There are few publicly available statistics on the restructuring market in New Zealand, and none which are comprehensive. New Zealand Insolvency and Trustee Services provide an annual report which covers only those corporate insolvencies where the Official Assignee has been appointed as the liquidator (not private appointments).
In 2016/2017, 3,250 companies were placed into liquidation with the Official Assignee appointed in 4% of these cases. The corresponding figures for 2017/18 were 3,091 and 4%, and for 2018/19, 2,830 and 3%.
However, insolvency and restructuring activity has begun to pick up over recent months as the New Zealand economy enters more difficult waters. Business confidence is down to the levels experienced during the Global Financial Crisis, and a liquidity squeeze with higher costs of credit is in prospect as a result of developments in the banking sector.
Chief among these is the review by the Reserve Bank of New Zealand (RBNZ) to raise significantly the capital adequacy requirements applying to the local commercial banks – a prospect the banks say will force them to adopt more conservative lending policies, particularly toward small business and rural New Zealand.
There has also been some impact from the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and from follow-on reviews by the RBNZ and the Financial Markets Authority (FMA) into the New Zealand insurance and banking sectors. This has resulted in legislative reform proposals to improve consumer protections, changes which the Government expects to implement within the next two years and which it acknowledges will push up compliance costs.
A Farm Debt Mediation Bill is also in the pipeline that will require creditors with security interests in farm property to offer mediation before taking any enforcement action in relation to that debt and will allow farmers to initiate statutory mediation with a secured creditor. Some of the leading banks are already concerned about their exposure to highly leveraged farms, particularly in the dairy sector.
Offshore credit funds now operating in New Zealand are offering structures, terms, pricing and tenors that can be difficult for local commercial banks to match. The bond market is also growing in popularity with more New Zealand companies using US private placements (USPP) as a funding option. USPP investors, bond-holders and credit funds may be less flexible than the local commercial banks in their approach to distressed borrowers.
Distressed debt investing or debt trading is not common or well developed in New Zealand. To the extent it does occur, it is likely to be at an institutional level.
The Companies Act 1993 governs corporate restructuring and insolvency of New Zealand corporations, including distributions of a company’s assets to creditors.
New Zealand’s main corporate restructuring processes are creditor compromises, schemes of arrangement, receivership, voluntary administration and liquidation.
There are no circumstances under which a company or its directors are obliged to commence formal insolvency proceedings. However, directors may initiate formal insolvency proceedings to minimise the risk of personal liability for reckless trading (see 12.1 Duties of Directors).
There are three formal corporate insolvency proceedings under New Zealand law:
• voluntary administration;
Each process is addressed in detail in 5 Unsecured Creditor Rights, Remedies and Priorities and 6 Statutory Restructurings, Rehabilitations and Reorganisations.
Formal compromises and schemes of arrangement are usually proposed by the debtor company or its board. They are rarely imposed by creditors as leave of the court is required.
Directors usually appoint voluntary administrators. Only a creditor with security over all, or substantially the whole, of the debtor’s assets may appoint a voluntary administrator. Such a creditor may also appoint a receiver.
Any creditor may apply to the court to appoint a liquidator. The company, and other creditors, are given an opportunity to oppose or support the application. A range of other persons also have the right to apply for a liquidation order, including the debtor company itself, directors, shareholders and various regulators. A special majority of creditors may appoint a liquidator by vote in a voluntary administration.
Shareholders may, by extraordinary resolution, appoint a liquidator at any time.
A formal compromise may be proposed where there is “reason to believe that a company is or will be unable to pay its debts”. To appoint a voluntary administrator, the board must resolve that “the company is insolvent or is likely to become insolvent”. To appoint a liquidator, a court must be satisfied that the company is unable to pay its debts, or that it is just and equitable in all the circumstances that it be liquidated.
A company is presumed to be unable to pay its debts if it fails to pay a debt demanded in a specific form, if a receiver has been appointed to it, or a formal (statutory) compromise has been put to creditors but not accepted. Otherwise, an inability to pay debts can be proved on the evidence. It is an objective test, on which the courts take a “practical business perspective”, considering both present debts and those that will, or may, fall due in the reasonably proximate future.
The government may appoint statutory managers to any company, and to any associated person, in cases involving serious concerns of fraud or reckless operations. This is invoked in serious cases involving very complex situations, large potential losses and widespread impact on the public. A statutory manager’s powers include suspending obligations, terminating contracts, paying creditors and compromising claims.
