Editorial: Receivership best option in hindsight

Opinion

Rumblings arising from the wholesale collapse of finance companies continue unabated.

This week, it was Capital + Merchant and Strategic Finance dominating the headlines.

In the case of the former, which has been in receivership for more than two years, the Securities Commission laid criminal charges and issued civil proceedings against directors.

Strategic Finance, for its part, was finally placed in receivership by its trustee. It transpired that its chiefs had continued to earn big pay even as the business was struggling and months into a moratorium agreement.

This cast the spotlight on the unenviable choice faced by many of the investors in these failed enterprises.

Often at the point of collapse they were offered the alternative of backing a delayed repayment scheme put forward by the company or consigning it to receivership.

Twelve finance companies won support to institute moratoriums. Increasingly, this seems not to have been the wisest of choices.

To a degree, it was understandable that investors would support this option.

Moratoriums were advanced as a means of creating certainty and, perhaps, of extracting a financial input from company owners that would be denied in a receivership.

They were also portrayed as the best way for investors to get some of their money back. In reality, however, their acceptance was too often a triumph of optimism over reality.

So far, four of the companies that instituted moratoriums have slid into receivership or, in the case of Hanover Finance and United Finance, which had almost $500 million frozen, been onsold (with its assets subsequently written down by $220 million by Allied Farmers). Others are looking shaky.

For those in receivership, a moratorium simply stalled the inevitable. Predictably enough, those who grounded the company were unable to get it off the rocks.

It always required a leap of faith to believe there would be any other outcome. Receivership, in contrast, put new hands at the helm and introduced the prospect of court action if the receiver's scrutiny uncovered possible offences.

That is not the only argument in favour of moratoriums which is looking increasingly weak. It was often said that receivership would be the expensive option, draining the potential return to investors.

The millions that flowed to Strategic Finance staff even as the company was in its moratorium has thrown a giant shadow over this claim. An early receivership would likely have stopped such payments.

Strategic's 13,000 investors would also not have had to stomach the chief executive, Kerry Finnigan, declaring, "That's not really the key issue. The key issue is about our investors and how they will end up in all of this."

In sum, the investor funding involved in the finance companies' calamity is a staggering $6.19 billion. Many unsophisticated mum-and-dad investors have lost their life savings.

Most were ignorant of the nuances of the likes of related-party transactions or took time to read prospectuses, let alone question some of the claims made about investment risks, liquidity and the like. Too late, they have become familiar with them.

Receivership has not always worked out for investors. Nothing, for example, was retrieved from Bridgecorp and, according to the receivers, the 7000 investors in Capital + Merchant are unlikely to see any of the $167 million they are owed. But a cold analysis suggests receivership always represented the best chance for investors to get their money back.

Events, increasingly, are reinforcing that view. Investors offered a moratorium should surely put emotion to one side and take a highly sceptical view.