We are debating the Insolvency Amendment Bill. As I was saying to the House just prior to its rising on Thursday of the last sitting week, insolvency is something I know quite a bit about. That is simply because I have been insolvent. I am sure I am not the first member of Parliament to come to the House having been insolvent, or to become insolvent after leaving the House.
In my case I was insolvent for a period of just on 5 years in the late 1980s and early 1990s. I have to say that the first 2 or 3 years of that period was probably the hardest period of my life. It was a time when I had to negotiate with my creditors to arrange the time payment of my debts. I knew that if just one creditor was not prepared to reach an arrangement with me, that person could put me into bankruptcy. It was a gut-wrenching experience when a court bailiff came knocking on the door of 5A Kenny Road to give me notice that the National Bank was proposing a mortgagee sale of my property—a very gut-wrenching experience.
But I was actually very lucky as I was in my early 30s and I had a chance to rebuild my financial position, to get on top of my debts, and to pay my creditors. I compare myself with the people today—mainly elderly; not totally, but mainly—who have lost some or all of their life savings through investments in finance companies. I think what has happened to so many New Zealanders in the last 2 or 3 years is absolutely tragic, and I think it is something that this House really needs to look at and look at very closely. It is an issue of real concern.
In our jobs as parliamentarians, we have probably all met constituents who have come to us with tales of loss, tales of misrepresentation, and tales of fraud, and we have all been concerned. It would be very easy to push those stories to one side and say that the money has been lost and that there is not much we can do, but I believe that as parliamentarians we have an obligation to investigate that.
My view was further supported when the Commerce Committee, of which I am a member, asked the Registrar of Companies, Mr Neville Harris, to supply a report into his view of the regulatory structure of finance companies in recent times. Mr Harris’s report makes very sorry reading. In some cases losses have been incurred through simple changes in market circumstances. A person may make an investment by lending money to a finance company, the finance company may decide to invest that money into a property development, there is a change of market, liquidity dries up, and the borrower is unable to repay that money. The finance company finds itself in a position where it has no alternative but to default on the people who lent it money.
I believe, however, we have seen a number of instances in recent times that point to mismanagement, malpractice, and possibly fraud. I guess one of the many things that concerns me is the issue of finance companies paying dividends to their shareholders in the period immediately prior to finding that they are not in a position to pay back the people who have lent them money. Many tens of millions of dollars have been paid out to those shareholders.
I am not suggesting that there is necessarily any fraud in those payments, and I am not suggesting that the directors have necessarily done anything wrong in authorising those payments to those shareholders. But we have to ask ourselves whether we should allow accounting standards that enable finance companies to capitalise interest to loans, to capitalise fees to loans, and then to report a profit that does not actually exist in cash, and then to take the cash that comes from new investors to pay out those shareholders, such that when it comes time to repay the people who have lent the finance company the money, that finance company is unable to do so.
I say that that is a very important issue to raise in the context of the Insolvency Amendment Bill, because one of the provisions of our insolvency law is to provide the official assignee with a right to claw back voidable preferences or, in this case, to claw back gifts. So if a bankrupt person gives a gift to someone and within a short time finds that he or she is not able to pay his or her bills, that gift is able to be clawed back. I suggest that one of the things that we as parliamentarians need to consider is whether we need such a provision in respect of dividends. It concerns me that literally tens of millions of dollars have been paid out from finance companies that then tell their lenders that they are unable to pay them back.
I should point out that there are many reasons why finance companies have failed, and I think it is important to acknowledge that some have failed simply because of market circumstances. Mascot Finance, for example, has been in the news recently. It was the first company to be given a taxpayer guarantee. Mascot Finance reported the fact that one of its borrowers tried to get a resource consent for a project, was unable to do so, and that there were delays of many years. So the Mascot Finance directors came to the conclusion that they needed to give notice that they may not be in a position to repay. So there can be quite legitimate reasons for finance companies finding themselves in that position.
I referred earlier to the report of Neville Harris, the Registrar of Companies. It was appended to the annual review of the Ministry of Economic Development. Mr Harris raises a number of issues. He raises the issue of corporate governance, and he makes the point that there are a number of companies where directors simply did not know what was going on or they were led—or misled, rather—by rather strong-willed chief executives. He also raises the issue of lending practices. In some cases finance companies have lent large sums of money to just a very few borrowers, so the loans have been very, very heavily concentrated, and investors have not appreciated the true risk.
At the annual review of the Securities Commission Jane Diplock made the point, as head of the Securities Commission, that the commission was required to authorise or approve the prospectus, but—certainly as she perceived the law—the Securities Commission had no capacity to monitor that that money was spent as the directors authorised. Mr Harris, in his report, also draws reference to the role of trustees. The word “trustee” conveys some substance. It conveys the word “trust”, but the reality is that a number of trustee companies are simply privately owned. They are probably perceived to be far stronger than they really are, and they are perhaps perceived to be far more independent. One of the points that Jane Diplock made was the fact that entering into a relationship between a trustee and a finance company—
Mr DEPUTY SPEAKER: I am sorry to interrupt the honourable member, but the time has come for me to leave the Chair for the dinner break.
- Sitting suspended from 6 p.m. to 7.30 p.m.
JOHN BOSCAWEN: Let me summarise by saying that several billion dollars worth of losses have been incurred through investment in finance companies in the last 2 or 3 years. Those losses have been sustained mainly, but not exclusively, by the elderly, and I think that we as parliamentarians owe it to those people to investigate why those losses occurred and what law changes are required to ensure that sort of thing does not happen to that extent in the future. The health of those people is being affected. In some cases their lives are at risk, and we owe it to them to give this bill our earnest attention.