A statutory manager may be appointed for a trading bank by the Governor-General, on the advice of the Minister. Otherwise, there are no insolvency processes specific to banks or non-bank deposit takers. However, the RBNZ has various powers to seek appointment of liquidators and administrators, and to be involved in any compromise proposal.
The RBNZ may also apply to court to liquidate insurance companies on various grounds, including insolvency, and to seek the appointment of a voluntary administrator. The RBNZ must approve any shareholder appointment of a liquidator to an insurer, or any appointment of a voluntary administrator by the board.
The INSOL Principles are generally adhered to for out-of-court restructurings. New Zealand law does not require mandatory consensual restructuring negotiations before commencement of a formal “statutory process” but market participants strongly prefer informal processes out of a recognition that they tend to preserve value for stakeholders.
Banks and other lenders will often ensure that borrower companies experiencing financial difficulties have working capital and standstill arrangements enabling them to continue trading while an investigating accountant completes a full and accurate report on the company’s prospects and capital structure.
New Zealand directors have historically felt comfortable continuing to trade if they were able to ensure that obligations incurred during the standstill period would be met from available revenue. However, this sense of comfort has been shaken by a recent High Court decision from the liquidation of Mainzeal, one of New Zealand’s major construction companies. Although the court found there had been no deterioration to the company’s position as a result of the directors’ decision to trade on, it still found them liable for a portion of all of the company’s unpaid debts as at liquidation.
Consensual restructuring and workouts in New Zealand are often initiated by the borrower requesting a waiver of defaults and perhaps an amendment of the credit agreement. If the defaults continue, a standstill arrangement may be entered into; the lenders may agree to defer certain payment obligations while restructuring options are developed, considered and implemented. Because the obligors are under stringent covenant and reporting requirements, it is easier for lenders to enforce their rights if there is a further deterioration in the credit, or if restructuring arrangements fail.
Typically, the debtor company will continue to trade in the ordinary course of business. It will submit a regular cash-flow forecast to the lenders outlining the payments that it anticipates making during that period, agree that no other payments will be made except with the consent of the lenders, meet its day-to-day trading creditors, and allow an investigating accountant full access to its records and operations.
No market practices have developed in New Zealand about establishment and co-ordination of creditor committees. Such committees are rarely used. The major banks typically lend in small syndicates so will all be equally involved in the work-out process, or they may lend as a sole lender.
New money is typically provided by the existing lenders. Third-party lenders may step in, but they will need the consent of the existing lenders. Generally, third-party lenders will require that their loan be repaid in priority to existing loans.
A deed of company arrangement (DOCA) or a creditor compromise might be set aside where there has been a breach of good faith or unfair prejudice to any individual creditor, but generally there are no special duties imposed upon creditors in a work-out or restructuring environment.
An out-of-court financial restructuring requires the unanimous consent of all significant creditors. Where this is not available, a formal process can be invoked, through voluntary administration, creditor compromise or scheme of arrangement, which bind dissenting creditors holding less than 25% of the debt.
Most credit agreements provide that if significant credit terms are to be changed, the unanimous consent of all lenders is required. It is extremely rare, therefore, to have clauses allowing a certain majority of lenders to bind other lenders in respect of matters such as dates of repayment or amendments to the amount of interest payable.
A creditor may take security over any form of property in New Zealand.
Security interests in real property are governed by the land transfer system, and the rules of equity. Statute law governs security in personal property, supplemented by common law.
Security over land must be in writing and signed by the debtor. Such security operates as a charge, not a transfer. A mortgage can be registered under the land transfer system. Title to that mortgage is thereby indefeasible, albeit subject to personal claims against the mortgagee. The Property Law Act 2007 contains various restrictions and conditions on the mortgage and the mortgagee’s actions. A mortgagee can enforce by sale, without taking possession. No mortgagee of land may enforce by foreclosure.
Unregistered mortgages are effective, with priority according to the rules of equity. Unregistered mortgages can be protected by the lodging of a caveat against the title to the land.
Any form of personal property may be the subject of a personal security interest, including moveable, intangible and intellectual property. While New Zealand’s statutory regime does not provide for a floating charge, circulating assets can be the subject of effective security interests. Inventory, work in progress and accounts receivable are routinely the subject of security interests. Certain creditors (primarily Inland Revenue and employees) have preferential status above general security interests in such assets but they are otherwise available for security.
