Dialogue: Voluntary code would help protect unsecured creditors

By GARETH HOOLE*

In recent weeks the spotlight has remained on the Hartner Construction receivership and some of the subcontractors who stand to lose money have asked that the Minister of Commerce appoint a statutory manager.

Some have evidently gone as far as laying complaints with the Serious Fraud Office, indicated by the minister to be an essential prerequisite to the appointment of a statutory manager under Part III of the Corporations (Investigation and Management) Act 1989.

The apparent motive for making this request to the minister is that a statutory manager has wider powers of investigation than those of a receiver.

The aggrieved subcontractors also believe that the receiver is acting primarily in the interests of the debenture holder, in this case the National Bank, while they stand as unprotected and unsecured creditors.

They have not questioned the competence nor commitment of the receiver; they have simply arrived at the correct conclusion that the receiver's loyalty is to the security holder.

In the event that a receiver of a company is able to realise sufficient proceeds to pay the debenture holder, the company in receivership will be handed back to its directors and the issue of the remaining, unpaid creditors would then need to be addressed.

More often than not liquidation follows a receivership and the unsecured creditors get little, if anything at all.

The Minister of Commerce has thus far refrained from invoking the legal provisions to appoint a statutory manager in the Hartner case, mainly because the nature of statutory management is controversial and the intent behind this legislation is that it be used cautiously.

The issue of protection of unsecured creditors remains valid and against this backdrop a strong argument can be raised for enacting a voluntary administration code, similar to that in Australia and along the lines of the often-utilised Chapter 11 bankruptcy relief in the United States.

The UK and Canada have similar regimes to aid the rescue of non-performing companies and to assist in protecting the rights of unsecured creditors.

Such legislation provides for an effective moratorium against companies which are ailing, during which time all creditors are prevented from taking precipitous action against the company and an independent administrator takes charge of its affairs.

That administrator formulates a plan of action in the short term and attempts to implement a long-term survival strategy, to nurse the company back to financial health.

It is recognised that this will not always work and sometimes the problems are too deep-seated to result in a turnaround.

However, if early indications show that a viable, sustainable business will exist under the right stewardship, surely it is preferable for creditors to defer their claims for a while in the expectation that they will derive a greater benefit in the future than they would if the company was to be liquidated in the short term?

Also affected would be the staff of the business who could well hold onto their jobs which they would otherwise have lost after liquidation, thus averting all the negative consequences of redundancies.

For such a regime to be effective and for the rights of all creditors to be protected, there must be sound rules and procedures in place, all carried out under the watchful eyes of the court.

Most importantly, the duration of the moratorium period during which claims by creditors are suspended must be restricted.

In both Australia and the UK an appointed administrator has just 28 days to take control of the affairs of the company, investigate the financial position and come up with a recommendation to the creditors as to the way forward.

When an administrator is satisfied that there is a chance of restoring profitability, that initial period can be extended to allow the turnaround exercise to be carried out.

In New Zealand, where most companies fit the description of small to medium sized enterprises, a turnaround exercise can realistically be expected to be achieved within six to 18 months.

A criticism of the Chapter 11 code is that management, who might well have been responsible for the demise of the company in the first place, can remain in control of the business during the protection period, working alongside an administrator.

The Australian practice of suspending existing management appears to be preferable as it adds the benefit of independence and impartiality.

* Gareth Hoole is a senior manager in the client advisory services division of Staples Rodway and is a member of the Turnaround Management Association.