Current New Zealand Law in Context of Rescue
Liquidation
Liquidation is the primary (and strictly speaking the only18) collective legislative procedure for dealing with distribution and realisation of assets of an insolvent company.
While a company, through its directors, can initiate a "voluntary" liquidation, creditors can, by petitioning the court, initiate a compulsory liquidation against the wishes of the company or its directors. The court has discretion to order a liquidation where a company is clearly unable to pay its debts or in certain other "public interest" situations. A liquidation involves the appointment of an independent professional but the purpose of liquidation is to terminate the company's affairs, collect in and distribute net assets to creditors. It is not a long-term objective of liquidation that a business should continue to trade. Once liquidation (a publicly notified procedure) commences, the value of a company's remaining assets is affected, and a stigma is undoubtedly attached to the company and those associated with it. In addition, liquidation exposes the directors and some creditors to claims which a liquidator has power to bring directly against those directors, as well as exposing them to challenges to voidable transactions which may include transactions between the company and its directors shortly before insolvency, and to investigation by the Companies Office.
Liquidators have power to propose a compromise or arrangement between the company and creditors under Parts XIV or XV, but any such compromise carries with it the weakness of the present Part XIV and (to a lesser extent) Part XV, and would only carry a very limited moratorium against creditor action (only court proceedings are automatically stayed in a liquidation, so secured and other creditors can still take non-court action to enforce their claims). In addition, liquidation is a terminal procedure where liquidators have very limited power to trade or manage a company as a going concern. It is sometimes possible for liquidators to act as facilitators for consensual arrangements among creditors (For example in the recent Voss Construction liquidation, creditors, through the liquidator, agreed to set up new subsidiary companies in order to complete specific building projects which would be of value to the creditors generally). However, generally this sort of arrangement is short-term (designed to complete existing contracts) and difficult to negotiate.
There is some uncertainty amongst the judiciary and practitioners as to the precise inter-relationship between liquidation and compromises under Parts XIV and XV.
Receivership
Receivership is not a collective insolvency process, and is largely contractual, arising out of a charge/security given by a company to a creditor, usually a bank, often over the whole or substantially all of the company's assets. Statute has superimposed limited duties and powers upon receivers under the Receiverships Act 1993 (which is not limited to company receiverships), some of which reflected existing law.
From the point of view of corporate rescue, the advantage of receivership relative to existing alternatives (other than statutory management) is that a receiver has the power to step into the shoes of the directors and continue to manage the business of the company as a going concern, if that is regarded as the appropriate course. For that reason, when in 1982 the UK Cork Committee on Review of Insolvency Law proposed a corporate rescue procedure (the administration order) they stated that it was designed to fill a lacuna where there was no chargeholder in a position to appoint a receiver who would have control over all or most of a company's assets. In other words, receivership was regarded as serving adequately to ensure survival of viable businesses or parts of businesses as going concerns, so that in those situations there would be no justification for a corporate rescue procedure. In addition, the administration order procedure in the UK includes power for such a chargeholder to effectively veto any administration order by appointing a receiver. The reasoning behind this was that the receiver, given similar powers as an administrator, could do everything an administrator could do to "rescue" a company, so there would be little point appointing an administrator.
However, two main points should be made about that comparison. In the UK, the 1986 legislation identified a new animal, the "administrative receiver", who was a receiver appointed over all or most of the company's assets and undertaking. Non-administrative receivers still exist, for example if only appointed over one asset or group of assets, or if an administrative receiver is already in place. The new animal was given enhanced powers and duties, effectively putting them in a similar position to an administrator. Thus, with certain court sanctions, they have power to dispose of other secured property without the security holders' consent. Secondly, they have to be licensed insolvency practitioners, and they have certain "soft" statutory duties to report to unsecured creditors. While in practice much of this is symbolic, the point is that in the UK the position of the receiver appointed under a floating charge is strengthened by statute. Notwithstanding this, the DTI report on Company Rescue has recommended removing the right of the appointor of such a receiver to veto an administration order. The policy debate which is currently being undertaken in the UK and elsewhere (for example Hong Kong) has shifted since the late 1970s, when receivership was seen as sacrosanct. Exposure to other jurisdictions which do not have the concept of receivership and the floating charge (France, the US) has led to a more balanced view of the role of receivership, though few would suggest it has no role.
