of shares did not take place.) Max purchased WRS Pacific by the issue of 5 million Max shares to companies associated with Briggs, and agreed to acquire WRS Europe in exchange for taking over WRS Europe's funding commitments to the French venture and the issue of 20 million options in Max shares to the Verheggens. Return ⁵ The minutes of the meeting noted the interest of Jeff Verheggen and Verheggen Snr in the matter. There is no indication in the minutes that any directors of the Company did not participate in discussion about, or vote on, the resolution approving these terms. However Langoulant and Jeff Verheggen have told us that Jeff Verheggen did not vote on the resolution. Return

Report of the Securities Commission on Aspects of the Affairs of Max Resources Limited

				Background to our report on Max's financial statements
		1.9		During calendar year 1997 Max had four directors, Messrs Michael James Langoulant, Josephus Jeffrey Verheggen ("Jeff Verheggen"), Thomas William Johnson, and Robert Ivan Owen McShane. Langoulant and McShane were also Company Secretaries.
		1.10		Jeff Verheggen and Langoulant live in Perth, Western Australia and were executive directors.
		1.11		Johnson and McShane live in New Zealand and were non-executive directors. They had been first appointed to the Board of the Company in October 1994. They were the members of the Company's Audit Committee.
		1.12		The principal business of Max was originally gold mining. However on 8 May 1997 the shareholders approved a change in the principal business of the Company to that of organic fertiliser processing. While the gold mining activities were concentrated in Western Australia the new business involved investments in the processing of organic fertiliser in India, Sri Lanka, Indonesia, Hong Kong, the United States of America and France.
		1.13		Max's Annual Report and audited financial statements for the year ended 30 June 1997 were signed by Langoulant and Jeff Verheggen as "directors", and described as being "For and on behalf of the Board in accordance with a resolution of Directors this 30th day of October 1997". (Johnson says that he and McShane did not approve the final text of the Annual Report). The financial statements received an unqualified audit report from the Company's auditors, Sinclair & Wood, Chartered Accountants, of Tauranga where the responsible partner was Mr Peter Morris Wood.
		1.14		The Annual General Meeting of Max was held in Auckland on 19 December 1997. Jeff Verheggen chaired the meeting. The financial statements were approved. Non-executive director Johnson advised the meeting that the Annual Report contained an incorrect statement. While it was reported in the Annual Report that the auditor had discussed the results for the year with the Audit Committee, Johnson told the meeting that no such discussion had taken place.
		1.15		At a meeting of all the directors of Max held in Auckland immediately prior to the Annual General Meeting and chaired by McShane, McShane and Johnson, we are informed, attempted to assume executive control of the Company. McShane was shown in the minutes of that meeting as "Executive Chairman" while Johnson signed the minutes as Deputy Chairman. However there is dispute as to whether the transfer of executive responsibility was effective. Langoulant has told us neither he nor Jeff Verheggen approved these minutes.
		1.16		On 4 January 1998 Jeff Verheggen resigned from the board of Max, to be replaced by his father, Mr Josephus Theodorus Herbertus Verheggen ("Verheggen Snr"). Also appointed to the board of Max around this time was Mr Peter Briggs, an Australian businessman. Subsequently another Australian businessman, Mr Edmund Czechowski, was appointed to Max's board.
		1.17		In March 1998 McShane and Johnson, because they had serious concerns about the management of the Company, travelled to Perth. They commissioned the McLernon Group to investigate aspects of the Company's activities. While in Perth they initiated court proceedings in Western Australia for the appointment of a provisional liquidator to Max on the grounds of the Company's insolvency. These proceedings were contested by the Australian directors and were ultimately withdrawn. This action attracted publicity in Australia and New Zealand.
		1.18		On 23 March 1998 the Panel suspended quotation of Max's listed securities. The Panel said it was concerned about the conflicting announcements made to the NZSE by directors of Max. The Panel also said that it could not be confident that Max had complied with the Listing Rules, or that it would comply in the future. The Panel said it had decided to suspend quotation of Max's shares on the basis that suspension was in the best interests of the market.
		1.19		On 1 June 1998 the NZSE was advised that McShane and Johnson had resigned as directors of Max.
		1.20		On 19 June 1998 the NZSE was advised that Langoulant and Verheggen Snr had also resigned as directors of Max. This left Briggs and Czechowski as the only directors of the Company. This meant the Company was not complying with the Listing Rules of the NZSE which required that there be two New Zealand directors.
		1.21		On 31 August 1998 Max was declared subject to statutory management by Order in Council made under section 38 of the Corporations (Investigation and Management) Act 1989.
		1.22		At the date of this report the quotation of Max's securities remains suspended. The statutory managers remain in office and are undertaking a program of controlled sale of the Company's assets.

