Statutory management – again

There is a strong sense of déjà vu (all over again) as we start or finish the day with claim and counterclaim about the state of the nation in the Du Val statutory management.  And here I make no criticism of the business media – after the initial news blackout (IMHO deplorable) they have been seeking to make sense of the key issues and report them.  There will be a range of interested parties equally keen to receive something/anything to fill the vacuum.

The “haven’t we been here before” feeling has been amplified by the suggestion that, because the supervisory folk at the FMA had given the much talked about IM some sort of green light (subject to provisions of additional information, and a get out of jail card, to alleviate concerns that it may have been misleading and deceptive), apparently only a few weeks before the balloon went up.  This sounds like the first rumblings of a claim against (ultimately) the taxpayer – for compensation.

But I digress.  The complexities highlighted by PwC’s 16 August report – and the plate of spaghetti reference to the group structure serve to underline a substantial part of the problem that may (ultimately) justify the logic for some form of statutory management remaining on the statute books. 

Where, deliberately or otherwise, the group structure is so complicated, or uncertain, that pooling under standardised insolvency processes is not possible – then statutory management may be the only answer. 

2001, a Law Commission study paper

But, as far back as the Securities Commission’s 1992 report – and again in the Law Commission’s 2001 study paper, the problems with the current legislative regime for statutory management were clearly identified.  And since then….crickets.  The issue was not targeted in the terms of reference for the Insolvency Working Group (2015 – 2017).

One of the primary recommendations in the Law Commission’s 2001 study paper was the need for improvement of New Zealand’s insolvency laws by the introduction of a targeted rehabilitation regime for distressed businesses.  Consequently, whilst the Law Commission considered that most of the potential benefits of statutory management would also be covered by the proposed rehabilitation regime, it concluded that statutory management may still be useful where:

• issues involving the public interest are involved; and
• a process is needed to bring order to chaos and then determine how to deal with the core business.

The Law Commission continued that, if statutory management is to be preserved as a remedy of last resort, then:

• Short/sharp:  the maximum initial period of statutory management should be 3 months, with power to extend this for a further 3 months;
• High Court appointment:  decisions to invoke statutory management should be made by the High Court, with provisions for notice of the hearing to be given, and reasons to be given;
• Reporting:  a report be provided to creditors and other stakeholder within 1 month – with a meeting to be held in the second month to decide what action should be taken – on the basis that statutory management should be used as a filter to determine what insolvency procedure should ultimately be used, or whether the business can be returned to management in a solvent state; and
• Group structures:  noting the need for special provisions to address any issues that arise where a smorgasbord of different types of entities are involved (not all of which may be corporates and/or domiciled in New Zealand – hampering the use of existing legislation for pooling of assets).

Interestingly, the Law Commission, whilst encouraging reporting and transparency, also recommended that statutory managers be given a privilege in respect of reports to enable them to:

“state with frankness the conclusions which they have reached”.

Deja Voodoo

Already, it seems that this statutory management contains many of the troubling features that hark back to the GFC.  The claims by some stakeholders that their stake was in a different bucket and should be treated separately (in priority) to others being just one.

Finally, the lessons from this statutory management need to be adopted, quickly.  If, as appears to be the case, this government is serious about modernising and improving the efficiency of our business laws, then in addition to dusting off the Law Commission’s recommendations – some serious re-thinking is needed about the demarcations for ‘wholesale investors’.  As other jurisdictions have shown, those demarcations are important.  To take one example, without clarity we risk depriving start-ups of capital – and shovelling more money into the property market.

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