However, the main disadvantage of receivership as a major corporate rescue procedure is that receivers' primary duties and loyalties are to the secured creditor who appointed them. While statute has overlaid a weak duty to consider other stakeholders on disposal of assets, such as the company itself and other secured creditors who might be affected, ultimately the aim of receivership is to realise the maximum amount in order to repay the secured debt to the chargeholder who appointed the receiver. Unlike liquidation, or corporate rescue procedures operating elsewhere, the receiver is not appointed as an agent of all creditors collectively, in order to maximise returns to creditors collectively. He or she is selected by the chargeholder and reports to the chargeholder. While technically the receiver can propose a compromise under Part XIV Companies Act 1993, it would be rare that this would happen unless the receiver thought it would assist in maximising returns to his appointor (who often has to yield priority to statutory preferential creditors).
While banks and receivers would argue that receivership is a rescue procedure, in that it often results in preservation or sale of viable businesses as a going concern, the limitations have to be acknowledged. First, the receiver is acting for one creditor only and once that creditor has been repaid, (or repaid as much as possible) from charged assets, the receiver has no interest in the fate of the company, business, or other creditors. Secondly, for this reason most receiverships are followed by liquidation, since the liquidator must deal with realisation and distribution of any remaining assets. Cases where receivership results in a return of the company (as opposed to part of its business) to solvency are so rare that they call for special remark. Receivers generally have no duty, power or mandate to take on any of the investigative functions in the public interest which are often incidental to a liquidator's or administrator's attack on past transactions or directors' conduct. They would often have no incentive to pursue potentially voidable transactions or pursue directors, even though this may maximise returns for all creditors, since their attitude will be to recover as much or all of the secured creditor's debt as quickly and expeditiously as possible at the lowest cost. Therefore, to the extent that receiverships do "rescue" viable businesses or parts thereof, it is incidental to their main purpose. It is therefore legitimately been claimed that receivership is "unfair" to preferential and unsecured creditors since there is no incentive to maximise returns to them, and that they therefore bear some of the costs of stemming from the banks' concern to look after its own interests. Clearly banks will not want to be associated with job losses and adverse publicity in some cases, particularly larger ones, but this intangible factor will not usually dictate the outcome of an insolvency once receivership has commenced.
How far does receivership achieve rescue? If rescue in receivership is defined as a going concern sale of the business or a return to its directors, limited research has been done. However, in a study commissioned by the UK DTI by Professor Julian Franks and Oren Sussman,19 they conclude that 44% of companies in receivership are sold as going concerns, though since the definition of going concern is imprecise, even this should be treated cautiously. But even if it is an overestimate, it does show that some sort of rescue of viable businesses occurs through receivership in the UK, and no doubt in New Zealand too (notwithstanding the slight advantages of the administrative receivership status in the UK). However, what that does not tell us is whether or not more businesses would be rescued through some alternative procedure, and does not tell us whether returns to all creditors, not just the appointing chargeholder, would be greater in alternative procedures. There are so many variables that such statistics would be difficult to produce, and would then not be directly applicable to other jurisdictions.
The behaviour of secured creditors in situations where they do have an option to appoint a receiver notwithstanding an alternative rescue procedure may throw some light on whether an alternative procedure is desirable. In the UK, where chargeholders with a security covering most or all of the company's assets have the option whether or not to appoint a receiver and prevent an administration order proceeding, research by Professor Harry Rajak confirms earlier research that in 50% of administrations and voluntary arrangements, floating charge lenders exist who must have therefore acceded to the rescue procedure being taken out of their control. This confirms the situation in Canada and Australia. In the latter a dubious practice has arisen of chargeholders consenting to the administration proceeding, but only on the basis that they can trigger appointment of a receiver at any stage (the legality of this has not yet been tested, but is quite prevalent since it allows the administration to proceed). However, of 47 companies in administration, Routledge found that administrators responded that 79% were companies where a substantial charge over company assets existed. The main reasons given were that the lenders were adequately secured and that they had confidence in the administrator.
