Statutory management was never on the cards

By Mike Ross

Friday 5th October 2001

Media pundits ran away with the idea statutory management would cure Air New Zealand's problems but the market knew better. Air NZ share prices fell 40% in one dramatic day after media speculation statutory managers might be appointed.

Investors dumped Air NZ stock, knowing from past experience this would be the kiss of death. Contrary to ill-informed media comment, statutory management was never intended to be used for corporate rescues and never has been.

Statutory management is like a neutron bomb, leaving the business structure intact while destroying all around it. It was not designed to rescue companies in financial difficulty. Its primary aim is to take control of companies where fraud is suspected or where there is no alternative legal procedure available to deal with a sudden crisis.

There has never been any evidence fraud is at the heart of Air NZ's travails. It is in financial difficulty but is not so overwhelmed only statutory management can deal with the problem.

Suggestions Air NZ might be put into statutory management led to a media feeding frenzy - print media, radio and television were so sure the axe was going to fall it was presented as a done deal. It never happened but investors were certainly spooked.

It is not clear where the rumours originated. Some reports had the airline's acting chairman, Dr Jim Farmer, threatening shareholders Singapore Airlines and Brierley Investments that any failure by them to front up with a promised capital injection would result in Air NZ going into statutory management.

Dr Farmer is a wily negotiator with a well-respected legal brain. When it comes to using legal rules to tactical advantage he is up in the top rank. But given the history of statutory management in this country, he would know the appointment of statutory managers would destroy Air NZ as it currently exists. He would also know Air NZ aircraft would never leave the country if statutory management were invoked, for fear of unpaid creditors seizing them.

Other reports intimated Prime Minister Helen Clark was looking favourably on statutory management. The inference was that Air NZ subsidiary Ansett Australia had imposed a moratorium on creditors' claims by going into voluntary administration and the New Zealand equivalent for Air NZ would be statutory management. Voluntary administration in Australia and statutory management in New Zealand are chalk and cheese - poles apart.

Something akin to voluntary administration was recommended for New Zealand in a Law Commission report earlier this year. In Australia, it kicks in simply on the resolution of the board of directors. Control of company assets passes to a board-appointed administrator.

The administrator is required to negotiate a rescue package that is put to creditors for approval. If creditors vote down the proposal, the company goes into liquidation.

While in control of the company, the administrator is personally liable for trading expenses. This liability can extend to personal liability for pre-existing lease and employment contracts.

Given the extent of this personal liability, the Ansett administrator probably had no choice but to shut down the airline. While voluntary administration does impose a moratorium on creditors' claims, to provide a breathing space while a rescue package is formulated, secured creditors with a floating charge have a right of veto.

The contrast with statutory management in New Zealand is stark.

This is a political decision made by the government on the recommendation of the Securities Commission.

A statutory moratorium freezes all creditors' claims. No secured creditor has a right of veto. The statutory manager is not obliged to prepare a rescue plan.

The 1989 legislation that set up statutory management was not designed to rescue companies in financial difficulty. It was intended as a "holding action" to freeze the position while an investigation was undertaken.

The most recent examples have been Max Resources (1998) and IMI Pacific & Walakahai Pacific (1999); both instances where fraud was suspected. Criminal charges resulted.

For a time, governments have been loath to use statutory management because of the commercial backlash that followed its use in the early 1990s. As part of the fall-out from the 1987 sharemarket crash, Equiticorp, Richmond Smart, the property arm of Chase Corporation and the Development Finance Corporation were all put into statutory management. Investors, both local and offshore, were so outraged by the all-encompassing nature of the moratorium the Securities Commission considered it politic to review the operation of statutory management.

Its 1992 report recommended improved accountability for statutory managers and provision for the courts to review the conduct of any statutory management. The recommendations have never been enacted.

Mike Ross teaches in the department of commercial law, University of Auckland business school

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