Five Star practices questioned

Five Star collapsed in August owing $63 million, including $54.43 million to debenture holders. Photo / Greg Bowker

Many of failed finance company Five Star Consumer Finance's large commercial loans were either improperly secured or completely unsecured, the company's receivers have found.

In his third report on the company, receiver Richard Agnew of PricewaterhouseCoopers confirmed that most loans in Five Star's commercial book, which accounted for $41 million of the company's $65 million in lending, were made "outside normal commercial lending practices".

"Furthermore, as a result of now having analysed each loan, we can confirm that many of the loans were made without security, or were made without satisfactory security."

Agnew earlier confirmed that many of the loans were made to parties related to Five Star Consumer Finance by way of common directors.

Five Star's directors were Auckland lawyer Marcus Macdonald, Nicholas Kirk and Anthony Bowden.

Five Star Consumer Finance's last prospectus indicates to investors that its main area of lending was secured consumer finance. Agnew has found the company's 9200 consumer loans made up less than a third of its total book.

Furthermore the prospectus indicates that all the company's loans were secured. Agnew said that was clearly at odds with what he'd found.

"We are conscious of not only what we have discovered in relation to the commercial loan book, but also of a number of concerns raised by investors and other parties in respect of the activities of the companies prior to the receiverships."

He has referred his findings to the "appropriate Government authorities".

Kapiti Coast financial adviser and finance company commentator Chris Lee said Agnew's findings clearly indicated the company had been operating outside the law.

"You go out with a prospectus and say 'we lend on many small loans via the Retailers Association and our main lending is on consumer goods', and when the company goes bung you find out that 80 per cent of the book is in a few very badly done commercial loans. That to me means that the prospectus was misleading and I am pretty certain the punishment for issuing a deceitful and dishonest prospectus is jail and very substantial fines."

Agnew also indicated court action by PricewaterhouseCoopers against various parties in relation to Five Star was a possibility if that had potential to increase recoveries for investors.

He said he had hoped to give an indication of likely returns in the report, but that would now have to wait until the next update, probably early next year.

Five Star Consumer Finance collapsed in late August owing $63 million, including $54.43 million to debenture holders.