				Procedure
		1.23		For the purposes of preparing our report we obtained or reviewed a number of documents related to the affairs of Max, including: Affidavit evidence filed in support of, and opposing, a winding up application and motion to appoint a provisional liquidator to the Company, filed in the Federal Court of Australia, Western Australian District, in March 1998 including: affidavits of McShane sworn on 18 March 1998 and 6 April 1998 together with supporting documents (some 260 pages) which included a report of the Company's operations from Horwath, Chartered Accountants, of Perth, ("the Horwath report") requested by McShane and Johnson in their capacity as the Audit Committee of directors of Max; affidavit of Johnson sworn on 18 March 1998; affidavits of Langoulant sworn on 24 March 1998, 30 March 1998, 2 April 1998, 7 April 1998 and 15 April 1998; affidavits of Jeff Verheggen sworn on 24 March 1998 and 2 April 1998; affidavits of Briggs sworn on 24 March 1998 and 2 April 1998; affidavit of Mr Jeffrey Laurence Herbert, chartered accountant, of PBB Ashton Read, Perth, sworn on 1 April 1998, including a report he had prepared on the solvency of Max at the request of Jeff Verheggen and Langoulant for the purposes of the hearing; Sinclair & Wood's audit file relating to the audit of Max's financial statements for the year ended 30 June 1997; papers received under summons relating to an investigation into the affairs of Max carried out for the independent directors, McShane and Johnson, by an Australian private investigator, McLernon Group Limited; papers of the Company held in New Zealand by the statutory managers; written submissions from a number of affected parties in response to versions of the report circulated to affected parties in May, October and November 1999.
		2		EXECUTIVE SUMMARY OF VOLUME 2
		2.1		The following are the key points arising from Volume 2 of our report: There are inherent difficulties for non-resident directors and regulatory authorities when a company is incorporated and listed in one country but operates and is managed in another country. Max is a New Zealand incorporated and listed company with its registered office in Tauranga but its principal place of business in West Leederville, Perth, Western Australia; The two New Zealand directors of the Company were concerned at the direction the Company was taking and attempted to take over its administrative control. Subsequently they instituted court proceedings in Western Australia to wind up the Company, and approached regulatory authorities in Australia and New Zealand; Max entered into certain transactions in October 1997 involving the sale of shares it held in Intrepid Mining Corporation NL ("Intrepid"). The Company's audited financial statements for the year ended 30 June 1997, and a statement to the NZSE, gave a misleading impression concerning the profit earned by Max from the sale of its Intrepid interests; Max suffered a significant loss of wealth following the sale of most of its largest mining asset, its interests in the Norseman Gold Joint Venture ("the Norseman Venture"), to Australasian Gold Mines NL ("AusGM") in exchange for shares in AusGM. The value of the AusGM shares received by Max was close to the book value of the Norseman Venture assets at the time the selling contracts were agreed. However the AusGM shares dropped in value soon after Max acquired them and had fallen significantly by the date of the Annual Report. We do not believe this loss of value was adequately disclosed in the Annual Report or financial statements; Max's investment in the French Venture resulted in funding demands on the Company that it was not able to meet, or met only with difficulty, and involved commitments to provide funding that were not disclosed in the audited financial statements; In its 1997 Annual Report and financial statements Max made certain statements concerning events subsequent to balance date. These statements gave a misleading impression of the effect of those transactions on the Company's financial and liquidity positions and failed to refer to the decline in value of assets acquired and to conditions attached to the transactions, particularly relating to the timing of receipts and payments; Max, like many small companies, had inadequate staff to maintain proper internal controls. In the absence of adequate internal controls the auditor, Mr Peter M Wood of Sinclair & Wood, Tauranga, needed to take a substantive approach to the audit of the Company's financial statements. We do not think he did this to the extent required by auditing standards; Max's internal control procedures leave open to question the reliability of the disclosed financial information concerning the Company's expenses, outstanding creditors and amounts owing to debtors; We believe the audit of Max's financial statements was deficient and was not carried out in accordance with generally accepted auditing standards; Max had an Audit Committee which met by telephone several times a year but had no formal charter, did not meet formally, and did not formally report to the board of the Company until early 1998; The registered office of the Company was at the offices of the company's auditors. We consider this is an inappropriate practice, at least in the case of a listed company with a diversity of public shareholders. This raises questions about the perceived independence of the auditor and puts the auditor at risk of being considered an officer of the company; Contrary to law, most of the Company's principal records were kept in the Perth office rather than at the registered office in New Zealand. This initially inhibited the efforts of the Commission, the Registrar of Companies and other agencies to investigate the Company's affairs. Once appointed the statutory managers gained control of the Company's records.
		2.2		This volume of our report raises questions as to whether any one or more of the directors failed to comply with: duties they owed to the Company; obligations they owed to the NZSE to use their best endeavours to procure the Company's compliance with the relevant Listing Rules; obligations under the laws of New Zealand in relation to financial reporting and related requirements.
		2.3		This volume of our report also raises questions as to whether the auditor of Max failed to comply with: responsibilities as auditor under the Companies Act 1993 and the Financial Reporting Act 1993; obligations as a chartered accountant and member of the Institute of Chartered Accountants of New Zealand.

		3.2		These financial statements indicated a working capital deficiency (current liabilities greater than current assets) for Max of approximately NZ$1million at 30 June 1997, a situation similar to that existing at 30 June 1996.
		3.3		Note 21 to the financial statements disclosed several significant events that had occurred subsequent to balance date. These were: Max had acquired the minority interest in the Norseman Venture1 from Max's existing partner for A$1.1million and then onsold that interest to AusGM in exchange for 3.75 million fully paid shares in AusGM2; the Company had sold half the interest in the Norseman Venture it had held at 30 June 1997 (i.e. excluding the acquisition referred to in paragraph (a)) to AusGM for consideration of 5 million fully paid shares in AusGM2; and Max had conditionally sold the remaining 50% of that interest, also to AusGM, for A$2 million, an amount that was only payable upon a positive feasibility study being completed for the project. The arrangement would lapse if the acquisition was not completed by June 1999; the Max group had sold its holding of Intrepid for a total consideration of A$2.4 million (approximately NZ$2.64 million) which was described in the financial statements as being "... above the 30 June 1997 book value... " and "...having exceeded the original cost of the investment by A$1,000,000".
		3.4		The "Executive Summary", at page 3 of the Annual Report: When discussing the Norseman sale transaction, said: ... This process was commenced in July 1997 with the sale of a portion of our Norseman gold project at a satisfactory sales consideration consistent with the current book value; and After discussing the Intrepid and Norseman transactions, said: During 1998 the sale proceeds from the sale of these resource assets will provider [sic] a minimum of A$2.3 million cash (and possibly up to A$5 million) to the Company for use in developing its fertiliser business.
				Comment on various aspects of Max's June 1997 financial statements *Working capital and wealth effect of events subsequent to balance date*
		3.5		The Annual Report and financial statement disclosure of events subsequent to balance date gave positive information about the Company's working capital and financial position by referring to the profitable sale of mining assets, the acquisition of significant parcels of listed company shares, and to the sale of its Intrepid holdings. In contrast to this: Max's purchase of the minority interest in the Norseman Venture involved immediate payment of A$50,000 deposit with the balance, a future spending commitment of A$1.05 million due on 31 March 1998, that was not disclosed in the notes to the financial statements (although there was a reference in the text of the Annual Report); The value of consideration received for the sale of Max's Norseman Venture interests, being AusGM shares, although "...consistent with the current book value..." of the Norseman assets at the time the two sales transactions were agreed to (late June and late July 1997), had declined in value considerably by the time the Annual Report was finalised on 30 October 1997. For example the first 5.0 million AusGM shares had been issued at A$0.50� ($A2.5 million or NZ$2.75 million) and the second 3.75 million had been issued at the equivalent of nearly A$0.30� per share (A$1.1 million or NZ$1.21 million), making a total "value" of NZ$3.96 million. By 30 October 1997 the value of these 8.75 million shares had declined to A$1.5 million (NZ$1.63 million), or A$0.17� per share. This fact was not recorded in the notes to the financial statements, although there was a statement in the Annual Report that "at current market prices" Max's holding of AusGM shares was worth NZ$2.4 million. Langoulant told us that this value had been established when this section of the Annual Report was finalised, being around 10 October 1997 (when the market price of AusGM shares was around A$0.25� per share). Of the total consideration of A$2.4 million payable to Max for the sale of shares in Intrepid, only A$750,000 had been paid within 30 days of the time of sale, with the balance of A$1.65 million being due on 31 December 1998. The first payment of A$750,000 came from the sale of 5 million shares to Village Lake Pty Limited ("Village Lake"). The outstanding amount owing of A$1.65 million was due from two Hong Kong-based but Bahamas-registered companies, Garland Investments Limited ("Garland") and Wah Fung International Limited ("Wah Fung") and arose from the sale of 11 million fully paid and 10 million contributory shares in Intrepid. The amounts due were interest free.
		3.6		We do not think it was clear from the Annual Report or the financial statements that the value of AusGM shares acquired by Max in exchange for its Norseman assets was, at NZ$1.63 million, considerably less at the date of the Annual Report than the NZ$3.53 million (A$3.21 million) book value of the assets exchanged for them. We think that since the Annual Report had made reference to the value of AusGM shares received at the time of sale being "consistent with book value" the statement in the Annual Report concerning the "current" market value should have been updated to the date of the Report and should have been included a comparison to the value of the Norseman assets.
		3.7		As noted above (see paragraph 3.4) the Executive Summary in the Annual Report referred to the sale proceeds of the mining assets yielding at least A$2.3 million "during 1998". This statement did not mention that most of the cash was not due until 31 December 1998, so would hardly assist the funding of expansion during the year, nor did it mention that the proceeds did not earn any interest meantime.3
		3.8		According to the Horwath report the effect of these post balance date transactions was to worsen the reported working capital deficiency by NZ$387,000 so that the deficiency was close to NZ$1.4 million by December 1997.

