Treasury sure SCF would fail

22:12, Aug 08 2014

Treasury thought South Canterbury Finance (SCF) was likely to fail and considered pulling it from the Government guarantee the year before its $1.58 billion collapse.

Colin Carruthers, QC, made the claim as he wound up the Crown case in the country's largest fraud trial in the High Court in Timaru yesterday.

Former SCF directors Ed Sullivan and Robert White, and former chief executive Lachie McLeod, face a total of 18 charges brought by the Serious Fraud Office. The trial is being heard by Justice Paul Heath alone.

Carruthers outlined count 10, which alleges all three defendants relied on prospectuses containing false statements to enter into the Government deposit guarantee scheme.

Carruthers said the defence will probably argue that SCF was "too big to fail" and would have been entered into the scheme regardless.

He said that was "hard to square with South Canterbury being only a part of a sector constituting a mere 2 per cent of the financial system".


Treasury became nervous in April 2009, Carruthers said.

"The Reserve Bank alerted Treasury to a possible breach of the guarantee deed for two related party transactions. South Canterbury explained the issue as an oversight but nonetheless the Treasury investigated.

"It appointed an inspector and carefully looked into South Canterbury affairs, coming to the conclusion it was likely to fail.

"Serious thought was given to pulling the guarantee, but it was recognised that that would cause the failure of the company and, of course, the Crown was already exposed because breach of the guarantee did not obviate the need to pay all existing depositors.

"So the evidence is that when Treasury became aware of related party issues with South Canterbury it took them seriously, to the point that South Canterbury's place in the guarantee was in real jeopardy."

SCF collapsed on August 31, 2010, with the Government paying out $1.58b. Receivers have recovered close to $800 million.

Count 8 covered a loan of $12m to Dairy Holdings chairman Colin Armer, which the Crown said was to avoid breaching the trust deed.

If the loan was to DHL directly it would have taken SCF exposure to over 35 per cent, a breach of the deed.

So instead a loan was advanced to Armer personally for $12m, Carruthers said. As a result McLeod faces a charge of theft by a person in a special relationship.

The judge queried the charge and said Armer could have personally guaranteed the loan to protect his major interest in DHL, especially as, "to put it flippantly, it became very clear Mr Armer didn't consider it a facade when he had to pay up," following SCF's collapse.

"If the Crown can't exclude the reasonable possibility that Mr McLeod wasn't prepared himself to authorise the lending if there was a breach of the trust deed, would you accept at that point he can't be found guilty on the charge?" Justice Heath asked Carruthers, who responded "yes".

The trial resumes on Tuesday with the start of the defence closing.

The Timaru Herald