Statutory management - what it means

Air New Zealand directors are expected to reconvene today to decide whether the main shareholders are willing to sign up to a $850 million rescue package.

If the proposal does not get the backing of the Government, bankers, Singapore Airlines and Brierley Investments - which are undertaking due diligence - the airline could end up in statutory management.

VERNON SMALL on what that would mean for the company and its customers.

Why would the Government choose statutory management?

Statutory management increases the likelihood of all or part of the business continuing to trade. It would ensure the airline kept flying and would probably ensure tickets, and possibly airpoints, could be honoured.

For Air NZ, it could mean some international routes would be trimmed. The domestic operation faces only limited competition and is likely to be able to trade profitably.

How would it occur?

Statutory management is a provision of the Corporations (Investigation and Management) Act passed in 1989 after the fallout from the 1987 sharemarket meltdown.

The Commerce Minister, acting on the advice of the Securities Commission, can place a corporation and its subsidiaries (unless specifically excluded) and any associated entities under statutory management. The commission is likely to want a clear indication that the company cannot continue trading on before acting.

If the minister accepts the commission's advice, he tells the Governor-General to appoint the statutory manager - normally an individual or team from a top accountancy or management firm.

What criteria does the Securities Commission use?

One reason to act would be a belief that the corporation was operating fraudulently or recklessly. There is no indication Air New Zealand is in this position.

Two other reasons - likely to be the criteria used for Air NZ - are:

* To preserve the interests of shareholders, creditors, beneficiaries, or the public interest.

* Or to enable its affairs to be dealt with more quickly or in a more orderly way.

What is the statutory manager expected to do?

The manager must look after the interests of shareholders, creditors, and beneficiaries of any trusts - and the public interest.

Consideration must also be given to resolving the corporation's difficulties and preserving its business.

What is the effect of statutory management?

The statutory manager can exercise all the powers of the board and shareholders. The appointment brings to an end any existing receivership or liquidation.

Once a manager has been appointed, the corporation is effectively protected from its existing liabilities and repayment of any debts can be suspended.

Assets can be sold, and contracts terminated immediately without penalty for non-performance - although the courts may award reasonable compensation.

The manager can transfer the whole or part of the business into a new company and sell it.

No one can start or continue any proceedings against the company, or attach any debt or enforce or seek any judgment against it. Nor can anyone foreclose, sell, take possession of property or appoint a receiver over it, or exercise any rights under mortgages or leases.

The statutory manager can waive these rights and they do not apply to any contracts entered into after statutory management.

Assets cannot be taken abroad.

Would Air NZ's assets be safe?

Those in New Zealand would be protected. But Finance Minister Michael Cullen has warned that planes and assets overseas could be seized, for instance by Ansett Australia's creditors or by US companies from which it leased planes.

For that reason an arrangement with those overseas interests would probably be needed before a statutory manager was appointed.

Who pays for the manager?

Fees and costs are paid out of the property of the corporation and have priority over all other claims. The Government may make an advance to the manager, but it must be repaid out of the assets of the corporation.

Has it been used before?

Several times. The best-known case was the property interests of Chase Corporation in 1989, involving 110 companies. It was feared that a disorderly fire sale of its buildings, following a string of property company failures, would devastate the market and undermine banks.

Richmond Smart Corporation was placed into statutory receivership in 1989 under the previous Companies Special Investigations Act 1958. Investment company Equiticorp suffered the same fate, and Development Finance Corporation was put into statutory management in October 1989 after high exposure to property and ailing companies such as Equiticorp and Richmond Smart.

In 1989, property magnate Sir Robert Jones described statutory management as a recipe for social disaster because it allowed Governments to usurp contracts.

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