				*Sale of shares in Intrepid - market announcement*
		3.9		As we have noted above (see para 3.3) Max's financial statements reported the sale of its Intrepid shares at "above the 30 June 1997 book value..." and "... having exceeded the original cost by A$1,000,000". An announcement to the NZSE was made on similar terms on 14 October 1997. We have several comments.
		3.10		First, a comparison with "book value" is not as useful as a comparison against market value when that book value is an amount determined by the directors. We think a comparison with 30 June 1997 market values would have been more helpful to the market.
		3.11		According to the working papers in Sinclair & Wood's audit file it appears the book value of Max's holdings in Intrepid at 30 June 1997 was NZ$2.51 million. A book "profit" of around NZ$130,000 was apparently derived from the sale. The 30 June 1997 book value was an amount determined by the directors based on 31 December 1996 market values. During the course of the financial year it had been revalued upwards by an amount of some NZ$0.99 million to NZ$2.51 million at 30 June 1997 (A$0.14.5� per share).
		3.12		According to submissions made by Wood (and confirmed by Langoulant), the entry to write up the value of the Intrepid holding by NZ$0.99 million "... was in accordance with the directors' resolution made on 7 January 1997..." when it was decided to revalue the shareholding "...to the market price as at 31 December 1996..." which was A$0.14.5� per share. This value compares to the market price of Intrepid shares at 30 June 1997 of just over A$0.20�. Wood submitted that "although the market price at 30 June 1997 was higher than this value, the value placed on the investment at that date had regard to the subsequent sale of the shares by the company. To carry the shares at a higher value would have been inappropriate given the subsequent sale value."
		3.13		At a price of $A0.20� per share Max's holding of Intrepid shares at 30 June 1997 would have been worth A$3.13 million or NZ$3.443 million (at the same exchange rates used in Max's financial statements), or around NZ$900,000 higher than the value at which the investment had been included in Max's audited financial statements. Had the proceeds from the sale of the Intrepid shares been compared to the 30 June 1997 market value of those shares there would have been a loss reported on the transaction of around NZ$770,000.
		3.14		Secondly, the profit comparison statement treated the consideration to be received by Max from the sale of its Intrepid shares as if it was all due for immediate settlement. The implied profit from the sale took no account of the lengthy delay in settlement of the shares sold to Wah Fung and Garland.
		3.15		Thirdly, it would not be apparent to financial statement readers that Max, despite announcing the sale of its "Intrepid holding" and making a comparison with the "cost" of its holdings, had, after balance date, brought and sold further shares in Intrepid. We noted that: between 3 July 1997 and 13 August 1997 Max had purchased a further 650,000 Intrepid shares at a cost of A$126,476 (average 19.4�); on 13 October 1997 Max had sold most of its Intrepid holdings at A$0.15� per share. However from 14 October 1997 to 28 October 1997 Max had purchased a further 2.1 million Intrepid shares at prices apparently ranging from A$0.24� to A$0.30� per share.
		3.16		Langoulant and Jeff Verheggen were directors of both Max and Intrepid at the time of these transactions.
		3.17		To summarise, while the statements about the Intrepid sale in the financial statements and to the NZSE may have been technically true we think they were misleading. They did not disclose that the amount received or to be received by Max from the sale of Intrepid shares was below the market value at 30 June 1997 and that a substantial part was not due for payment for some considerable time. Moreover the 30 June 1997 book value did not reflect either the cost of the shares to Max or their then market value but was based on a revaluation by directors.4

