National Finance's bad or doubtful debts were becoming such a problem for the company that the directors "should have blown the whistle" and stopped taking investors money, the High Court has heard.
Insolvency expert David Crichton is giving evidence for the Crown in the trial of National Finance 2000's Carol Braithwaite.
Braithwaite - the former partner of jailed National Finance boss Trevor Ludlow - is the first director from a failed New Zealand finance company to have a case heard before a jury.
She faces one charge of making untrue statements in a company prospectus and has pleaded not guilty.
According to the Crown, there are 10 material untruths in the document, an allegation Braithwaite now accepts.
However, she will defend the charge on the basis that she believed at the time the prospectus was correct.
The charge, laid by the Financial Markets Authority, carries a maximum penalty of five years in prison or fines of up to $300,000.
Expert witness David Crichton was quizzed by Crown lawyer John Dixon this morning about National Finance's allegedly misleading prospectus, distributed in 2005 and 2006.
The exchange covered related-party lending that National Finance entered into - including with a business run by Braithwaite's daughter - but did not disclose to its investors.
As well as this, security was not taken over a number of these related-party loans, nor was there the proper loan documentation for them.
While the propsectus said National Finance had made proper provisioning for bad debts, Crichton said today that it was "totally inadequate".
For a particular set of loans, the company should have had twice the amount set aside for problem debts than it did, he said.
If the proper amount had been set aside, it would have reduced the company's before-tax profit reported in March 2005 by almost $1 million, he said.
Given the situation the company found itself in, the directors "should have blown the whistle" and stopped taking investors money, Crichton said.
National Finance faced in the lead up to its receivership in May 2006, owing investors $21 million. Some investors have recovered 49c in the dollar.
Braithwaite's trial continues this afternoon.By Hamish Fletcher @hamishfletcher Email Hamish