Failed Finance Company Settlements - Secrets Revealed

Failed Finance Company Settlements - Secrets Revealed
Thursday June 19, 2014

I have to be a little careful with this blog.  My motivation for going to digital print on this topic is altruistic. Recently, the mainstream media have once again reported that yet another settlement has been reached by the receivers of a failed finance company (this time Strategic Finance) with the investors having no input and simply being left to accept the outcome.  The investors, as reported by the media, complain that they have not been consulted with and have no idea how or why the receivers have settled the claims of the company, with the settlement resulting in 5 cents in the dollar for the investors. Below are some general observations:

  1. Secured creditors have, in certain circumstances, the right to take over certain aspects of the management of a company via one or sometimes two insolvency practitioners who they appoint as receivers to the company;
  2. The receivers have a relationship with their appointers (the secured creditor(s)) which they want to maintain and strengthen;
  3. The receivers take their fees from what they recover from the company but underwritten (i.e. guaranteed) by their appointer;
  4. The secured creditors’ interest is in recovering the debt owed to them, and will in many (but not all) respects have priority, ahead of other creditors, to any money recovered.    The secured creditor has little real incentive to fight to recover more than is owed to them;
  5. The receivers’ primary commercial interest is to keep their appointer satisfied.  Receivers do owe a legal duty to have regard to the interests of other creditors, but it can be very difficult (and prohibitively expensive) for other creditors to prove to the Courts that a receiver could have, and should have, recovered more;
  6. The receivers interest is to keep their appointer satisfied;
  7. The receivers are in the business of providing insolvency services and like other professionals often charge by the hour as opposed to by the value; and
  8. Investors in failed finance companies are not secured creditors.

  Aspects of the above might be regarded, by some, as controversial.  The additional general observations below may also be regarded as controversial:

  1. Investors are not aware that receivers do owe duties of good faith towards unsecured creditors;
  2. Receivers are not the only party who can claim against a company and\or its directors;
  3. Investors do not know their rights or more importantly the pathway towards maximising their entitlement to recover their losses;
  4. Company directors and receivers have no interest in raising the awareness of investors that they (the investors) have a right to pursue the company and\or its directors to recover the losses suffered by the investors.

I would expect a failed finance company investor to say “Chris thanks for the above and now that we are aware a pathway exists, how do we go down that pathway?”  I like to keep things simple. So in simple terms this is what you do in respect of the first pathway (there is actually two):

  1. File a proof of debt with the liquidator failed finance company (all of them are in liquidation).  A proof of debt form can be obtained by emailing the liquidator who has an obligation to provide one;
  2. Once the proof of debt is accepted then the investor is officially a creditor;
  3. As a creditor, a claim can be filed against the director(s) of the failed company pursuant to section 301 of the Companies Act 1993.  Section 301 is a great but little known and used section. In short s 301 gives every creditor the right to seek an order that the director(s) pay money into the company due to their shortcomings; and
  4. The director will either take no steps and face bankruptcy or defend the claim (unlikely if they have already settled with the receiver) or settle.

Someone, perhaps the lawyers acting for the defendant director(s), might point out that any money paid by a director or his\her insurer will end up going to the secured creditors, so why would an unsecured creditor bother?  Well, the answer is simply that a receiver would be in breach of their obligation of good faith if they failed to agree with the unsecured creditors, to allow them to keep all or some of any recovery obtained from their claim against the director(s), given that the receiver had already reached a settlement with the director(s). A receiver who has settled with the director(s) no longer has any interest in pursuing the directors. A receiver, in those circumstances, cannot, as a matter of good faith stand in the way of the unsecured creditors seeking to recover some of their losses or simply seeking the satisfaction of bankrupting the individuals responsible for the loss of their (the investors) hard earned money. It can be an arguable line between incompetence and theft. The law must provide a remedy to all wrongs. Otherwise, why should we be surprised when the victims take matters into their own hands? What has surprised me is how forgiving the investing public has been towards a number of company directors. Mark Byers springs to mind. The reason for the apathy of investors might, in part, be due to the State being willing to underwrite some of those losses via the Retail Deposit Guarantee Scheme.  Not that Blue Chip was part of the tax payer paid scheme that allowed those who were chasing high returns to keep both the interest payments they received but also to be reimbursed for their investments when it all went sour.   Another reason is ignorance.  This blog seeks to overcome that reason, in part. There must be more than a few company directors breathing easy knowing that:

  1.  Investors are ignorant of their rights;
  2. The State has failed to educate investors of their rights and has been selective as to how and who has been prosecuted;
  3. Directors who are potential defendants are not going to advise investors of their rights; and
  4. Civil claims are time barred six (6) years after an investor has become aware that they have suffered a loss.

The failure of a large number of New Zealand’s second tier financial institutions wiped several billion out of our economy. Some might say that investors got what they deserved.  However, when the State intervened it resulted in tax payers money being used to help clean up the mess.  Money, which could have been used to save lives through hospitals or to educate our children and grandchildren.  Have all of those responsible paid their fair share?  I do not think so.  Has the insolvency industry or the State held them fully accountable?  Ask the investors who have lost their life savings.

By Chris Patterson, 2014

 

By Chris Patterson