				*Move into organic fertiliser processing*
		3.18		Max's "other investments" in its 1997 financial statements included a loan of NZ$920,210 to an entity "proposed to become a controlled entity upon shareholder approval.". That entity was WRS Europe Limited ("WRS Europe"), a French company owned by Jeff Verheggen and Verheggen Snr that had agreed to acquire an 87% interest in another French company, Amendments et Fertilisants D'Amorique SA ("AFA") which was developing an organic fertiliser production factory at St Thois, France.
		3.19		The Company's records disclosed that as early as 27 November 1996 the directors of Max had decided to change the direction of the Company's business to that of processing organic fertiliser ("Waste Recovery Systems" or "WRS"). Minutes of a telephone conference meeting of the four Max directors on that date recorded that: Directors had been unable to complete acceptable negotiations to acquire Asian WRS plants; A WRS plant in Ohio, United States of America was available for purchase for US$700,000 but a non-refundable deposit of US$100,000 was required within the next week; Max had the opportunity to buy directly into the French WRS plant ("the French Venture"), with an issue of options in Max to be made to Max's then director Jeff Verheggen and his father Verheggen Snr in consideration for their interest in WRS Europe5, but that A$460,000 needed to be lodged with AFA's bankers within the next week; Further short term borrowings or asset sales would be needed to finance these purchases.
		3.20		Shareholder approval for a change in principal business is a requirement of the Listing Rules of the NZSE. We have already noted (see para 1.12 above) that Max obtained shareholder approval at an Extraordinary General Meeting on 8 May 1997 to change its principal business from mining to the processing of organic fertiliser.
		3.21		A teleconference meeting of the four Max directors was held on 12 December 1996. The interests of both Jeff Verheggen and Verheggen Snr in the French Venture were noted. The minutes recorded: It was noted that this transaction was a Material related party transaction and KPMG of Perth had been commissioned to prepare the required Appraisal Report. This report would ascertain whether the transaction was fair to all shareholders.
				Footnote(s): The Norseman Gold Joint Venture was Max's largest mining asset, with a book value in Max's financial statements of some NZ$4.6 million (A$4.22 million) at 30 June 1997. Although not mentioned in the Notes to the financial statements, earlier in the Annual Report it is disclosed that the AusGM shares acquired by Max had to be held, under Australian Stock Exchange Rules, in escrow until September 1998. This meant they could not be traded during that period. Langoulant has told us that the Company was given to understand that it could receive the A$2m due from AusGM early in 1998 once a positive feasibility study had been obtained. Max's accounting policy for investments stated "Except where revalued by directors, Investments are stated at the lower of cost or net realisable value". Max's policy was not to state investments at "market value". Our information suggests that in 1996 WRS Pacific Limited ("WRS Pacific"), a company owned by current Max director Briggs, and employees Mr Robert Skidmore and Mr Trevor Lunt, had an 87% interest in AFA. This interest involved financial commitments to the venture that WRS Pacific could not meet. Subsequently AFA decided to increase its issued capital by issuing new shares to WRS Europe, Jeff Verheggen and Verheggen Snr's company, which would result in WRS Europe having an 87% interest in AFA, although we understand the issue of shares to WRS Europe was not completed. Max purchased WRS Pacific by the issue of 5 million Max shares to companies associated with Briggs, and agreed to acquire WRS Europe in exchange for taking over WRS Europe's funding commitments to the French venture and the issue of 20 million options in Max shares to the Verheggens.

				*Recording and approving company expenditure and borrowing*
		3.34		Note 14 to Max's June 1997 financial statements disclosed creditors and accruals for Max of NZ$479,000 and amounts owed to directors of NZ$153,000.
		3.35		The Horwath report included a review of loans made to the Company by its directors since balance date. It recorded that the amounts owed by Max to its directors and their associated companies had risen to NZ$1,212,329 by 31 December 1997, an increase of just over NZ$1 million from the position disclosed at balance date. While Horwath was able to substantiate some of this increase its report recorded that many items required follow up (with Langoulant).
		3.36		This escalation in the amounts owed by Max to its directors would seem to be consistent with a company that was having difficulty in meeting its day to day financial obligations. However there may also be other reasons. Horwath said in its report: Lack of documentation for certain director related transactions In a number of instances Mr Mike Langoulant authorised reimbursements for his own expenses without providing full or adequate documentation to support the claim. An example of this can be seen in ... where Mr Langoulant has claimed for all of his overseas telephone calls on his private phone. The documentation he has provided is the summary of his phone bill cost and not an itemised list of all the phone calls made, the duration of these, the destination of the phone call and the date and time of these calls. This does not permit an independent assessment of the validity of such claims. Langoulant describes this as a "petty" comment and said that when he and Jeff Verheggen were travelling on Company business they "... did not claim the full extent of all sundry travel costs they incurred."
		3.37		Horwath also looked at Max's expenditure control systems. Its review revealed: Many invoices in the unpaid invoices file had not been included in the creditors listing. A number of amounts were estimated or rounded down, when there was a specified amount payable printed on the invoice. Many invoices which were overdue by several months, including a few which were at debt collection agencies. In his affidavit of 2 April 1998 Langoulant said that he "...disputed Horwath's statement that many unpaid invoices were not included in the creditors listing. There may have been some accidentally omitted or for which details were subsequently received. ..."
		3.38		Horwath commented generally on Max's accounting systems. Its report said: In conducting our review we have encountered significant difficulties in obtaining documentary evidence for transactions made by Max, including payments, receipts and accounting journal entries. We do not believe that the system of control and audit trail of transactions is adequate. We have specifically noted the following issues, together with our recommendations: there were no cheque requisitions attached to any of the payments made; the filing of payments was not systematic; there was no indication that invoices had been paid; there was no authorisation for payment on any of the invoices reviewed. The risk of not having a cheque requisition attached to paid invoices is that: payments could be made more than once for the same transaction; payments could be made that are not properly authorised." Horwath recommended introduction of a cheque requisition template with appropriate space for verification and authorisation of payments to be made. Langoulant said this was unnecessary because of the small number of cheques issued by the Company.
		3.39		Max's auditor, Wood, in a letter dated 18 January 1996 to Johnson (as a member of Max's Audit Committee), and written, we have been told by Johnson, at the request of the Audit Committee, said: Further to our recent discussion as part of the audit review of the company for the year ended June 1995 we set out below comments made by us. The records of the company for the year were well presented to us and were in order in all material matters. Due to the nature of the administration of the company it is impossible to provide adequate internal controls in respect of the cash affairs of the company. Therefore the directors play an additional role as part of the internal control procedures. In this regard we recommend - A summary of all deposits made into the company bank accounts be presented to each directors meeting. The directors will be aware what receipts of both income or capital nature that the company would be expecting to receive and can therefore monitor these expectations against the report. That a listing of all cheques issued be presented to each directors meeting covering items paid out since the previous report. This should include the name of the payee and the cheque amount. It could simply be a copy of the cashbook. This would give the directors the opportunity to review in detail the payments made by the company between directors meetings and question individual items.
		3.40		We are advised that Johnson and McShane, in response to Wood's recommendations, followed up the question of internal controls with Langoulant. Johnson has told us that Langoulant provided the Audit Committee with information confirming that various improvements had been made. Notes Johnson made of a directors' meeting of 3 December 1997 indicate various administrative matters were discussed. Langoulant says he has no recollection of Johnson and McShane making any enquiries concerning internal controls.
		3.41		However, on the basis of Horwath's comments, supported by Wood's letter of January 1996, and despite the assurances apparently given by Langoulant to the Audit Committee and the comments of Langoulant recorded in paragraphs 3.36 to 3.40, we believe there are questions about: the reliability of the Company's reported expenditure and amount of outstanding creditors; the reliability of amounts reported as being owed by Max to its directors and companies associated with them.