To be effective against third parties, including other creditors, security interests must be evidenced in writing by the debtor, save where the creditor has possession. The form of the security interest has limited significance, as New Zealand’s Personal Property Securities Act 1999 largely treats all security interests the same, regardless of form and regardless of the location of title. Title-based security interests, such as retention of title, are included in the regime as it applies to interests based on economic effect, rather than legal form.
Security interests in personal property may be registered on the Personal Property Securities Register, an on-line real-time register. Registration protects the priority of a security interest, but is not required for validity. Registration itself does not create any security interest, nor does lack of registration invalidate any security interest.
With limited exceptions, secured creditors can enforce their security rights during formal insolvency processes.
Statutory compromise proposals do not create any automatic moratorium, and the court’s power to prevent action by creditors while the proposal is being considered does not extend to secured creditors.
Secured creditors are prevented from enforcing their security interests during a voluntary administration. The court can direct otherwise, and a creditor holding security over all or substantially all of the assets may appoint a receiver within the first ten working days of the administration. An administrator may agree to extend that period.
While the body of creditors may, by special majority, bind all creditors to a restructure proposal, security cannot be removed or affected by such arrangements. That applies under statutory compromises, schemes of arrangement and voluntary administrations. Of course, a secured creditor may consent to any change as part of such a restructure arrangement.
Liquidation does not limit or remove security rights. The liquidator may deal with secured assets, but has no greater rights than the debtor in respect of them. A liquidator may, however, require a secured creditor to elect whether to enforce the security, or abandon the asset to the estate and instead prove as an unsecured creditor.
Timelines for enforcing security interests depend on compliance with statutory notice periods. Those periods are generally not affected by formal insolvency processes, except as already described (especially in voluntary administration).
Mortgagee sales of land or mortgaged goods require at least 20 working days’ notice before a sale may become unconditional. Similar notice applies to acceleration of debt and repossession. A receiver appointed under a security interest in the whole or substantially the whole of a corporate entity’s assets may, however, sell or go into possession without a prior formal notice. Post-sale notices are required in either case.
All receivers, mortgagees and secured creditors have an obligation to achieve the best price reasonably obtainable at the time of the sale of any secured asset, but are free to choose the time of sale.
There is no distinction in New Zealand security law between local and foreign creditors in respect of assets located in New Zealand. See also 5.7 Foreign Creditors.
See 4.2 Rights and Remedies.
Certain unsecured creditors have preferential status over secured creditors in respect of some assets (accounts receivable and inventory). Unsecured claims which are not preferential will be paid out of any residual assets after secured and preferential claims have been met.
New Zealand insolvency law provides for new unsecured trade creditors to be kept whole during voluntary administration and receivership. Administrators and receivers are personally liable for debts incurred in the exercise of their powers but parties can agree to exclude or limit the receiver’s personal liability.
Prior to any restructuring or insolvency process, unsecured creditors’ claims may be pursued by legal proceedings against the debtor company. Default or summary judgment processes are available. An undisputed debt claim can form the basis of a statutory demand, non-payment of which is grounds for an application to liquidate the debtor.
Once a company is in administration or liquidation, legal proceedings cannot be continued without the consent of the administrator or liquidator, or the court.
Instead, unsecured creditors have the right to prove their debts in the administration or liquidation. Creditors can vote on the future direction of the company in a voluntary administration, and in both administration and liquidation may vote to replace the administrator or liquidator, or to appoint a creditors’ committee.
A creditor can obtain a pre-judgment charging order over the debtor company’s property. A court will grant such an order where the debtor company, with intent to defeat creditors, is concealing or disposing its property, or has left or is about to leave New Zealand. A pre-judgment freezing order is available on similar grounds. Pre-judgment orders such as this are unlikely to create an advantage for any creditor in an insolvency process.
It can take two or three months to obtain orders putting a debtor company into liquidation using the statutory demand process. The process can take longer if the debtor company applies to set aside the statutory demand or opposes the liquidation application.
A receiver is not liable to pay pre-receivership rents, but a receiver will become personally liable for rent and related payments accruing in the period 14 days after appointment until the receivership ends, or when the company stops using or occupying the property. The receiver can apply to the court to limit that liability in part or in whole.
An administrator will be similarly liable for rent and other payments that accrue in the period seven days after appointment, until the administration ends or the company stops using or occupying the property. The administrator can avoid that liability by issuing a non-use notice before that period.
Foreign creditors have the same rights regarding the commencement of, and participation in, a New Zealand insolvency proceeding as creditors in New Zealand. Their status as foreign creditors does not affect the ranking of their claims, save that claims for foreign tax and security are excluded from New Zealand insolvency proceedings.