What this indicates is that even where an alternative to receivership exists, which alternative would remove control from the receiver and their appointor, lenders are still prepared to accede to the wider rescue on behalf of all creditors. There may be several reasons for this. In practical terms, in most cases funding during the rescue will be sourced from pre-insolvency lenders and where, as in most cases, there are only one or two principal lenders, they have an ongoing interest in continuing to finance the company during the rescue process, either to realise their investment and/or to continue the banking relationship. Secondly, the independent administrator is likely to be a professional well-known to the bank and thus commanding their confidence that he or she will do their best to maximise returns for all creditors, and act with integrity towards the secured creditors. In terms of outcome, secured creditors in these regimes may now realise the benefits of the collective rescue procedures, which are attended with many statutory advantages in terms of the administrator's powers, so that they expect a greater return through the administration process, and of course avoid absorbing the costs of receivership.
The Changing Role of Secured Lending
The above discussion examines the role of receivership as a "rescue" device, even though it was not designed as such. However, for the same reason that the Cork Committee concluded that administration orders were needed, it should be emphasised that not all company finance presupposes existence of the holder of a charge over all or substantially all of its assets. Two relevant points should be made.
First, personal property security legislation (PPSA) will change the nature of the discussion, so that new terminology would be needed to define the scope of an all-embracing charge over assets and inventory such as to give a receiver control over the business. Secondly, much bank lending, particularly among larger public corporations, does not rely on secured lending or on the taking of a floating charge. Large unsecured overdrafts are quite common for established companies. Thus, receivership cannot perform the entire "rescue task" even under existing New Zealand law. At present, only the statutory management regime and Part XIV Companies Act would be available to achieve any sort of "rescue" where there is no principal chargeholder with "control" over the assets and undertaking.
In addition, there are two further factors which suggest that receivership cannot be relied upon in future to perform the major role in saving viable businesses. First, the nature of corporate finance is evolving, so that new financial security instruments are being utilised, or existing ones are being increasingly used. Thus, asset financing, invoice discounting and factoring are becoming increasingly important. The DTI UK report on Business Rescue states, in respect of the UK sector:
"An increase in the number and diversity of parties holding floating charges and as a consequence with the right to appoint an administrative receiver: this is partly a reflection of the growing diversity and specialisation of business finance, such as the growth in asset-backed lending, factoring and invoice discounting; there is concern that the new diversity of floating chargeholders makes it more difficult to ensure that the appointment of administrative receivers is effectively treated as a last resort by lenders; the diversity is also making it more difficult to rely on self-regulatory measures by creditors such as the banks' Statement of Principles."20
Secondly, the Personal Property Securities Act, insofar as it widens the scope of instruments which confer security, and insofar as it expands existing security by recognising a continuous security interest (for example extending into proceeds), may serve to enhance the effectiveness and thus the development of other forms of security over assets and intangibles.21, One possibility is that the benefits of simplicity, certainty and enforceability, as well as expansion of the security rights recognised under the PPSA, may mean that a traditional bank debenture will no longer cover so much of the assets and undertaking of the company and it will be less possible for a receiver appointed under it to carry out an effective rescue or sale of the business, because the key assets will be fragmented. While it is too early to predict whether the PPSA will have such an impact on traditional secured lending, it may be a potential factor which should tell against relying on traditional receivership under a fixed and floating charge debenture as the major method of business rescue, apart from all the other weaknesses of receivership referred to above.
Lastly, global initiatives such as the UNCITRAL work on cross-border insolvency and possibly on other areas of insolvency in future, mean that the concept of receivership and the floating charge, which is less well-known outside of the English-speaking world,22 will be difficult to reconcile with collective insolvency procedures at the heart of such global initiatives.
For these reasons, receiverships, though performing a valuable "incidental" rescue function, cannot be relied upon to do so, and are not possible in all cases. In addition, they are not a collective insolvency process and are not designed to maximise creditor returns generally.
