Imperator Fish on South Canterbury Finance

Imperator Fish is a lawyer. He leans to the left, but has always been a fair critic.

He has gone through all legal deeds about South Canterbury Finance, which were posted on Red Alert. Trevor Mallard has shown his legal skills are as excellent as his diplomatic skills and concluded it is all Bill English’s fault, and Bill has cost the taxpayer $300 million.

If you wish to take your legal advice from Trevor, then can I suggest you hire him to negotiate your purchase of the Auckland Harbour Bridge, which I have exclusive sale rights to.

Here is what Imperator Fish has found and concluded:

The Crown unquestionably had a legal obligation to pay out New Zealand depositors. This is unarguable. When SCF went into receivership, Bill English had no choice but to write out a cheque. Had he not done so the Crown would have been sued en masse by investors, and would have lost and been ordered to pay costs. The same business commentators now savaging Bill English for paying out investors would then be calling him a fool.

Including Trevor no doubt.

Some in the media and blogosphere have suggested the terms of the guarantee deeds may have been breached, and that this meant payment didn’t need to be made. Some go on to say that the fact payment was made proves this is just National looking after its mates. Wrong. It’s quite possible that breaches of the deeds occurred and should have been detected, and that the detection of such breaches may have enabled action to be taken to limit the Crown’s liability. But prior breaches do not affect the Crown’s liability to pay.

Important to note.

There was no obligation to pay overseas investors, as Bill English has himself admitted. He has said paying them out enables the Crown to take control of the receivership. It may seem unfair that some people are getting the benefit of a guarantee not designed for them, but the alternative is to risk getting much less during the receivership. English’s position on this matter is at least defensible, and may in fact be financially prudent.

One may have ended up with years of litigation, if some investors were excluded. An extra $20 million, to gain full control seemed worth doing.

SCF had a number of obligations under the deeds, including the obligation to conduct its business and operations in a proper, businesslike, efficient and prudent manner, and the obligation not to engage in related-party transactions. Any breach by SCF of those obligations would give the Crown the right to withdraw the guarantee in relation to future deposits only.

This is what many people do not realise. Once the guarantee is in place, you can’t punish the investors for the sins of the company.

IF does want an inquiry though:

I stand by the move to pay New Zealand depositors, because legally any other position would have been utterly indefensible. The decision to pay overseas depositors can at least be debated, though I understand the reasoning behind the move.

But questions remain about the role of Treasury and others in this. Could SCF’s troubles have been detected earlier? Could the Government have avoided paying out some of this money?

This needs a public enquiry. A huge amount of money has been paid out, and the decisions of those involved should be scrutinised. If it turns out they have acted entirely properly, then they will have nothing to fear.