321. HFL has also provided Axis with a revolving credit (RC) facility in order to fund its general working capital requirements. Two such facilities were combined in a new facility on 21 December 2007. Out of the total facility amount of $22.0m an amount of $12.6m was drawn at 19 August 2008. Interest of 17% p.a. is being capitalised on the balance. Axis has ultimately received proceeds of $4.0m of HFL dividends in February/March 2008 and applied a portion of the proceeds from the sale of 5 properties ($8.5m) in order to partly repay the facility. The facility matures on 30 December 2008.

Distributions

322. HFL has historically paid dividends to its immediate shareholders, HCL and HFSL. Total dividends paid over the four year period FY05 to FY08 amounted to $136.6m. Reported profits after tax over the same period were $131.6m.

323. Until February 2008 HFL applied a dividend policy whereby $2m was distributed each month. This policy was suspended with effect from March 2008, however, dividends have continued to be declared on a month by month basis since then until June 2008, when the last dividends were declared and paid.

324. The following distributions totalling $45.5m were made by HFL in the year ending 30 June 2008:

$2.0m ($1.1m to HCL and $0.9m to HFSL) in each of the following months: July 2007 to October 2007 and December 2007 to May 2008. An additional $2m dividend in February 2008 and March 2008 were applied towards partial repayment of the Axis RC facility. The dividends in April and May 2008 were declared conditional on the payments being applied to reduce related party exposures.

$10.0m dividend in September 2007, which was applied to reduce the related party loan balance to Axis.

$8.0m special dividend in October 2007, with $4.2m paid to HCL and $3.8m paid to HFSL, also conditional on the dividends being applied to reduce related party exposures.

$5.5m in June 2008 to HCL and HFSL split in equal amounts. We understand these dividends were used to fund the acquisition of certain properties from HFP Investments.

325. The minutes of the Board meetings confirm that all distributions during the period reviewed were supported by consideration of solvency and a formal board solvency certificate was prepared.

326. We understand that all HFL dividends ($45.5m) were passed up to Hanover Group Limited and, in turn, to Hanover Group Holdings Limited (HGHL). Of the total dividends of $45.5m, HGHL then made the following payments (refer funds flow summary below):

$23.5m (in total) was paid out to Hotchin Investments Limited (a company controlled by Mark Hotchin), Forefront Investments Limited and Cullen Investments Limited (both companies controlled by Eric Watson). Of the $23.5m paid to these parties, $9.5m was then applied to reducing the balance of the Axis RC facility; and

$22.0m was also directly applied by HGHL to pay down the balance of the Axis RC facility.

327. In total $31.5m of dividends were directly and indirectly applied to the reduction of Related Party loans with an additional reduction by $37m funded from sources outside the dividend flow.

328. HCL paid a total of $13.9m by way of principal and interest to HCL Capital Bondholders. This was funded via the redemption of Redeemable Preference Shares (RPS) of $9.7m by HFL, a cash reduction in HCL of $3.2m and by using part of an HCL income tax refund of $2.1m.

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Property transactions

329. Omara Property Group Limited (Omara), another company jointly controlled by the Shareholders applied the funds received from HFL dividends of $9.5m and additional funds totalling $15.9m to acquire certain properties from various Axis Companies for $18.3m and from HFP Investments for $7.1m. Axis applied $9.5m of its subsidiary’s proceeds to the repayment of the RC facility.

Funds flow summary

330. The following diagram summarises the flow of dividends during the year from 1 July 2007 to 30 June 2008 from HFL, dividends to HCL Bondholders, cash flows surrounding the purchase of properties by Omara from HFP Investments and various Axis subsidiaries, with the latter applying some of the funds received against a reduction in the Axis RC facility provided by HFL:

Dividends $22.3m

Hanover Finance Limited

Forefront Investments Limited

Hotchin Investments Limited

$4.75m

Hanover Financial Services Limited Hanover Capital Limited

Hanover Group Limited

Hanover Group Holdings Limited

Dividends $23.2m

$23.2m$22.3m

$45.5m

Axis Property Group Holdings Limited

Repayment of loan (RC) $31.5m

RPS redemption

$9.7m

RPS issue $0.8m

Payment on behalf of the Shareholders $22m

HCL Bondholders

Omara Property Group Limited

Various Axis Property Group subsidiaries

$9.5m of the proceeds from property sales

$11.75m

$11.75m

Cullen Investments Limited

$4.75m

$4.75m

$18.3m purchase price for

properties

$7.1m purchase of properties

HFP Investments Limited

$13.9m1

Note 1: HFL dividends were fully passed on further up the Group by HCL. Payments to HCL Bondholders were funded by HFL RPS redemptions of $9.7m, a cash reduction in HCL of $3.2m and an income tax refund for HCL of $2.1m.

