Skip to Content »

Hubbards a “corporation” for statutory management purposes?

  • June 21st, 2010

The Corporations (Investigation and Management) Act 1989 was controversial when it was passed. 

The powers conferred were so sweeping (including suspension of the rights of secured creditors) that there were concerns it could increase the risk premium for lending in and to New Zealand. The sparing use of it since has largely reassured markets, so much so that few would have remembered the early fears. It was passed when New Zealand was feeling particularly humble in the gloomy after party debris of our de-regulation boom, and before the lordly Australians realised that they had corporate cowboys and looters whose falls from grace were even more spectacular.

But I doubt that any of us who analysed it back then would have expected to see [wealthy?] individuals going unwlllingly into statutory management. 

'Corporation' is defined for the purposes of that Act to mean "a body of persons, whether incorporated or not, and whether incorporated or established in New Zealand or elsewhere" .

 The Act gave the power from the start to bring associated persons within the controlled net.  I suppose if one thinks it OK to have a precautionary power to supersede ordinary insolvency and receivership law by decree, there is no particular reason to stop it at genuine "bodies of persons". Individuals too can be so wealthy or have such tentacles that their financial downfall can affect people just as a corporate collapse can. But this law is now being applied in circumstances far from those cited in the speeches of Sir Geoffrey Palmer and others who pushed it through. It was considered necessary  to bring order to collapses large enough to shake the economy – what we'd now all recognise as systemic risks.  The collapse of Hubbard, now that South Canterbury Finance seems to have been insulated from it, is spectacular but hardly a matter of systemic risk.

To apply statutory management in the interests of some charitable trusts and $88m worth of lending seems a long step from what the promoters of this law said they were doing. This is power creep on a grand scale, however useful it may be in the particular circumstances.  I take it to have been used for proper motives. But the powers are so wide and open to political misuse, that this is not a favourable sign.

Alan Hubbard may be grateful for at least one feature of the law.  The hasty drafting in 1989 leaves the statutory managers with an unresolved conflict of interests. Company law and insolvency law usually establish and respect a hierarchy of claimants. At the top are secured and preferential creditors (including IRD and employees). After them come unsecured creditors. Equity holders (members) rank last, as they should. They have the highest risk investment, and their interests should be sacrificed if necessary to help ensure that the higher ranking "stakeholders" get their contractual entitilements. 

Confusingly sections 4 and 5 of the Act state the purposes in terms that treat creditors, members and beneficiaries as if they are all equally deserving of protection. Section 41 confirms the clanger in the statement of what the statutory managers must consider in the exercise of their powers.  This flaw has caused managers deep concern in the past.  It should have been fixed with a simple amendment to confirm that they can discriminate in accordance with the normal hierarchy without liability to anyone.

For Mr and Mrs Hubbard however, it could be a comfort. The managers will have to be aware that if they take a course that might put priority say on prompt realisation, against the risk of further deterioration in property prices (bearing in mind for example Bernard Hickey's bearish expectations for property price (latest –  more falls))  they may be sacrificing the equity stakeholders' prospects of recovery. 

Decisions will be subject to judicial review. A manager is protected by Crown indemnity (section 63) for a good faith exercise of power , but such a draconian law should have been tidied up long ago.

This law is also now a sitting temptation for regulators and a snare for politicians. Even if the ordinary law could handle a situation like this (which might be problematic in the particular circumstances of a mix of trusts and companies and individual affairs) this case could foster cries for "decisive action" from the State in any high profile collapse.  It might be hard for a MInister to answer the question – "why not us?" from the creditors of the next high profile collapser.

Sooner or later sound insolvency law will be damaged.



cooool keep it up!!

Leave your comments:

* Required fields. Your e-mail address will not be published on this site

You can use the following HTML tags:
<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>