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Related party loans hurt Clegg and Co debentureholders

Investors in failed finance company Clegg and Co are likely to between and 70 and 85 cents in the dollar back, but could have ended up with a better result if it wasn't the state of some related party loans to the firm's principal.

Thursday, 22 November 2007
The first receivers' report from BDO Spicers says 496 investors had $15.12 million invested with Clegg and Co at the time of receivership.

The receivers say the finance company failed because it had breached its trust deed.

"There was an obligation on the company to maintain net assets in accordance with the terms of the trust deed, as well as imposing a limit on the extent of advances to related parties. During recent months, the related party advances to Cleggs have exceeded the requisite limits.

"After due consideration of all available options the trustee determined that steps needed to be taken to protect the interest of stockholders, resulting in the appointment of receivers.

In its report the receivers say there were two key related party loans, one of $3.05 million and the other of $153,231. Part of the debt was secured by a first mortgage over Brian Clegg and Pamela Nicholas-Clegg's Algies Bay home.

This home is now on the market and the receiver says once it is sold there is still likely to be a shortfall of around $2.5 million in related party loans.

The receiver says other steps are being considered to recover the money, however hopes of success don't appear high.

Two scenarios of recoveries have been presented to creditor. If it eventuates there will be a low overall recovery the receivers suggest only $550,000 of the more than $3 million in related party loans will be recovered. In the high recovery scenario it predicts that amount will rise to $660,000.

The receivers say are looking at selling the company's assets, however they warn that the business is not for sale at a discounted price.

Currently the receivers are managing the business. It says a substantial portion of the loan book is not due for settlement. It will continue to collect installments and encourage early settlement of loans at net book value.

It acknowledges there are a number of loans overdue for settlement and a desire to refinance the loans with other companies. However, in the current market that is proving difficult to achieve.

Overall BDO say investors should get between 70 and 85c in the dollar back after its fees and expenses.

It does not predict that investors will get any of their interest payments. A first dividend of between 10 and 20 cents in the dollar is expected to be paid before Christmas and a further dividend in late February early March. The quantum of the second dividend will be dependent on the success in achieving early settlement of loans.

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