United Finance Limited

Dividends$12.8m

Tax losses

331. HFL received tax losses of $3.5m on 31 December 2007 from Hanover Group Holding Limited for no consideration.

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Appendix A – Statement of Qualifications, Independence, Disclaimer, Restrictions, Limitation of Liability and Indemnity

Qualifications

This Report has been prepared by the Corporate Finance division of PricewaterhouseCoopers, which provides advice on mergers, acquisitions and divestments, valuations, independent expert’s reports and appraisals, financial investigations and strategic corporate advice.

The Partners responsible for this report are David Bridgman M.Com, LLB, ACA and John Waller B.Com, CA, both of whom have extensive experience in relation to corporate restructurings and the preparation of independent expert reports for the benefit of investors.

Independence

PricewaterhouseCoopers considers itself independent of Hanover Finance Limited and its related entities in relation to the Debt Restructuring Proposal. We confirm that:

We have not been responsible for formulation of the Debt Restructuring Proposal, although we have provided extensive advice to the Trustees on various iterations of the Proposal and provided detailed comments and suggestions back to Hanover Group on behalf of the Trustees;

Our fees for preparation of this Report are based on the time required for its completion, and are not contingent on the success or implementation of the Debt Restructuring Proposal; and

We are not, and do not intend to be, a director, officer, or employee of HFL or any associated entity, however as noted in our Report, PwC may be requested to undertake an ongoing monitoring role on behalf of the Trustee if the Debt Restructuring Proposal is approved and may also be asked to act as an independent advisor to the HFL Credit Committee pending appointment of an independent director approved by the Trustee.

In addition to the provision of this Report, we have carried out the following work during the last three years for companies in the Hanover Group and parties associated with the Hanover Group:

In 2007 PwC provided limited tax advice to HFL around PIE (Portfolio Investment Entities) schemes and funds management. We understand no action was taken by HFL on our advice provided;

In 2006/2007 PwC was engaged by HFL to negotiate on its behalf a settlement with a group of clients. This role finished in September 2007; and

In 2007 PwC Partners John Waller and Colin McCloy were appointed compromise managers of a creditors’ compromise scheme that was entered into by Wall Group Limited, a wholly owned subsidiary of Cullen Investments Limited (Cullen), being a company ultimately owned and controlled by interests associated with Eric Watson. Cullen is not part of Hanover Group. This compromise is nearing finalisation.

We believe that the independence of PricewaterhouseCoopers asserted in relation to the conduct of this assignment is not impaired by our other work undertaken for Hanover Group or any of its related parties.

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Disclaimer and restrictions on the scope of our work

The statements and opinions expressed in this Report are based on information available as at the date of the Report.

In preparing this Report, we have not independently verified the accuracy of information provided to us, and have not conducted any form of audit in respect of HFL or any of its related entities. Accordingly, we express no opinion on the reliability, accuracy, or completeness of the information provided to us and upon which we have relied.

In forming our opinion, we have relied on forecasts and assumptions prepared by HFL about future events which by their nature are not able to be independently verified. Inevitably, some assumptions may not materialise and unanticipated events and circumstances are likely to occur. Therefore, actual results in the future will vary from the forecasts upon which we have relied. These variations may be material.

The statements and opinions expressed in this Report have been made in good faith and on the basis that all relevant information for the purposes of preparing this Report has been provided by HFL and / or its directors and advisors, and that all such information is true and accurate in all material aspects and not misleading by reason of omission or otherwise. Accordingly, neither PricewaterhouseCoopers nor its partners, employees or agents, accept any responsibility or liability for any such information being inaccurate, incomplete, unreliable or not soundly based or for any errors in the analysis, statements and opinions provided in this Report resulting directly or indirectly from any such circumstances or from any assumptions upon which this Report is based proving unjustified.

Our opinion has been arrived at based on economic, market and other conditions prevailing at the date of this Report. Such conditions may change significantly over relatively short periods of time.

We reserve the right, but will be under no obligation, to review or amend our Report, if any additional information, which was in existence on the date of this Report, was not brought to our attention, or subsequently comes to light.

Limitation of Liability

PricewaterhouseCoopers will accept liability to pay damages for losses arising as a direct result of breach of contract or negligence on our part in respect of services provided in connection with, or arising out of, this engagement but, to the extent permitted by law, any liability of PricewaterhouseCoopers, its partners and staff (whether in contract, negligence or otherwise) shall in no circumstances exceed the greater of $1,000,000 or five times the fees paid in aggregate in respect of all such services.

Indemnity

Guardian Trust and HFL have agreed to indemnify us against claims brought by any third party (which includes but is not limited to HFL and the Investors). The indemnity covers PricewaterhouseCoopers for any loss or liability suffered or incurred as a result of or in connection with the preparation of this Report. The indemnity will not apply to the extent that it has been determined by a Court that there is negligence or misconduct on our part. The extent of the indemnity from the Trustee is limited to the realisable value of the asset to which Guardian Trust has recourse under the Trust Deed between itself and HFL.

Consent

We consent to this report being distributed to HFL Secured Depositors.

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