Jane Diplock: Statutory management should be last resort

Jane Diplock says statutory management has rarely been used. Photo / Martin Sykes

Opinion

A number of commentators have been calling for the statutory management of various companies, and querying why it wasn't used for finance companies such as Bridgecorp, Nathans or Capital + Merchant.

The frustration of these commentators and investors is understandable.

The concept of statutory management and the way in which it can be used is not well understood. It is a tool of last resort with strict tests as to how and when it can be applied.

Statutory management is uncommon and very difficult to apply under current law and in my opinion it should remain so.

Statutory management takes over the rights of shareholders and creditors as well as directors. For that reason the circumstances in which it can be used are tightly prescribed by the legislation and its exercise is subject to layers of decision-making.

Statutory management is available only where the Securities Commission is satisfied on reasonable grounds either that the corporation is, or may be, operating fraudulently or recklessly; or it is in the interests of shareholders, creditors or trust beneficiaries or in the public interest to use the statutory management measure and those interests cannot be adequately protected in any other way.

This last requirement - no other alternative - is critical. In the great majority of cases shareholders or debenture holders have rights under the law to take action to protect their interests, for example by their trustee appointing a receiver under a security, or by seeking the appointment of a liquidator. Obviously each case depends on its own facts, but the indicators that statutory management might be needed include:

A complex group of corporations linked by shareholdings or inter-company debts.

Many creditors, unsecured or holding a range of different securities, affecting different companies in the group.

No security document enabling the timely appointment of a receiver or manager for the group as a whole.

The prospects of protracted litigation and expense to trace rights through a complex group.

Vulnerable assets, such as work-in-progress under construction or development contracts.

The effect on a market of the possibility of unco-ordinated and distressed sales.

The effects of intervention and non-intervention upon the credit standings of companies.

Typically statutory managements begin with an investigation by the Registrar of Companies using his various powers to request or compel information and to investigate the affairs of a corporation, and to report to the Securities Commission.

When the matter is considered by the commission, it must first satisfy itself that the relevant reasonable ground is established.

Even if it does so, the commission then has to consider whether statutory management would limit or prevent the risk of further financial deterioration or fraudulent activity or its effects; or preserve the interests of creditors etc or would be in the public interest; or would enable the corporation's affairs to be dealt with in a more orderly or expeditious way.

The commission must keep in mind that statutory management is only available where there is no other alternative, such as receivership.

If all these factors apply, then a recommendation for statutory management can be made to the Minister of Commerce.

The minister separately decides whether to act on the recommendation, and accordingly receives advice from his officials.

If the minister accepts the recommendation, the statutory management is formally achieved by an Order in Council. During the past 10 years, statutory management has been used only three times.

The statutory manager of a company must decide whether and when the statutory management will cease. It is not a matter for the Securities Commission. Its role ceases on the recommendation for statutory management to the minister.

If investors and commentators believe that the criteria for statutory management should be expanded, now is the time for them to act. The current review of the Securities Act could consider this.

However, given the impact on the rights of all involved in a statutory management, I do not believe any change is warranted.

To my mind it should remain a constrained power with the current checks and balances.

However, the expansion of statutory management as a regulatory tool is only one option to be considered.

My support for properly enforceable directors' duties in the public interest has been well publicised.

I believe that if directors' duties were enforceable by the regulator, then we would hear fewer calls for the use or expansion of statutory management.

Jane Diplock is chairman of the Securities Commission.