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Welcome to the last issue of news from Paul Gallagher Legal for 2007. We have put up a new page on our website which is for Ex-pats looking to return to our fair shores. We can assist those returning home with a raft of services, so if you know of anyone who may be interested, please let them know. This area of the site will be developed further in the New Year. It has been a very busy year for us and our clients alike. We have really enjoyed the diverse nature of work we have been involved with lately, and look forward to more from our valued clients in the New Year.
Investing your funds wisely?
The past few months have been like a rollercoaster ride for some investors as we observe the turmoil the finance sector has been experiencing. About 70 finance companies exist in a sector that has grown enormously in the past five years. Together with the recent failures of at least 13 finance companies totalling over $1B (NZ Herald, 29/11/2007), it needs to be recognised that many investors have had long-term favourable experiences with finance companies over the years. What has happened to cause the recent fallout, what do you need to be aware of when investing and how do you know what to look for?
Traditionally, finance companies have been sought out as a means for providing finance for the commercial and sometimes private sector. Companies have used the funds to buy plant for their factories or restaurants - with ‘Joe Public’ purchasing appliances or such-like for their homes. More recently, the newer-established finance companies such as Capital + Merchant Finance Limited have lent to the property and property development sector with more inherent risk, raising the funds at a slightly higher rate than mainstream organisations such as banks. In New Zealand, finance companies occupy the riskier end of the market, but they comprise a small portion of the overall system – much smaller than the sub-prime mortgage market did in the United States.
We’ve all seen the advertisements touting “…bad credit rating? Can’t get funds elsewhere? Come see us, we can help you…”. This has been coupled with problems in the ‘sub-prime’ market where there have been problems with badly performing CDOs (collateralized debt obligations - a type of asset-backed security and structured credit product), and the decline of US house prices with accompanying higher interest rates. This has caused massive losses, increasing investor withdrawals and margin-calls, forcing sales on illiquid markets. As the market has ‘crashed’, US banks such as Citibank and Bank of America have had to borrow at a discounted rate to lend to their broker affiliates in order to prevent these banks’ mortgage books from imploding. Thus banks are ‘being poisoned by toxic credit’. These banks include conservative German banks and the huge Bank of China. Thus the issue is a global one which is why New Zealand has been exposed to the flow-on effect.
What can we do to minimise the risk for ourselves? A good rule of thumb is usually – if it looks too good to be true it usually is – but that aside from that there are things to look for:
- The ‘SQP’ score – rates an organisation by Strength, Quality and Profitability. It is NOT a credit rating, but will provide a useful and clear indication of a company’s relative strengths and weaknesses. www.interest.co.nz/coinfo
- AXIS Ratings Limited scale. This is an independent New Zealand credit ratings agency which uses Rapid Ratings international qualitative rating system – a quantitative global rating agency offering ratings and research on credit risk and equity risk for public and private companies and banks in all major markets. There is an ‘equivalence corporate ratings’ scale between Axis, Standard and Poor and Moody’s. see http://www.axisratings.com for more information about the comparisons and the Axis Ratings Credit Rating Report.
- Deposit rates do not always indicate risk. Assess whether the interest rate offered adequately compensates for the risk you are taking.
- Know the risk you are taking. Finance companies issue securities under a trust deed, and these are a reflection of the risk the finance company is able to take. A higher level of risk may be associated with an investment in subordinate notes or unsecured deposits – always, always check the trust deed.
- Read the investment statement or prospectus. This will outline the finance company’s principal activities, the people involved, track record, diversification and risk exposure and what is likely to happen if the investment turns out for the worst.
- Diversify your investments. Don’t ‘put all your eggs in one basket’, this may be a cliché, however, it minimises the exposure you have to the cyclic nature of investments.
If the financial organisation you’ve invested in does run into difficulty and is put ‘in the hands of the receivers’ – the following process is likely as can be seen with the recent collapse of the ‘Five Star’ finance company:
- A receiver in the ‘Five Star’ case was appointed by the trustee at the request of that company’s board of directors.
- The role of the receiver is to protect the interests of ALL creditors by preventing one creditor from trying to wind up the company up, putting other creditors at risk.
- The receivers provide investors with an idea of what the current securities might be worth following a preliminary investigation into financial situation of the company that has been placed into receivership. This entails gathering information on assets and operations of the Companies, communicating with the stakeholders and forming preliminary views on likely realisation processes (recovery of funds and subsequent payout to investors).
