The Commerce Commission has begun an investigation into Hanover Finance.
The commission made the announcement on Thursday and will look at whether Hanover breached the Fair Trading Act by making misleading representations to prospective investors and the public.
Hanover, one of New Zealand's biggest companies, has more than 16,000 investors. It announced on Wednesday it has frozen investments and repayments totalling $554 million, pending finalisation of a restructuring proposal.
The announcement brings the total amount of money put at risk in the finance sector in 2½ years to $3.9 billion. Some of that money is being recovered, but many investors are finding their money is gone for good.
Hanover Finance says it is acting to preserve the value of its investments as market conditions deteriorate and uncertainty mounts over the ability of borrowers to repay as forecast.
It says it is continuing to meet its trust deed obligations and has a continuing financial capacity to trade.
The suspension applies to sister company Hanover Capital and subsidiary United Finance. Together, three companies have 16,500 investors. Another subsidiary, FAI Finance Limited, is not included in the process.
The international credit agency, Fitch has downgraded the troubled finance company's rating from BB+ to C.
That means it expects Hanover to default on its repayments in the next week, which would then send its rating down further to D.
Hanover says it is working on a plan to restructure the business. Co-owner Mark Hotchin says a softening property market, global credit problems and finance industry failings are to blame for its problems.
Mr Hotchin, who owns the company with Eric Watson, says many property developments either cannot be sold for a good price or are putting stress on people who owe the company money.
Dividends
The Shareholders Association says it was inappropriate for Eric Watson and Mark Hotchin to take tens of millions of dollars in dividends from the company last year.
Association chair Bruce Sheppard estimates each owner would have to pay $50 million to bail out the company.
Mr Sheppard says they no longer have the money to do that, having stripped their capital from the company in dividends, and believes they should instead appoint a liquidator.
However financial advisor Chris Lee says with so much of the owners' wealth tied up in the company, they have too much to lose by not bailing it out.
He estimates a they would have to pay $50 million cost between them, and thinks part of that could come from replacing dividends they took from Hanover last year.
TV ads criticised
Insolvency specialist Gerry Rea says Hanover Finance should have withdrawn its television advertising when problems first became apparent.
Mr Rea says he is not surprised by Hanover's announcement but the company should have acted sooner - particulary in relation to its TV advertising campaign which had promised to protect deposits "whatever the economic weather".
In 2007, Hanover had a complaint upheld against it by the Advertising Standards Authority for its TV adverts, which said it had the "size and strength to withstand any conditions."
The authority says the ad was deemed to breach standards of truthful presentation and social responsibility, considering the financial climate.
