Tuesday, June 24, 2008

Ethics Of Corporate Money Lending

The sudden, and spectacular, crash of Beechwood Homes has affected ordinary people. People who are trying to build a house.
Recent reports suggest that owner Larry King "borrowed" about $40 Million to personally invest in a racehorse stud, "Written Bloodstock", which has failed as a business. Mr King invested the money with Mark Peters, a former bankrupt, and banned gambler.

There were several options available to raise the money, including business and/or personal loans in the name of Mr King. What he did, it's been reported, is borrow $40 million from his other company, Beechwood Homes. At least some of this money would have had an attached liability on the balance sheet: it was money paid by customers for work that had yet to be done! It was also money needed by the company to ensure that it continued to receive other payments - that is, to continue its business operations.

A case could be made that companies ought not to lend money to owners to an extent that leaves a company, or other entity, with insufficient funds to meet its liabilities; or would do, if there are several rises in interest rates. A prudent Chief Financial Officer or accountant would have advised as much.

This case seems to highlight another instance where what is "legal" is a gulf away from what is ethical. Our legislators should ensure that it cannot happen again, not with specific case legislation, but by amending existing legislation to include general safeguards against actions that are clearly not in the interests of customers who are often asked to pay up-front amounts before work commences. While they are at it, the building insurance scheme needs to be overhauled.