- The aim in this case was to ‘maintain the value of the non-commercial receivables through continuing to operate the business. Most of the company’s existing staff have been retained to assist with recoveries’.
- The receivers monitor debt collection to maximise debt recovery – thus maximising recovery for investors. In this case there are two scenarios; the first being to collect the loans and wind down the business – the second being an outright sale. This is yet to be decided in the case of ‘Five Star’.
Receivership is a commonly used recovery tool. On appointment of the receiver/ manager, the powers of the board of directors of the debtor company are suspended and the secured assets and business will be in the hands of the receiver/manager. The receiver/ manager is normally empowered to run the debtor’s business and realise the secured assets.
There is also a website that has been developed by the Securities Commission, New Zealand’s main investment regulator. The purpose of the website is to get people thinking about where their money is going and who is looking after it. It doesn’t give tips about specific investments, it is all about advising what investors need to know before they invest and how to find out information – educating about investing and securities. It was not an initiative that was launched in response to the finance company collapses – it was part of the Security Commission’s statutory functions.
It is always advisable that you contact a Solicitor and gain good legal advice about investing and if you find yourself in a situation where your investment ‘turns sour’ we can provide good independent advice. Please call either Paul or Cherie if you would like to chat further about this.
Reference sites/materials used for research: www.interest.co.nz ; Herald on Sunday article ‘ Asking the right questions’ by Chris Daniels; www.goodreturns.co.nz
Ph 09 415 9321 or www.lawfirm.co.nz
Client Care – fostering good client relationships
Any good, successful business cannot prosper without good client relationships. Our practice, like many others, gains a major portion of its business by referrals from happy clients who in turn become our advocates. Hand in hand with this, many firms also now actively promote themselves to the wider market via various marketing tools and techniques.
Being a fairly traditional and conservative bunch, members of the legal profession are usually quite reluctant to ‘blow their own trumpet’; and by nature lawyers and marketers tend to be at opposite ends of the spectrum. Therefore Solicitors tend to be fairly cautious when undertaking any form of self-promotion, recognising the need to live up to what they say they will deliver.
It is quite timely then that there is a new act about to be released which reshapes the framework of professional regulation by shifting it towards consumerism. This is the Lawyers and Conveyancers Act 2006 – and in a nutshell it is a benchmark for a ‘compulsory care code’.
There are courses that a Solicitor can enrol in so they can be informed about the threshold of expectations that a member of the public can expect. This will educate the course attendees about how to actively communicate with a client, for example:
- Ways of communicating clearly with a client
- How to outline the initial letter of engagement and scope the work to be undertaken
- It’s OK to be upfront about discussing the possible fees with a client and perhaps explaining the costs when submitting a final account
- How to manage a complaint if it happens, early warning signs and managing the complaint through discussion.
The Law Society is the ‘watch-dog’ for any client complaints and is available to investigate the issue and report back with findings and a recommendation. There are a variety of disciplinary actions that can be taken if necessary. It is therefore helpful if the firm you are dealing with understands what the latest professional standard of conduct is.
We make it a policy of ours to be open and honest with our clients and encourage transparency in our dealings with you. However, if you have any areas of concern we invite you to contact us to discuss them. And, yes we will be attending the course so we are up to speed with the latest trends within our industry.
If there is anything you need to discuss we invite you to call either Paul or Cherie, Ph: 415 9321. They’ll be happy to talk with you further.
Living together happily ever after?
Ahhh, once upon a time you were gazing into each-others eyes – holding hands across the table – sweaty palms – swearing undying love and pledging a commitment to be together forever. Then ‘something’ happened and now you want to go your separate ways. It’s like you’re a character out of ‘War of the Roses’ (Danni De Vito, Michael Douglas and Kathleen Turner) – embroiled in a tense battle over territory and worldly possessions. OK, so it may not be quite as dramatic as that, but haggles over matrimonial spoils when emotions are running hot has even the most cool-headed individual fighting to keep calm.
It may be the beginning of the ‘wedding season’ at this time of the year, but here at PGL we have been recently involved with assisting many a client through the sometimes traumatic ‘separation’ process. It may seem unnecessary, or even over-kill to those in the initial stages of a relationship where the loving couple see themselves spending a lifetime together, but an agreement or ‘pre nuptial’ is a common-sense way to minimise the fall out if your relationship deteriorates and you should decide to separate.
