Statutory management is a regulatory intervention mechanism used by the Non-Bank Financial Institutions Regulatory Authority (the Regulator) in the financial services sector. This regime is particularly relevant for non-bank financial institutions (NBFIs) that are in distress or facing significant financial instability.
Under this regime, a Statutory Manager is appointed to take control of an NBFI to protect the interests of depositors, shareholders, creditors, and the broader financial system.
The financial services legal framework that governs the statutory management regime is the Non-Bank Financial Institutions Regulatory Act, 2023, as well as other sector-specific legislation, such as the Securities Act (which regulates the conducting of securities business in Botswana, i.e., asset managers), the Insurance Industry Act (which regulates the conducting of insurance business in Botswana, i.e., insurers and reinsurers), and the Retirement Funds Act.
What is an NBFI?
The Non-Bank Financial Institutions Regulatory Act, 2023, defines a “nonbank financial institution” as, amongst others, the following persons operating an institution of:
- an asset manager;
- a retirement fund;
- an administrator of a retirement fund;
- a collective investment undertaking;
- an insurance agent;
- an insurance broker;
- an insurer;
- an investment adviser;
- a securities broker or dealer;
- a securities exchange;
- a medical aid fund;
- a microlender;
- a pawnshop; and
- a virtual asset service provider.
Appointment of a Statutory Manager
A Statutory Manager may be appointed in two ways. Firstly, by the Regulator appointing the Statutory Manager directly. However, upon the direct appointment of a Statutory Manager by the Regulator, the Regulator must then apply to the High Court within five days for an order confirming the appointment of the Statutory Manager.
Secondly, by way of an application to the High Court. This can be done by either the Regulator or an interested party (i.e. a creditor), provided that they obtain the written consent of the Regulator before they apply for statutory management at the High Court.
The basis for appointing a Statutory Manager of an NBFI in terms of the financial services legal framework is if the NBFI is likely:
- to not be complying with any financial services law; or
- to be in an unsound financial position; or
- to be involved in a financial crime.
In the event that the Regulator elects to appoint a Statutory Manager directly, it may also do so on the basis that it is necessary to protect the:
- interests of a client of the NBFI;
- stability, fairness, efficiency, and orderliness of the financial system; or
- safety and soundness of the NBFI.
Powers and Duties of a Statutory Manager
The Statutory Manager’s primary duty is to manage the affairs of the NBFI to the exclusion of its directors and act in the best interests of the institution’s stakeholders and the public.
The Statutory Manager has broad powers in managing the affairs of an NBFI, which include, amongst other things, taking control of assets, managing operations, restructuring the institution, and making decisions to stabilize and restore its financial health.
The Statutory Manager also has the power to repudiate contracts deemed detrimental to the interests of any client of the NBFI. This means that the Statutory Manager can refuse to fulfill contractual obligations that the NBFI has, thereby rejecting or renouncing the contract.
It must be noted that the powers of a Statutory Manager are not unfettered, as they cannot make unilateral decisions on the business of the NBFI that would require shareholders’ approval. Furthermore, the Statutory Manager is also subject to complying with the Regulator’s directions during the statutory management of the NBFI.
The Statutory Manager shall, as soon as practicable after appointment and investigating the affairs of the NBFI, advise and report to the Regulator on procedures to ensure the NBFI is compliant with financial services laws, financially sound, and free from financial crimes.
If it is not practicable to use the prescribed procedures to ensure compliance, the Statutory Manager may:
- Direct that the business of the NBFI be transferred to another person, specifying the terms of such transfer; or
- Recommend to the Regulator that the NBFI be wound up or placed under liquidation.
Remuneration of a Statutory Manager/Who pays the Statutory Manager?
The Statutory Manager is entitled to receive remuneration from the business of the NBFI as ordered by the Court during the period of statutory management.
Termination of Statutory Management
The office of the Statutory Manager terminates when:
- the Regulator is satisfied that the purpose for the appointment no longer exists; or
- the Regulator applies to the High Court for the NBFI to be wound up on the basis of insolvency and the unlikelihood of returning to solvency within a reasonable time.
Is Statutory Management the same as Judicial Management?
Although statutory management and judicial management are similar in that a manager is appointed to manage the affairs of the entity, they are not the same. This is because judicial management:
- generally refers to situations where a company is unable to pay its debts due to mismanagement or some other cause, in which a Judicial Manager is appointed with the objective of rescuing the company and returning it to profitability, and thereafter returning the company to its directors;
- is a process where the Judicial Manager is appointed in terms of Part XXVI of the Companies Act and therefore falls within the jurisdiction of the Master of the High Court, unlike the Statutory Manager, who is appointed in terms of the abovementioned financial services laws and is answerable to the Regulator;
- applies to all companies whilst the statutory management applies only to NBFIs; and
- is made by way of a petition to the High Court by the company itself, a creditor, or a member to the High Court.
Historical Use of Statutory Management
The Courts have recently confirmed the appointment of Statutory Managers of NBFIs by the Regulator in cases such as those set out below.
A notable case involved Capital Management Botswana (Proprietary) Limited (“CMB”), a licensed asset manager at the time, being placed under statutory management by the Regulator on the basis that it discovered that CMB was in breach of the provisions of the Securities Act, in particular, the failure to submit audited financials.
Another notable case involved a company called Bluthorn Fund Managers (Proprietary) Limited (“Bluthorn”), which was licensed as a collective investment undertaking. It was also placed under statutory management by the Regulator on the basis that there were various breaches of the provisions of the Collective Investment Undertakings Act.
Conclusion
It is therefore important for directors and managers of NBFIs to be aware of the possible steps that the Regulator may take to ensure compliance with financial services laws, in particular, statutory management. Understanding this mechanism helps in better governance and adherence to financial services laws, which ultimately safeguards the interests of clients, maintains the stability of the financial system, and upholds the integrity of the NBFI itself.
Directors should proactively ensure that their institutions operate within the legal framework to avoid the need for such interventions. By prioritizing financial soundness, transparency, and regulatory compliance, NBFIs can contribute positively to the broader financial ecosystem and prevent the adverse consequences of statutory management.