				The audit of Max's financial statements
		4.1		Max's financial statements were audited by Sinclair & Wood, Chartered Accountants, of Tauranga. The audit partner responsible was Peter Morris Wood.
		4.2		Max's financial statements for the year ended 30 June 1997 received an unqualified audit report. The financial statements disclosed that the cost of the audit for the year had been $3,762.
		4.3		In conducting their audit Sinclair & Wood were obliged to comply with, and said in their audit report that they had complied with, generally accepted auditing standards.
		4.4		Auditing Standard 6 B Planning, issued by the Institute of Chartered Accountants of New Zealand's predecessor, the New Zealand Society of Accountants, in March 1994 says: The auditor's work should be planned so as to enable an effective audit to be conducted in an efficient and timely manner. Plans should be based on a knowledge of the client's business and should be further developed and revised as necessary during the course of the audit.
		4.5		In developing an overall plan paragraph 6.9 of the standard says: The auditor should consider the following matters in developing the overall plan for the expected scope and conduct of the audit: the terms of the engagement and any statutory responsibilities; conditions requiring special attention, such as the possibility of material error or fraud; the degree of reliance expected to be able to be placed on accounting systems and internal control; the nature and extent of audit evidence to be obtained.
		4.6		In relation to accounting systems and internal control Auditing Standard No 7 B Accounting Systems and Internal Control, says: The auditor should gain a preliminary understanding of the principal features of the accounting system and related internal controls to assist in determining the nature, timing and extent of audit procedures. The auditor should study, evaluate and test, as appropriate, the operation of those internal controls upon which reliance is to be placed. Where the auditor concludes that reliance can be placed on certain internal controls, substantive procedures would normally be less extensive than would otherwise be required and may also differ as to their nature and timing.
		4.7		Max was a publicly listed company and the audit approach should have reflected that fact.
		4.8		From our review of Sinclair & Wood's audit file, and from discussions with Wood, we observed: There appeared to be a lack of up-front planning of the audit. We would have expected to see documentation on file in the first half of the financial year discussing the approach to be taken in the audit. This would have referred to the client's business, changes in that business, and changes in the environment in which the business operates. It would have noted: that Max had a history of trading losses; that there were liquidity concerns; that operating cash flows were negative; that a number of the Company's creditors had taken, or had threatened to take, action to enforce repayment of amounts due; that Max had changed its business direction and had acquired new ventures. The strategy paper would have discussed how much reliance could be placed on internal controls and the extent to which a substantive audit would have to be undertaken. There would have been an assessment of the level of materiality to be applied in undertaking the audit. There was no such documentation 7. The audit programs were not specific to the client. They appeared to be based on a standard approach for a small business. Wood has told us he believed his approach was fit for the purpose. We think there was insufficient recognition that Max was a New Zealand listed company operating outside New Zealand. Wood did not seem to obtain adequate audit evidence. There does not appear to have been any review of the originals of the Company's books and records. Most information was faxed to Wood from Western Australia. This included vouchers for payments and the cashbook. In respect of major transactions Wood appears to have relied on copies of directors' resolutions and, in some cases, copies of key letters and principal contracts. As we understand Wood's practices he did not review complete files relating to particular transactions. The file did not include audit evidence for all the asset revaluations that had been undertaken at balance date. Wood did not visit the offices of the Company in Perth for the purposes of conduct of the audit 8; Wood told us he audited several mining companies operating in Perth and that where those companies carried out real mining activities there (as compared with paper transactions) he would get a Perth accounting firm to carry out audit responsibilities. He had not done this for Max; There appeared to be no engagement letter on the audit file. Wood has told us that, while sending an engagement letter represents best practice, it is not a requirement of auditing standards. Wood considers that the purpose of an engagement letter was substantively met by the terms of the representation letter 9 received from Max on 30 October 1997; The audit report is dated 30 October 1997 but did not appear to have been signed until at least 20 November 1997. Wood says it is common practice for there to be short gaps between the release date of the audit report and the date it is signed; There are no financial statements on the audit file for Max's subsidiary companies, just a consolidation workpaper. Wood says he was not engaged to undertake statutory audits of the subsidiaries; Wood did not review the substantial security holder disclosure in the Annual Report to ensure consistency with any published information and his audit report excluded reference to this information. He did not know where the Company's file of substantial security holder notices had been kept, assuming it to be in Perth.
		4.9		We have already noted (see para 3.32) that Sinclair & Wood's audit report was not qualified for the Company's non-compliance with its obligations to provide a comparison with previously published prospective financial information.
		4.10		As also noted earlier (see para 3.39), in January 1996 Wood had written to the Company's Audit Committee pointing out to them the impossibility of providing adequate internal controls in respect of the cash affairs of the Company because of the nature of its administration. Wood had recommended implementation of some steps that would have improved the directors' control over the day to day operations of the Company. Wood's audit approach for dealing with these internal control problems should have been outlined in his audit strategy document. However there was no such document.
		4.11		Because of the size and nature of the Company's operations it was difficult to maintain effective internal controls. In our view this required more extensive substantive year-end audit procedures than those carried out by Sinclair & Wood.
		4.12		We do not believe it was possible to carry out the audit of Max to the standard required by generally accepted auditing standards without the auditor examining at first hand the records of the Company.
		4.13		Max's registered office is at the offices of Sinclair & Wood in Tauranga. While there is no prohibition on a company having its registered office at the offices of its auditor, we think, for two reasons, this is undesirable, particularly in the case of a listed company with a diversity of shareholders. First, the independence of the auditor is crucial. We think the perception of independence is likely to be compromised when the company has its offices at the auditor's office. Secondly, there is a risk that in such a situation the auditor will be considered to be an officer of the company. Having said this we note that we have seen no evidence to suggest that Wood did not act independently in relation to the audit of Max.