Whether you are married or in a ‘de facto relationship’, heterosexual or same-sex, the Property (Relationship) Act treats these relationships the same when it comes to matters of property. Some property such as the house you both live in, even if one person already owned it before the relationship started, will be classed as relationship property that has to be shared equally in the event of a separation – except in exceptional circumstances. In the case of a de facto relationship, if the relationship has lasted more than three years, ‘relationship’ property needs to be shared equally. This act also applies to the death of a partner with the surviving partner becoming the sole owner.
If you do not want to be covered by the Relationship Property Act, you will need to draw up your own agreement as to how your property will be divided if you decide to separate. Each partner will need separate legal advice to ensure the agreement is fair to both parties. This is particularly important if either of you already owns assets such as a property or a business; has inherited or is likely to inherit property. An agreement will also protect the interests of children if they are coming into a new relationship and are the dependents of previous partners.
If you have children and separate from your spouse or partner, you do need to decide who will look after them. You should try and negotiate an agreement that takes the interests of the children as the primary focus. It is likely that the children will be anxious and so any matters concerning them should be settled quickly with a minimum of disruption if at all possible. The Family Court may appoint a lawyer to represent any children involved in the separation and, depending upon their ages, their wishes will be taken into account. The Family Court also offers free counselling, conciliation and mediation to help you reach an agreement.
A pre nuptial agreement can outline the intentions for the sharing of assets before it is needed. Then, it can be used as a way to work through the process of separation, hopefully making the whole situation less painful in some respects. A legal battle through the court is likely to intensify as hurt and anger often comes hand-in-hand with a separation.
Lest we forget – there is the weird and wonderful that can pop into a ‘prenup’ agreement. Who gets the dog for example – sometimes the most heated argument is over the family pooch. As reported on www.legalzoom.com one client covered in-law issues in their prenup barring the mother in-law from sleepover visits! Or the one where the wife’s prenup agreement limited her weight to 120lbs – the penalty of which is that she gives up a whopping $100,000 of her separate property if her weight goes above that stated in her agreement... whew!
Another matter to be aware of is the ‘separation agreement’. This agreement outlines the conditions regarding the dual or mutual obligations of your separation. This means that upon your separation you need to agree to the terms of each others future financial liability. You could be separated for quite a while before a divorce is finalised. One partner could rake up a mountain of debt after the separation and unless otherwise agreed, the other partner could be liable for up to half of the debt accumulated. So, bear this in mind and talk with your Solicitor as soon as possible so your interests are protected.
No matter what conditions you find yourself facing, we can help you to draw up your pre nuptial agreement and work with your partner’s representative to make sure that the contract is fair and both parties’ requirements and taken into account. If the time comes and you do decide to separate, we can also assist mediate the process to a mutually beneficial outcome as Paul is a qualified mediator and has a great deal of experience with such matters.
Ph 09 415 9321 or www.lawfirm.co.nz
Summer stuff
After a gorgeous start to the spring we find ourselves limping into summer – complete with inclement weather. It is lovely to see Jim Hickey is back on One News updating the nation with the weather forecast but we don’t think his influence extends to actually manipulating the weather! So as we hope for a fine summer day for the 25th, remember to pace yourself with food during that all-important day or you’ll not be able to fit in that extra bit of Xmas pud for dessert at dinner time.
And if you’re travelling by car for the holidays – keep yourselves and the kids happy by stopping regularly and stretching your legs. You’ll be amazed at how temperaments are improved and you never know what goodies you uncover at the olde roadside tearooms (the ice cream shop at Mangatawhiri is exceptionally good).
Finally, we’ll leave you with a great tip from the Huggies site. Before wrapping little kids presents and putting them under the tree, take off all the packaging first. This saves having to undo all of those ties etc that hold toys into their boxes and allow them to start playing with their new toys quicker. You don't have the worry about cleaning up all the mess and you can enjoy your child's joy playing with their new toys.
We wish you all a safe and happy Christmas and look forward to the New Year. Oh yeah, and Paul says “Please watch out for motorcyclists over the holiday break!).
Cheers from the team at Paul Gallagher Legal.
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