Du Val statutory management

The news, last night, that the Government had placed companies associated with Du Val property development group into statutory management is surprising – but perhaps not surprising.

But I am no fan of statutory management as its presence on the statute books (even if not used) quite clearly adds a layer of country risk to the way overseas parties view lending and investing in New Zealand.  More on this below.

I have been intrigued about the move, by the FMA at the end of last month, to obtain court orders to place 64 Du Val companies (as well as the group’s founders) into ‘interim receivership’.  To date, the relevant Court orders (aka the reasons) are not publicly available.

The announcement, by Commerce Minister Andrew Bayly, has (for me) an unfortunate ring of the late 80s to it.  In that announcement, he said that:

[Du Val] has recently gone into interim receivership leaving significant liabilities. The situation is complex and of such a scale that immediate intervention is required to prevent broader harm.

The Minister than added that statutory management is last resort option – used to deal with complex corporate failure where ordinary insolvency law is inadequate.  And that it is intended to protect investors and creditors from further losses, and to enable the orderly administration of a company’s affairs.

When we look at the numbers, The Minister’s announcement says that the Du Val group is made up of about 70 entities, including 46 subsidiaries, and 20 limited partnerships.  There are between 120–150 investors, home buyers and commercial lenders tangled up.  And that, given the number people involved, it’s important to ensure the process is orderly and fair.

By implementing statutory management, all current insolvency processes are suspended.  As a result, the affairs of Du Val can be dealt with by one team – rather than multiple insolvency processes.

As it must, the decision to put Du Val into statutory management follows a recommendation by the FMA.  In turn, that recommendation follows a report from the Court-appointed interim receivers.  And the Minister also refers to the FMA’s ongoing investigations.

It seems that the list of entities wraps up the Du Val group with one exception.  The Order in Council applies to four “core” Du Val companies plus associated persons (all limited partnerships), and 46 subsidiaries.  But one subsidiary is excluded as it is 50% owned by a third party and operates independently of the Du Val group.

The statutory managers are the Court appointed interim receivers, PwC.

In a parallel media announcement last night, the FMA said that statutory management provides remedies to deal with complex corporate failures and is most appropriate where a company has, or may have been operating fraudulently or recklessly or, alternatively, where the ordinary law is inadequate to deal with an orderly wind up of the companies.   It said that, in this case, the FMA considers both provisions apply.

It noted that the report from the Court- appointed interim receivers is currently subject to Court orders restricting its publication. 

The FMA added that it considers that the conditions for appointing statutory managers have been met, and that it is satisfied that statutory management is the most appropriate available option for each of the Du Val group entity to which it has been applied, for the purpose of: 

• limiting or preventing the risk of further deterioration of the financial affairs of those entities;
• limiting or preventing the carrying out, or the effects of, any fraudulent act or activity;
• preserving the interests of their creditors or beneficiaries or the public interest; and 
• enabling the affairs of the Du Val group entities to be managed in a more orderly way. 

Absent any detail, it is difficult to comment further.  For example, as well as investor funds tied up in various projects and entities, it is apparent that there are third party creditors involved – such as contractors on building projects.  Perhaps the Court orders will be illuminating, when they finally emerge.

Comments

There isn’t the time or space available to dissect statutory management and why New Zealand still has the tool available.  It was used in the late 80s to literally protect Chase Corporation and Equiticorp from themselves.  Such was the complexity of the banking and other arrangements that entwined those two groups.  At about the same time, a parallel process available to the Reserve Bank was applied to the DFC. 

Consequently, flotillas of Japanese banks and Belgian dentists, with substantial funds at stake in various loans and other financial instruments, were left very unhappy and largely powerless to apply their rights as creditors. 

The US investment analysts that I worked for in London, on my Big OE in the early 90s, had two pieces about New Zealand in the database – both about statutory management.  Coupled to this was a label affecting advice to clients thinking about venturing outside the mainstream – which simply said:

Country risk – avoid

Statutory management went largely unused until the GFC – when it was applied to Allan Hubbard’s empire.

There must be a serious question as to why this legacy of the Depression, updated slightly in the 80s, continues to be necessary to deal with complex corporate failure – where ordinary insolvency law is inadequate.  It does not have parallels in other countries – notably Australia.

For a country that continues to rely (for growth) on the savings of people in other countries, having an unusual statute available that deprives creditors (particularly), or their contractual rights needs to be carefully explained.  By continuing to be an outlier and (worse still) showing a willingness to use this legacy sledgehammer – will come at an ongoing cost. 

In the meantime, the Minister, the FMA and the statutory managers should be encouraged to communicate frequently and clearly with not only the affected stakeholders, but also the wider commercial community, to manage the optics better.  I would suggest that a 3-week delay is not a promising start. 

And the business media needs to do a better job too.  Forget the salacious gossip – and start asking some hard questions and demanding details.  Not only of the statutory managers, but also of the FMA and ultimately the Minister.  There is quite a lot at stake – and must include a country risk weighting.

For more information, please do not hesitate to contact me.