AA 'link' reassured worried National Finance investor

Payless Cars owes millions of dollars to National Finance 2000, says receiver Colin McCloy.

Aucklander Russell Walls became uneasy about his $10,000 investment in National Finance 2000 last year when he realised investor cash was being used to pay for vehicles to stock associated company Payless Cars' yards.

But when he was assured that Payless had been endorsed by the Automobile Association, those worries were laid to rest.

"The AA are like God in the motoring world. I thought if they're in bed with the AA, that's good enough for me."

Reassured, he sank another $10,000 into National Finance.

Unfortunately for Walls, Payless did not have AA backing and is now in receivership, as is National Finance 2000, which owes 2026 investors $25.5 million. Walls, like other investors, now stands to lose 50 to 70 per cent of his $20,000 investment in National Finance debenture stock.

Receiver Colin McCloy, of PricewaterhouseCoopers, said last week he had referred issues uncovered during his work to "relevant government authorities", without specifying which authorities.

In January, the managing director of National Finance 2000 and Payless Cars, Allan Ludlow, wrote to National Finance investors saying Payless was to become the AA's "accredited dealer exclusively for the Auckland region".

"The AA brand is the most identifiable and respected motor vehicle brand in New Zealand and the AA has 990,000 members, many of whom are our investors," Ludlow wrote in the newsletter, which carried an "AA accredited dealer" logo.

"The accreditation of Paylesscars.co.nz with the AA Insurance's product range will provide further assurance to the National Finance investors."

AA secretary Murray Lander said yesterday Payless was authorised just to sell AA warranty insurance but was never an AA-accredited motor vehicle dealer.

The association was unaware that Ludlow was promoting Payless as an AA-accredited dealer until recently.

"By the time we found out about it, he had already been put into receivership."

Predictions of failure in finance company sector

Ludlow himself had predicted failures in the finance company sector in another newsletter a year earlier.

"When and not if a finance company goes bust, I hope the regulatory authorities and the courts look to the directors and shareholders of the company and force them (and their family trusts where applicable) to repay any dividends they have received in the past five years (fat chance!)."

With that statement in mind, National Finance 2000 investors will be wondering what is going to happen to Ludlow's own house.

Ludlow appears to have done well out of National Finance 2000. According to Quotable Value, he is one of the owners of a $1.2 million house on Takarunga Rd, one of the better streets in upmarket Devonport.

In the same newsletter, Ludlow gave investors an update on the introduction of Payless Cars - a company established "for the primary purpose of providing a high-quality motor vehicle product that attracts purchasers in the middle and upper finance market".

"The aim of this is to allow National Finance to move away from the hotly contested lower end of the market, a market where other finance companies are now falling over one another to write 'questionable' finance contracts."

However, there is now little question the finance contracts written by National Finance itself were, in most cases, of poor quality.

McCloy reckons only about 30 to 50 per cent of the company's loan book is recoverable.

The month before Ludlow wrote to investors about Payless Cars, National Finance 2000 held a meeting of investors at its Payless Cars site in Albany.

At the meeting, a resolution was passed "almost unanimously" to amend the company's trust deeds to allow it to lend money to Payless Cars.

It is understood the money was to be used to pay for used vehicles imported from Japan.

Walls attended the Albany meeting but believes there was no mention made of plans to lend money to Payless. He was concerned to learn later the company was considering doing just that.

McCloy confirmed yesterday that Payless Cars still owes National Finance "a substantial amount" of money. "It's in the millions."

He was "still working through the recoveries from Payless".

Payless also owes money to its main supplier of used vehicles, importer Nichibo New Zealand.

It was National Finance's loans to Payless that first alerted trustee Graham Miller, of Covenant Trustee Co, to National's problems.

Miller said he became aware of issues of compliance with the company's trust deed in early March.

Those issues "related fairly specifically to the manner in which they were operating the related-party activity".

Related party activities - deals with companies associated with a finance company or its owners - have attracted scrutiny because of their potential to disguise the entities and activities investors ultimately fund.

"We felt that there should be some provisioning against it, and that then put them in breach of what you might call the more significant total liabilities to total tangible assets ratio," said Miller.

National Finance's attempts to fix those problems did not satisfy Covenant, which then called in the receivers.