Having said that, all modern corporate rescue procedures give recognition and varying degrees of paramountcy to secured creditor's rights. This is a major issue which has to be addressed in discussion of any rescue procedure and it is the other reason why the legislature in the UK has enabled secured creditors to "veto" the collective rescue procedure. Established contractual security rights are respected as a given premise in most insolvency regimes. Part XIV of the NZ Companies Act 1993, for example, states that no moratorium imposed by the court can affect secured creditor's rights to enforce security. Whether or not secured creditors should have their enforcement rights postponed in the short term in order to attempt a rescue, is a matter of policy which should be decided in light of such evidence as is available about the behaviour of secured creditors in rescue situations. The role of secured credit in rescues will be discussed below.
Part XIV and Part XV Companies Act 1993
Part XIV Companies Act 1993 (Part VB Companies Act 1955) was passed in 1993 in order to make compromises between a company and its creditors simpler to achieve. Before then, the alternative was to pursue a court-sanctioned compromise or arrangement under section 205 of the 1955 Act. The latter provisions were not designed specifically for insolvent companies, but as part of a package enabling company reconstructions. Such provisions have been in Commonwealth company legislation for many years. They could be and are used by insolvent companies, but the major disadvantage of using them for achieving compromises on insolvency is the cost and inconvenience of court sanction. In addition, as a late inclusion in the legislative and consultative process, what is now Part XV Companies Act 1993 was added, which provides for court-sanctioned amalgamations, not necessarily just on insolvency. There may be some benefit in using Part XV in the insolvency of a complex group structure or to have the court's sanction for "cramming down", i.e. diluting the rights, of one class of creditors or shareholders where the requisite majorities for Part XIV could not be achieved. (The court may sanction a scheme within Part XV notwithstanding that it could have been proposed under Part XIV). In addition, the potentially wide discretion given to the courts under section 236 means that a wider variety of interests, such as the public interest in preserving a business in the community, have been taken into account, not just creditor views. While the courts have developed a considerable body of jurisprudence as to the test for sanction or refusal of compromises or arrangements, designed to protect minority interests by reference to reasonableness, the Court of Appeal has taken the approach that Part XV does not necessarily dictate application of those tests. In addition, by giving a wide interpretation to the term "compromise", they have reluctantly acknowledged that it could be used even where there is no consensual agreement amongst a group of creditors and the company, but merely, as in that case, a proposal by the debtor in regard to one creditor's claim. Under Part XV there is no precondition of insolvency, so that theoretically, a company could make a proposal under Part XV where there was an early sense of financial trouble, but short of imminent or actual insolvency. Part XV has no exact equivalent in other jurisdictions. The Court of Appeal has expressed concerns about its justification, its wide discretion given to the court, and its relationship with Parts XIII and XIV of the Act. In addition, the Court acknowledged the difficulty in applying any particular objective standard as to whether it should make the scheme binding on a creditor or creditors. In its decisions in Suspended Ceilings v CIR23, some members of the court expressed unease with the provisions of Part XV, and in particular that it seemed to give much judicial discretion with little legislative guidance, which discretion could be utilised so as to avoid some of the consequences of the voting and other requirements of Part XIV. The courts will continue to be cautious in the exercise of their discretion so that they do not create a conflicting body of jurisprudence as between the two Parts. The courts seem to accept that the creditor voting control inherent in Part XIV should be generally acknowledged when exercising discretion under Part XV. However, it is unfortunate that the court has to be put in that position. In any event, cost means that Part XV applications may be prohibitive for most small and medium sized companies in trouble.
The relationship between Part XIV and XV in particular should be examined when reviewing or amending Part XIV.
