The director of the Du Val group, Kenyon Clarke, promoted an enviable image of opulence and glamour. Private jets, super cars, champagne and an attempt at a self-funded reality show. Understandably, the recent announcement of Du Val entering statutory management has been a hot topic in the media. So, what is statutory management and was it the right decision?
Statutory management (SM) It is the last resort insolvency procedure which allows a company and its assets to be frozen by the Crown. An external and independent manager is appointed for the purpose of preserving stakeholder interests. The company’s future will be decided by said manager, and most commonly, an orderly liquidation will be its fate. It is altogether a rarely used procedure.
For commencement of SM, the Financial Markets Authority must be satisfied that the corporation may be operating fraudulently or recklessly. Let’s take just one example of Du Val’s actions which could hint at this:
Investors in late 2023 were offered to swap their debt instruments for shares, after Du Val failed to pay coupons. Amongst the Information Memorandum (IM) was an internally produced valuation of up to $431m, supported by no formal independent opinions. Some 66 mum and dad investors accepted the offer.
Furthermore, the IM listed several professional advisors, suggesting their approval of the document. As at 16 August 2024 only two had responded to PwC for comment, both of which admitted they in-fact had no involvement in its preparation whatsoever.
According to the Court of Appeal in Ararimu Farms and Investments Ltd v Stotter, the purpose of the Act which governs SM is to “deal with corporate collapses of such a magnitude that the normal legal procedures available to a corporation, its members or creditors are totally inadequate”.
It’s interesting to note the actual size of Du Val in comparison to other developers in New Zealand as it is not as grand as their image portrayed. According to Opes Partners in August 2024 as measured by volume of building consents:
- Wolfbrook – 5 times larger
- Williams Corporation – 14 times larger
- Golden Homes – 14 times larger
- Fletcher Residential – 18 times larger
- Mike Greer Homes – 19 times larger
Du Val group never floated on a stock exchange, so therefore was never required to disclose their financial balance sheet publicly. Images on social media should never be the yard stick used for judging significance.
The Du Val group is a structure comprised of a very large number of entities; nearly 70. PwC has argued in the High Court that it will be more cost efficient to have a single liquidation process, rather than multiple entities going through the process with a multitude of insolvency practitioners.
Deciding whether it was the right decision to place Du Val into SM is perhaps a question to which the answer will never be revealed. In SM there is no requirement to provide reports to creditors, unlike in a normal liquidation or receivership.
SM could allow creditor claims to be systematically addressed more equitably, via a coordinated effort. Through SM, a moratorium on creditors’ claims is activated. Given the number of entities, there was a perceived risk that individual creditor action could result in a disorderly distribution of assets.
Clearly, SM is at least a very serious procedure reserved for special circumstances. Du Val group’s acting lawyer told the High Court in early September 2024, that it’s a “brutal regime and a level of state intervention that has Cold War vibes to it”. Whilst this claim could belong in a court room drama, it is perhaps a critique not totally unwarranted.
The Securities Commission in 1992 and the Law Commission in 2001 both levelled criticism at the involvement of a political process in the decision to subject an entity to SM, and the lack of transparency and accountability inherent in the procedure. This resulted in no changes to the regime.
Whether or not the use of SM is entirely appropriate in this circumstance, or indeed in any, will be debated. What is clear; however, is that any circumstance where a company is put into SM, will make headlines. SM is the most significant insolvency procedure available in New Zealand.