		the Act		Securities Act 1978
		AFA		Amendments et Fertilisants D'Amorique SA, French company developing fertiliser plant in France
		AG-8		Auditing Guideline 8, "Other Information in Documents Containing Audited Financial Statements" issued by the New Zealand Society of Accountants in March 1986
		AusGM		Australasian Gold Mines NL, Australian gold mining company
		the Amendment Act		Securities Amendment Act 1988
		ASX		Australian Stock Exchange
		Briggs		Peter Briggs, director of Max and of WRS Pacific
		the Commission		the Securities Commission
		the Company		Max Resources Limited (In Statutory Management)
		CR2I		Conception Realisations Industrielles et Immobilieres, French company constructing fertiliser plant for AFA
		Czechowski		Edmund Czechowski, director of Max
		the French Venture		an organic fertiliser processing venture in France in which Max was involved.
		FRS-9		"Information To Be Disclosed In Financial Statements", financial reporting standard No 9 issued by the Institute of Chartered Accountants of New Zealand in February 1995 and revised in May 1996
		FRS-29		"Prospective Financial Information", financial reporting standard No 29 issued by the Institute of Chartered Accountants of New Zealand in April 1996
		Garland		Garland Investments Limited, Hong Kong based, Bahamas registered investment company
		Herbert		Jeffrey Laurence Herbert, chartered accountant, partner of PBB Ashton Read, Perth, prepared a report on the financial condition of Max for Langoulant and Jeff Verheggen
		Horwath Report		Independent review of the affairs of Max by Horwath, Chartered Accountants, of Perth, commissioned by McShane and Johnson
		Intrepid		Intrepid Mining NL, Australian incorporated mining company listed on the ASX, renamed on 23 March 1998 to "Cobra Resources NL".
		Jeff Verheggen		Josephus Jeffery Verheggen, former director of Max
		Johnson		Thomas William Johnson, former director of Max
		KPMG		KPMG Corporate Pty Limited, Perth, chartered accounting firm retained to prepare appraisal report on Max's entry into French Venture
		Langoulant		Michael James Langoulant, former executive director of Max
		Lunt		Trevor Lunt, former employee of Max and WRS Pacific
		McLernon Group		Australian private investigation firm, commissioned by McShane and Johnson in March 1998 to investigate Max's affairs
		McShane		Robert Ivan Owen McShane, former director of Max
		Max		Max Resources Limited (In Statutory Management), New Zealand incorporated listed company
		the Norseman Venture		Norseman Gold Joint Venture, significant mining investment for Max
		NZSE		New Zealand Stock Exchange
		Panel		Market Surveillance Panel of the New Zealand Stock Exchange
		Robregal		Robregal Investments Limited, NZ incorporated wholly owned subsidiary of Max
		Skidmore		Robert Skidmore, employee of WRS Pacific and of Max
		Statutory managers		John Anthony Waller and Colin Thomas McCloy, partners of PricewaterhouseCoopers, chartered accountants, appointed on 31 August 1998 as statutory managers to Max by Order in Council under section 38 of the Corporations (Investigation and Management) Act 1989
		Verheggen Snr		Josephus Theodorus Herbertus Verheggen, former director of Max, father of Jeff Verheggen
		Village Lake		Village Lake Pty Limited, Australian company owned by Sophie and Peter Papavasilliou
		Wah Fung		Wah Fung International Limited, Hong Kong based, Bahamas registered investment company
		Wood		Peter Morris Wood, partner, Sinclair & Wood, Chartered Accountants, Tauranga, auditor of Max
		WRS		Waste Recovery Systems, the business of processing organic fertiliser
		WRS Europe		WRS Europe Limited, French registered company, formerly owned by Verheggen family, holds 87% of AFA after share issue by AFA in August 1996, sold in November 1996 to Max
		WRS Pacific		WRS Pacific Pty Limited, company formerly owned by Briggs, Lunt, and Skidmore which held 87% interest in AFA until AFA increased its capital in August 1996 by issue of shares to WRS Europe

				*Comparison with published prospective financial information*
		3.26		For the purposes of the Extraordinary General Meeting held on 8 May 1997 to approve the change in the Company's principal business (see para 1.12 above) an Information Memorandum, which included detailed financial forecasts for the group, was provided to shareholders.
		3.27		Note 19 to Max's June 1997 published financial statements stated: The Company published prospective financial statements in its Information Memorandum to shareholders dated 18 April 1997. The assumptions contained in those prospective financial statements are not consistent with the basis of the preparation of these financial statements and it is not considered appropriate to make a comparison.
		3.28		FRS-29 "Prospective Financial Information" issued by the Institute of Chartered Accountants of New Zealand in April 1996 requires (para 5.9), among other things, that prospective financial information, where covered by the standard 6, shall be prepared in accordance with the accounting policies expected in the future for reporting historically orientated general purpose financial reports. In addition, if a "forecast" were to be disclosed, it would need to be "prepared on the basis of assumptions as to future events that the governing body reasonably expects to occur associated with the actions the governing body reasonably expects to take as at the date that the information is prepared (best estimate assumptions)."
		3.29		Para 5.4 of FRS-9 "Information to be disclosed in financial statements" states that: Where an entity has published prospective financial information (in accordance with FRS-29 ...) for the period of the financial report, the entity shall present a comparison of the prospective financial information previously published with the actual financial results being reported. Explanations for major variations shall be given.
		3.30		The Company does not appear to have complied with FRS-9 because it did not publish a comparison between the actual results and the prospective financial information, nor did it explain any major variances.
		3.31		A memorandum dated 29 October 1997 from Wood to Max included: We discussed briefly the requirement to publish forecast figures as a comparison - this is in accordance with FRS-9 paragraph 5.4 enclosed. Reviewing the forecasts it can be seen that they bear no resemblance to the actual figures at May 1997 because of the different method of consolidation. It may be appropriate for a note to the financial statements giving a brief explanation as to why these comparisons are not given.
		3.32		The audit report was not qualified in respect of this non-compliance with an approved financial reporting standard. While the true and fair view may not have been affected, we think a qualification should have been considered.
		3.33		Wood submitted that, because the original forecast assumed certain companies would be consolidated but were in fact equity accounted as a result of a different acquisition strategy, he considered compliance with FRS-9 may have been misleading. For this reason a note was inserted in the financial statements explaining why no reconciliation was provided. In Wood's view the true and fair view was not impaired and no qualification was required.

		3.43		The Horwath analysis suggests that the net value of Max had declined by some NZ$6 million in the six months to December 1997 from its reported position of NZ$12.79 million at 30 June 1997 to NZ$6.4 million. An analysis by PPB Ashton Read, referred to in Herbert's affidavit and prepared for Langoulant and Verheggen, estimated that Max had equity of A$5.5 million by 31 March 1998, although on a realisable basis they estimated this figure would have been A$1.6 million.
		3.44		Once the statutory managers had taken control of the Company they undertook a comprehensive review of Max's financial position. In doing so they had access to the Company's financial records held in the Perth office, interviewed the directors of the Company, and inspected all important assets. On 1 March 1999 they released a report to shareholders. The statutory managers' view of the financial standing of Max was that the "realistic value of Max's assets could be less than the Group's liabilities" and that "there may be little if any surplus available for shareholders after the sale process." They are now undertaking a controlled sale of all assets.
				Footnote(s): FRS-29 generally covers prospective financial information in prospectuses and other offer documents, also annual and other reports provided to shareholders, regulatory bodies and other interested parties