Part XIV requires that a proponent of a compromise has reason to believe that a company is unable, or will be unable, to pay its debts within section 287 (the liquidation test of insolvency, consisting of rebuttable presumptions). The board of directors, a receiver over all or substantially all assets, a liquidator or (with leave of court) a creditor or shareholder can propose a compromise. The courts have interpreted "compromise" widely to enable any variation, reduction or cancellation of debts or rights and it is not necessary to point to an existing claim or dispute in order to "compromise" it. The proponent gives notice in accordance with statutory form and containing details and possible consequences of the compromise, to all known creditors. Where the interests of different creditors are regarded as distinct, it is necessary to have separate voting for each class and there is a presumption that the compromise is conditional on approval of each class. This requirement for class voting is a potential difficulty for proponents, since it has often proved difficult to identify which creditors should be treated as in different classes, and the courts have had difficulty defining this test. This introduces an element of uncertainty and unpredictability into the notice procedure, because a creditor could challenge the compromise on the basis of insufficiently or inappropriately identified classes.
A compromise is binding once approved by creditors or classes of creditors at a meeting held in accordance with the rules for holding of creditors' meetings in liquidation. It is binding on all creditors who received notice of the proposal in accordance with the statutory requirements (this places a heavy burden on proponents of such schemes to discover all possible creditors. - there is no requirement for advertisement of meetings and even where it is done, it may not affect the outcome for those who did not see the advertisement).
It was a major objective of the introduction of Part XIV to reduce the role of the court, and thus the cost and accessibility of the procedure. While that has happened, there is often court involvement, and in some cases, such as where a creditor proposes a scheme, or where powers of management are intended to be reduced, it is a prerequisite. It may still be the case that the degree of court involvement could be further reduced, especially if modifications included some reporting or monitoring requirement by an outside professional.
The court has power on application of the proponent to stay enforcement proceedings or to order a creditor to refrain from taking any other enforcement measure against the company in relation to debts. This stay may imposed from the giving of initial notice until a period ten days after notice of approval of the compromise has been lodged. Thus, it is sufficient to provide a limited moratorium preventing creditors from taking proceedings, and, at the court's insistence, other enforcement steps. However, it is of limited effectiveness in that it is not automatic, as is the case in most rescue procedures, and the only general prohibition is on proceedings in court; other enforcement steps can only be prohibited if specifically requested. Lastly, it may be regarded as a major weakness of Part XIV that neither the scheme nor the court can affect the enforcement rights of secured creditors.
A compromise may continue under Part XIV notwithstanding that the company goes into liquidation. The court may make orders either before or after liquidation about the extent and period of continuation of the compromise after liquidation. This can be seen as an uncertainty in the procedure, or a useful flexibility. In other rescue procedures, there is a more rigid but clearer relationship between the compromise and other insolvency procedures, particularly liquidation. It should also be noted that section 287 Companies Act specifies failure of a Part XIV proposal as a ground for presumption of insolvency, enabling a petition for liquidation to be brought. One question to address when considering any new rescue procedure is how far failure to achieve a consensual compromise should automatically lead to liquidation.
In conclusion, the present Part XIV is an improvement on the available tools for consensual compromise which existed prior to 1993, but its major disadvantages are the lack of an automatic moratorium, and one that binds secured creditors, and secondly, the requirement for class meetings.
If possible, research should be undertaken as to how far Part XIV has actually been used, and to what effect. One suspects that it has been infrequently used due to the problems identified above, and due to uncertainty about its scope and relation to Part XV.
Statutory Management
I understand that a review of statutory management under Corporations (Investigation and Management) Act 1989 and related Reserve Bank Act legislation is a specific topic within the review of insolvency law by the Minister and has been referred to the Law Commission. Therefore comments at this stage will be confined to its advantages and disadvantages as a rescue procedure.
