Finance moratoriums only work if there's something to save, inquiry told

OPI Pacific Finance stockholders in 2008, meeting to discuss a moratorium on repayments to investors. Photo / Paul Estcourt

Moratoria work well when there is something in a company worth saving but many of the finance companies that collapsed had flawed business models and were "wind downs", a partner from PricewaterhouseCoopers told politicians today.

John Fisk appeared before the Commerce Select Committee's inquiry into finance company failures today.

Finance companies began to collapse after the property market stalled, he said. Developers defaulted on loans, investors got nervous and asked for their money back which created a cash strain.

Finance companies were rapidly faced with a cash crisis, Fisk said.

When faced with a choice many of the mum and dad investors in the companies opted for moratoria over receivership.

A moratorium is a temporary delay in the payment of debt.

National MP Katrina Shanks described the finance company moratoria as "death by a thousand cuts instead of death by two cuts"

"A moratorium gave people hope," she said.

Fisk said moratoria worked well when there was a "viable core" in a company - "something to be saved".

"Finance companies were more wind-downs."

Most finance companies also operated a "flawed model", they worked well when the market was good and money was coming in, but not when the reverse was true.

Moratoria provided flexibility and use of existing knowledge.

The problem was payment plans created tension as to whether the payments could be met and companies were left with the same management that got them into trouble, he said.

In meetings to decide whether a moratorium should be adopted investors decided on emotion, rather than making a decision based on the information, said Fisk.

Much of the information was hard for them to get a handle on, he said.

"I think investors generally look at these things pretty simplistically.

"Receivership is painted as the corporate undertakers coming in rather than the hope of a moratorium."

However, Fisk said investors had a democratic right to decide, as it was their money at stake.

It was the role of a trustee to ensure investors understood the information provided to them and that they were informed enough to make a decision, he said.

Chapman Tripp corporate partner Roger Wallace told the inquiry moratoria gave investors the choice and option that receivership would not.

He said he attended many meetings where the choice was made and believed investors were provided with sufficient information and attempts were made to simplify it for unsophisticated investors.

Many questions were asked at the meetings and Wallace said he did not see a problem in allowing investors to make the decision.

NZPA