				Approval of the Company's 1997 Annual Report
		4.14		As we have already noted (see para 1.14 above) at the Company's Annual General Meeting in December 1997 Johnson drew the shareholders' attention to an allegedly incorrect statement in the Annual Report concerning the Audit Committee.
		4.15		That statement, on page 10 of the Annual Report, said: The Company has a formally constituted Audit Committee comprising Messrs McShane and Johnson which has discussed the results of the audit with the auditor.
		4.16		A letter dated 24 November 1997 from Bate Hallett, Barristers and Solicitors of Hastings (acting for Johnson and McShane) to Sinclair & Wood, said: Of concern to both Messrs McShane and Johnson is the statement contained in the Directors report to the company accounts as at 30 June 1997 that they discussed the result of the audit of the company's financial accounts with you as auditor. This statement is incorrect as no such discussions took place. Mr Johnson and Mr McShane have recorded their objection to the incorporation of that statement in the Directors report with the other two directors and wish to draw your attention to their concerns.10
		4.17		Sinclair & Wood's audit file showed that Wood received several drafts of the final text of the Annual Report prior to its completion. All these versions had included the offending words. On a draft dated 29 October 1997 Wood had actually corrected the preceding paragraph of the statement but had not amended the complained of words.
		4.18		Wood acknowledged to us that he had seen the text of the Annual Report prior to its completion. He also acknowledged that there had been no discussion with the Audit Committee about the Company's results.
		4.19		Auditing Guideline 8 ("AG-8") Other Information in Documents Containing Audited Financial Statements, issued by the New Zealand Society of Accountants in March 1986, was applicable in 1997. AG-8 deals with the obligations of the auditor to review information contained in a company's annual report or similar document but on which the auditor is not legally obliged to specifically report.
		4.20		In relation to a "Material Misstatement of Fact" AG-8 says: If on reading other information the auditor becomes aware that the other information, although not inconsistent with the financial statements, nevertheless appears to include a material misstatement of fact, the auditor should discuss the matter with the client. When discussing the matter with the client, the auditor should consider personal competence to evaluate the validity of the other information or management's responses to the enquiries and that there may be valid differences of judgement or opinion. If after discussion with the client the auditor still believes there is a basis for concern as to the validity of the other information, the auditor should request the client to consult with some other party, such as the entity's legal counsel and the auditor should consider the opinion received. If the auditor concludes that there exists a material misstatement of fact which the client refuses to correct, the auditor should consider such steps as notifying the client in writing of the concern regarding the other information and obtaining legal advice as to further appropriate action.
		4.21		We are not aware that Wood had any discussions with the directors of Max concerning this misstatement. While we recognise that the primary responsibility for statements in the Annual Report lies with the directors, we think Wood should have asked for the erroneous statement in the Annual Report concerning discussions he was purported to have had with the Audit Committee to be corrected. He did not do so.11

				The Audit Committee
		4.22		Wood advised that as far as he was aware the Audit Committee of Max had no charter and had never formally met. There are no minutes of any meetings of the Audit Committee.
		4.23		Johnson has told us that the Audit Committee met by telephone several times a year and that notes of discussions were provided to the Company. The Audit Committee does not appear to have reported formally to the board of Max before early 1998. Langoulant says that the Company's office in Perth never received any notes of these meetings.
		4.24		Wood said that he had spoken to Johnson and McShane after the conclusion of the 1997 audit and had encouraged them to become properly constituted with a specific role and functions. Wood said he had sent them material about the operation of Audit Committees although there were no copies on Wood's audit file and Johnson has no recollection of receiving any such material.
		4.25		We would have expected the Audit Committee's activities to have been more formally recognised by the Company. Shareholders could reasonably have had higher expectations of the Committee than actually eventuated.12
		4.26		We note, however, that there are wider questions of corporate governance. We also note that efforts were made by the then non-executive directors, McShane and Johnson, from the latter part of 1997, in relation to these wider questions.

				Referral
		4.27		We are referring this report to the Registrar of Companies, the Institute of Chartered Accountants of New Zealand and the Institute of Directors of New Zealand.
		4.28		We are aware that the Institute of Chartered Accountants has already considered some of the matters raised in this report.
		4.29		We invite the Institute of Chartered Accountants to review its findings in the light of the matters contained in our report.
				Footnote(s): Wood, through his legal advisers, acknowledges that he should have better documented his audit and planning. However Wood submits that he did plan the audit adequately. He says this is evidenced by the tests he undertook as part of the audit. Wood concedes that accepting photocopies and faxes as audit evidence will not always be appropriate, particularly if there is evidence of fraud. However Wood says he was unaware of any indications of fraud or evidence to suggest that the audit evidence had been falsified. In Wood's view no harm has come from his reliance on accepting copies of documents. A representation letter is a letter from the Company's board and management to the auditor outlining their responsibilities in relation to the accounting records and financial statements. Langoulant has told us that McShane and Johnson saw several drafts of the Annual Report containing the offending words but had not mentioned, during discussions on the Report, that the statement was incorrect. Johnson has told us that he and McShane did not approve the final form of the Annual Report. Wood notes that the Annual Report was adopted at the Annual General Meeting even though Johnson had raised his concerns about the misstatement about the results having been discussed with the Audit Committee. Wood considered he could rely on this matter being brought to the attention of shareholders by Johnson since Johnson had told him he would be raising the matter. Wood considers that no harm or loss flowed from this misstatement. The Institute of Directors of New Zealand issued a statement on 2 October 1996 on "Audit Committees - Best Practice for New Zealand Directors." The Introduction says "An audit committee is a committee of the board whose principal function is to assist the board in producing accurate financial statements in compliance with all applicable legal requirements and accounting standards. In fulfilling this role audit committees should be expected to: oversee, review and enhance the company's external financial reporting procedures; and monitor and enhance the company's internal financial systems and controls." The statement goes on to detail the expectations of an audit committee in terms of establishment, terms of reference, composition, meetings, and access to records and personnel

4	ISSUES CONSIDERED IN VOLUME 1

4.1	As noted in paragraph 3.3, the Commission has considered the following issues in preparing this volume of the report: Was there significant non-compliance with the requirements of Part II of the Amendment Act in respect of the disclosure of relevant interests in Max's listed securities? In particular, was there significant non-compliance with these requirements by any of the directors of Max, or any persons associated with them? Did Max's directors, in procuring Max to enter into certain transactions in 1996 and 1997, have proper regard to their duties to the Company and the interests of Max's shareholders and creditors, in particular: the duty to act in good faith and in what they believe to be the best interests of the Company; and the duty to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances?