The first disadvantage from the point of view of the company and its directors, and from the point of view of rescuing viable businesses, is that the procedure can only be initiated by Order in Council by the Governor-General on advice from a Minister in accordance with recommendation of the Securities Commission. It is not a procedure over which creditors have any direct control or standing. This is also true of the company and its directors. Creditors, the company and its directors are usually the main groups who would initiate insolvency proceedings; while most jurisdictions give standing to an appropriate government minister to initiate proceedings in the public interest, by bringing a petition for liquidation or administration before the court, statutory management goes further. First, only the Executive can initiate the procedure; secondly, there is no court hearing at all. The related disadvantage is the cost involved (albeit one that falls on the government) in initiating the procedure. It is normally shareholders and creditors who monitor the performance of the company and it could be argued that the existence of a government power to "rescue" troubled companies is a disincentive to monitoring and therefore transfers costs to the government. (There is a provision in CIMA designed to avoid this "moral hazard", since it provides that neither the Registrar-General nor any other person is under a duty to supervise a corporation subjected to statutory management, section 7). (Lastly, statutory management does not show the same deference as is shown in many jurisdictions' corporate rescue procedures to secured creditors' rights to appoint a receiver. While the Securities Commission certainly takes into account whether such a chargeholder exists (see Appendix 1 to report of April 1991 on CIMA) in deciding whether or not to recommend statutory management, no existing liquidator or receiver can remain in office while the statutory management is on foot.)
For this and other reasons, statutory management cannot be regarded as a collective insolvency procedure. There is no requirement of actual or imminent insolvency in order for the procedure to be used, though fraud and public interest are often factors in insolvency. While the creditor's interests are something to which the statutory manager must have regard, so are the interests of members, beneficiaries of any trust and where appropriate, the public interest. There is no suggestion that any one of these interests has primacy and therefore the focus and objectives of the procedure are potentially wider than in most collective insolvency procedures, which are largely creditor-focused.
However, the advantages of statutory management, and the reasons why it has been possible to conduct procedures in relation to relatively large company groups in the 1980s and early 1990s, have been threefold. First, there is an extremely wide moratorium in section 42 prohibiting most types of creditor enforcement steps, including secured creditors, self-help remedies and set-off. This type of wide moratorium is found in the United States Chapter 11 procedure, the moratoria in Australia and England being slightly narrower.
There is no doubt that the moratorium under the C(IM)A, or even a narrower-ranging moratorium, would be a powerful complement to Part XIV, or a good basis for any new rescue procedure.
Secondly, the powers granted to a statutory manager are similar to powers of a receiver of a company, yet wider in that, for example, a statutory manager can disclaim onerous property and sell property subject to security. The powers of a statutory manager to continue running a business, with the benefit of a wide moratorium, put the statutory manager in a very similar position to an English or Australian administrator. Again, if the Ministry chose to enact a rescue procedure which had an independent manager who assumed directors' functions, statutory management would be a possible basis for the powers of such a person. In some respects, a statutory manager has wider powers than any combination of receiver and liquidator , for example the power to suspend payment of (pre-statutory management) debts , or employment or agency contracts, without causing repudiation or breach of any contract (sections 44, 49).
In conclusion, while not wishing to pre-empt either a review of statutory management as a separate topic, or a more detailed review of corporate rescue procedures later in the process, there are some ingredients of the statutory management regime which are central to any separate rescue procedure, principally the wide moratorium, and the powers given to any independent manager who assumes the directors' functions. On more detailed consideration of the nature of any desirable rescue procedure, it would be possible to incorporate or adapt these aspects of statutory management in any new or adapted procedure.
It should be noted that the Securities Commission, in its April 1992 Discussion Paper on CIMA 1989 noted the absence in New Zealand of "adequate rules of law which provide for corporate moratoria and corporate restructuring on a timely basis" (para 9). The method of initiation of a statutory management (or the related procedures under the Reserve Bank Act) makes it unavailable to creditors or the company as an avenue for rescue. Since arguably the need for any rescue procedure is for a simple and accessible procedure so that a company or its creditors can take prompt and early action of an affordable nature to preserve any viable business, statutory management as presently constituted is not an adequate basis for a rescue procedure.
