Moratoria slow-death for finance companies rather than quick: Diplock

Securities Commission chairman Jane Diplock has lamented investors' unwillingness to cut their losses and walk away from failed ventures, resulting in a number of finance companies going into moratorium when receivership would have been a better option.

Friday, September 25th 2009, 7:54AM 2 Comments

Speaking at Parliament's Commerce Committee, Diplock said investors are too optimistic about the prospect of regaining lost money and have been easily led to accept putting a company into moratorium when receivership would be a better option.

"I think that investors are often very optimistic and reluctant to crystallise the loss even in their own mind," Diplock said. "They want to hear the company will somehow get back to life."

The regulator was scathing on the prospects for most finance companies operating in moratoria, saying the proposals are "usually the slow-death of the company rather than the quick death of the company."

Still, Diplock would not want to remove the option from distressed firms altogether, as there are some that can survive long enough to trade their way out of trouble.

The commission is currently looking into ways to improve moratoria proposals, such as requiring a very short, heavily prescribed disclosure document explaining to investors how directors believe a moratorium would make the company solvent. In conjunction with this, the company's trustee would have to give its views on the merit of the offer.

One of Diplock's main concerns is around the related-party involvement in moratoria, and the financial benefits management often has in keeping a company operating. Still, she admitted it would be difficult to introduce independent assessors of the schemes due to cost constraints.

The government recently announced new rules for finance companies seeking a moratorium, which will require clear and concise investment statements about the proposed terms to freeze funds, along with independent advice and the views of trustees and company directors.

Similarly, as part of its wider inquiry into finance companies, the Commerce Committee will be looking into whether management should be able to retain their positions if they enter moratorium.

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Comments from our readers

On 25 September 2009 at 8:30 am Independent Observer said:

I have been vocal about this stance previously - and will repeated myself once more:

The role of the Regulator must be to prevent systemic risks like the finance company debacle from occurring - NOT being the ambulance waiting at the bottom of the cliff debating moratoria versus receivership.

Open note to the Regulators: Spend your time making decisions that will protect consumers from future disasters, rather than grandstanding with 'after the event' statements.

I'll even give you a hint: your next disaster will be in the Kiwisaver space... are you ready for that?

On 25 September 2009 at 1:14 pm albert k said:

Totally agrees with Independent Observer.

Was really puzzled how come developing countries like Malaysia & Indonesia have regulations, like the below, in placed for over 20 years, none existed here?
1. Minimum paid up capital
2. NPL cannot exceed 5%
3. No more than 10% can be loan to related companies
4. Their Commissions can audit financial institutions without warning & prosecute offenders.

If the Security Commission here does not have the teeth to enforce any of the above, it is a waste of tax-payers' money to have them in the first place.