		1		INTRODUCTION
				Scope and purpose of our report
		1.1		Max Resources Limited (In Statutory Management) ("Max", or "the Company") is a public listed company incorporated in New Zealand on 8 October 1987 with its registered office at Tauranga. Max is also registered as an overseas company in Australia under the same name and, until recently, had its principal operating office in West Leederville, Perth, Western Australia.
		1.2		On 23 March 1998, the Market Surveillance Panel ("Panel") of the New Zealand Stock Exchange ("NZSE") suspended the quotation of Max's listed securities.
		1.3		On 31 August 1998, by an Order in Council pursuant to section 38 of the Corporations (Investigation and Management) Act 1989, on the recommendation of the Securities Commission ("Commission"), Max was declared subject to statutory management with effect from that date.
		1.4		It is one of the Commission's functions under section 10 (c) of the Securities Act 1978 ("Act") to "keep under review practices relating to securities, and to comment thereon to any appropriate body". The purpose of this report is to publish, for the benefit of the shareholders of Max and any other appropriate body, the Commission's comments on aspects of the affairs of Max during the period 1996 to early 1998 and subsequent related events.
		1.5		The report contains the Commission's observations on aspects of Max's affairs. The report has been based on documents made available to the Commission and on submissions from parties to whom consultative draft reports were distributed for comment. The Commission took careful account of all information and comments received.
		1.6		The report is prepared in two volumes - Volume 1 - Substantial Security Holder Disclosure and Directors' Conduct in Transactions of the Company Volume 2 - Financial Statements. This is Volume 2 of the report. Volume 1 of the report provides greater detail of many of the transactions referred to in this volume.
		1.7		The report has been prepared by a quorum of Members of the Commission comprising: Mr E H Abernethy, Chairman Mr F R S Clouston, Member Ms E M Hickey, Member.
		1.8		When referring to persons in our report we use the customary honorific the first time a person's name is mentioned. Subsequently we may use the surname only. No disrespect is intended by this practice.

				Summary of reported financial position
		3.1		Max's audited consolidated financial statements for the year ended 30 June 1997 disclosed the following financial position of the Company and its subsidiaries: Shareholders' Equity Share capital $10,602,000 Reserves 8,255,000 Accumulated losses (6,063,000) Total shareholders' equity $12,794,000 Current Assets $279,000 Fixed Assets $2,267,000 Other Long Term Assets $4,639,000 Investments $6,867,000 TOTAL ASSETS $14,052,000 Current Liabilities $1,258,000 NET ASSETS $12,794,000

		3.23		According to the Horwath report the post balance-date payments included a payment of NZ$240,000 made to WRS Europe on 21 October 1997. Horwath said that, as the payment had been made before the Annual Report had been signed, it should have been disclosed in the financial statements. Had reference to the payment been made in Max's financial statements it would have alerted shareholders that the Company had been continuing to fund obligations in relation to the French Venture after balance date.
		3.24		No reference was made in the text of the Annual Report to any obligations on the part of Max to finance the building of the plant at St Thois. Note 16 to the financial statements, under the heading "Expenditure Commitments" says that the Company had no expenditure commitments other than an agreement to advance up to a further US$300,000 in relation to the Indonesian WRS operation. In Volume 1 of our Report we comment at some length on what appear to be commitments on the part of Max to fund the French Venture (see section headed "The French Venture" in section 6 of Volume 1).
		3.25		The failure to refer in the financial statements to Max's apparent obligations to provide significant further funding for the French Venture may be considered a material omission, particularly given the Company's precarious cash position.

				Consolidated statement of financial position for Max at 31 December 1997
		3.42		As part of their review Horwath compiled a balance sheet for Max at 31 December 1997, taking into account a number of adjustments arising as a result of their enquiries. In summary form this revised statement showed: Total Current Assets $2,026,000 Investments Shares and options $352,000 Other (mostly WRS interests) $4,727,000 Other non-current assets $2,215,000 TOTAL ASSETS $9,320,000 Total Current Liabilities $2,930,000 NET ASSETS (EQUITY) $6,390,000 Notes: Max's audited financial statements for the year ended 30 June 1997 had disclosed shareholders' equity of $12.79 million. Horwath excluded all Max's interests in Norseman but included Max's holding of 9.409 million AusGM shares at zero value because that company was under administration and quotation of its shares had been suspended. However AusGM shares were reinstated to Official Quotation on 29 June 1998 and have since traded at around A$0.3� per share. At that value Max's holdings would be worth around NZ$312,000 and its net equity around NZ$6.7 million. Recent trading has been at around A$0.8� per share, giving the holding a value of A$0.8 million.

		5.1		There are a number of provisions in the Companies Act 1993 and the Securities Amendment Act 1988 which impose obligations on New Zealand registered companies to maintain various records.
		5.2		Examples of these provisions include: section 189 of the Companies Act obliges a company to keep at its registered office: the constitution of the company; minutes of all meetings and resolutions of shareholders within the last seven years; an interests register; minutes of all meetings and resolutions of directors and directors' committees within the last seven years; certificates given by directors under the Companies Act within the last seven years; the full names and addresses of the current directors; copies of all written communications to all shareholders or all holders of the same class of shares during the last seven years, including annual reports; copies of all financial statements and group financial statements for the last seven years; the accounting records of the company for the current year and for the last seven completed accounting periods; the share register. Under section 195 of that Act a company need not keep its accounting records in New Zealand. However certain records must be sent to New Zealand and notice of the place where the accounting records are kept must be given to the Registrar of Companies. Section 189(3) of the Companies Act 1993 allows companies to keep the records required to be kept at the registered office (other than the share register) to be kept at another place in New Zealand provided the Registrar of Companies is notified. Under section 25 of the Securities Amendment Act 1988 every public issuer is obliged to maintain a file of all notices given to it under the sections of that Act requiring notification of substantial security holders and of changes in their relevant interests. This file has to be kept in New Zealand either at the company's registered office, the office of the issuer's share registrar, or the principal place of business of the issuer.
		5.3		The Company's registered office is at the offices of Sinclair & Wood, Tauranga. While that firm kept a copy of the Company's constitution on its audit files, it did not appear to keep any of the other records or files required by the Companies Act and the Securities Amendment Act.
		5.4		As far as we know Max did not advise the Registrar of Companies that the records it was required to keep in New Zealand were kept at a location other than its registered office.
		5.5		A number of the powers available to the Registrar of Companies and the Commission are rendered ineffectual when a company does not retain its primary records within the New Zealand jurisdiction.
		5.6		Langoulant and McShane were joint Company Secretaries.
				Referral
		5.7		We are referring this matter to the Registrar of Companies.

New Zealand Securities Commission

Report of the Securities Commission on aspects of the affairs of Max Resources Limited (in statutory management) volume 1 and 2 [2000] NZSecCom 1 (18 January 2000)