Systemic Failure
A different question which would have to be addressed if it was decided to introduce a new rescue procedure or adapt an existing one such as Part XIV, is whether there should be some provision giving an appropriate governmental or ministerial body standing to initiate the procedure on public interest grounds, along the lines set out in Corporations (Investigation and Management) Act 1989. In addition, the special position of financial institutions might arguably lead to special standing of an appropriate Minister or official to initiate any new rescue procedure. It might even be a logically consistent step to retain the substance of the Reserve Bank Act statutory management procedure, but not the CIMA corporations procedure:
"In market economies, the liquidation and rescue process should not be the subject of political or government influence or intervention. However, the presence or absence of some exceptional economic, social or other such circumstance might sometimes justify a special process and the involvement or intervention of the government. Typical of such a process is one that might be applied when the banking sector of a country is itself in financial difficulty."24
Two of the main purported objectives of statutory management and its predecessor were to deal with fraud and to deal with large group failures. The objectives are broadly stated in section 4 of the Act and elsewhere, and it needs to be shown (except where fraud or recklessness is involved) that a corporation's creditors, members or the public interest cannot be adequately protected under the Companies Act 1993. In relation to group companies, the placing of a corporation into statutory management will automatically extend to its subsidiaries unless they are exempt by order in council. While highly convenient, both these matters can arguably be dealt with by rescue procedures and by liquidation. Corporate rescue procedures in major jurisdictions have been used to deal with large complex group insolvencies such as Maxwell and Polly Peck, often multinationals. These matters would need to be addressed in conjunction with the review of statutory management. In particular the question of how to deal with corporate groups in insolvency and restructuring situations is clearly one which overlaps with other parts of the review of both "phoenix companies" and statutory management. (Professor Ian Ramsay at Melbourne University , at the request of ASIC, has recently produced a large report purely on the treatment of corporate groups).
Much of the work following on from the Asian Crisis has been in the context of how insolvency systems can be designed to deal with systemic failure, particularly the effect of failure in the financial sector. As a consequence, many countries in that region have passed legislation or established procedures which involve central government, or government agencies, directly in the rescue process. This has been done mainly by one of two routes, or by both routes. The government has either established an entity or bank authority which actually intervenes by trading in distressed debt, as has happened in the complex provisions for the Danharta authority in Malaysia. Alternatively, as in Indonesia and Thailand, attempts have been made to establish a committee or agency which will facilitate rescues or oversee liquidations. To some extent these entities are performing the functions which private insolvency professionals would perform in more developed systems such as New Zealand, and so there is no suggestion that these experiences are relevant here. However, it serves to illustrate that business failures, particularly in the financial sector, can have wider systemic effects and it is a matter of policy whether this is to be left to the usual insolvency procedures, or whether special procedures are necessary to deal with these, such as the powers in the Reserve Bank Act. It is widely acknowledged that excepting banking and insurance companies from the scope of rehabilitation procedures, and subjecting them to more specific procedures, is acceptable. On the other hand, there would have to be clear reasons why certain sectors were not amenable to the mainstream rescue procedure. In the UK, administration procedure was extended to banks in 1989, and has been used successfully. It is also true that in the UK specific pieces of legislation on privatisation of utilities, have devised adapted administration order procedures to deal with these essential services (this has happened with Rail, Gas, Electricity and Water). Largely, however, the structure follows the Insolvency Act 1986 concepts.
In conclusion, statutory management was conceived with broad objectives within an Act some of whose provisions coincide with the usually accepted objectives of corporate rescue on insolvency, and others which are part of the wider role of the State in investigation and regulation of commercial morality, and preservation of the commercial infrastructure and investor confidence. Consequently, aspects of statutory management (and related Reserve Bank Act) procedure could be preserved in any rescue procedure, such as the moratorium and the powers of the manager, but the initiation and termination of the procedure and the complete absence of either debtor or creditor control is virtually unprecedented in the developed world, inconsistent with other corporate provisions and goals in the Companies Act (such as Part XIV itself) and arguably places unnecessary monitoring and regulatory cost on the State and courts, which could be transferred to creditors and other stakeholders.
Whether there is a case for dealing with systemic failure in the financial sector, or specific financial sector failures by separate procedures such as that in the Reserve Bank Act, and aside from any mainstream corporate rescue procedure, can be examined in the review of statutory management. However, it is suggested that the overriding principle should be the need to make out a clear case in the public interest why an executive-initiated and controlled procedure is necessary in preference to the mainstream insolvency regime.
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