The waterfall of priorities under New Zealand insolvency law is as follows:
The statutory waterfall does not expressly apply to administrations but the courts are likely to set aside a DoCA that does not reflect statutory preferences without good reason.
See 5.8 Statutory Waterfall of Claims and 7.4 Priority New Money During the Statutory Process.
The objectives of voluntary administration are to:
Most commonly, an administrator will be appointed by the board but appointment can also be by secured creditors, liquidators and the court. In all cases, the administrator must act in the interests of all the creditors.
The administrator will take control of the company and work with the company and its creditors to make decisions as to the future viability of the company.
Appointment of an administrator activates a statutory moratorium.
An administrator must hold a “watershed” meeting of creditors within 25 working days of the appointment (although that period may be extended by the court) at which the creditors will vote to determine the future of the company. The creditors may vote to:
The administrator must prepare a report to creditors setting out the recommended option.
A resolution will be passed if approved by a majority in number, representing 75% in value, of the creditors voting.
Once passed, the DOCA binds the company, its directors, shareholders and unsecured creditors. Secured creditors who vote against the DOCA are permitted to enforce their security unless the court orders otherwise. The outcome of the DOCA depends on its terms and will typically terminate once its stated objectives have been achieved. If a DOCA’s objectives are not achieved or the DOCA is challenged by creditors, it may be terminated by the court or in accordance with the terms of the DOCA.
A creditor compromise under Part 14 of the Companies Act may be proposed if there is reason to believe a company is or will be unable to pay its debts. The proposal may be made by a company’s board, receiver, liquidator or, with leave of the court, a creditor or shareholder.
A compromise will be approved if it is supported by a majority in number, representing 75% in value, of the creditors voting. The compromise will then be binding on all creditors who had been given the opportunity to vote. A compromise may be put to, and affect, a subset of the whole body of creditors.
Scheme of Arrangement
A court may, on the application of a company or any shareholder or creditor of a company, order that an arrangement or amalgamation or compromise shall be binding on the company.
A scheme of arrangement may require that creditors vote in classes. A class should include those persons whose interests are sufficiently similar to enable them to consult together with a view to a common interest. While the court determines the voting threshold for a class, typically the threshold is the same as for a voluntary administration or a Part 14 compromise (majority in number representing 75% in value of the creditors voting). Minority creditors are bound by the majority decision.
Even if approved by a creditors’ vote, the scheme of arrangement must also be approved by the court. A court may decide not to approve the scheme if, for example, the proper process was not followed, or sufficient information was not given to creditors.
A statutory moratorium is activated upon the appointment of an administrator. The moratorium stays all claims asserted against the company to afford the administrator time to investigate the affairs of a company. A limited exception is that a secured creditor holding security over all of the company’s assets may enforce its security within ten days of the administrator’s appointment.
There is no statutory moratorium implemented when a scheme of arrangement or creditor compromise is proposed. Existing management maintains control of the company.
In each of voluntary administration, creditor compromises and schemes of arrangement, the creditors’ role is to receive and consider information and vote on the outcome. In voluntary administration, a formal creditors' committee may be established. Its role is to consult with the administrator, but it has no decision-making powers.
In each process, dissenting creditors can be bound to the compromise if the requisite majority approves it. In each case, dissatisfied creditors may have recourse to the court. A compromise may be set aside (or not declared binding) where there was a serious procedural irregularity or some undue prejudice.
There are no statutory limitations on trading claims during a voluntary administration, creditor compromise process, scheme of arrangement, liquidation or receivership. It is a matter of contract between the trading participants.
Voluntary administration and creditor compromises require actual or likely insolvency. Further, they are limited to affecting relationships between the company and its creditors. Schemes of arrangement are more flexible and can be sought outside of insolvency. They can affect shareholders; they are not limited to arrangements with creditors.
Transactions or dealings completed by a company in administration are void unless entered into by the administrator or with court approval. There are no statutory restrictions or conditions that apply to a company’s use or sale of its assets during a formal restructuring process, except that the administrator sells or trades subject to his or her duty to act in the best interests of all creditors.
The terms of the respective compromise or scheme will provide for the disposal of company and assets and any required security release. The company’s directors who remain in office execute the sale of assets or the business. New Zealand has no formal rules applying to creditor bids.
Formal creditor compromises, whether under voluntary administration, compromise or scheme of arrangement, cannot alter rights of secured creditors, save to the extent the creditor in fact consents. Similarly, they cannot alter rights of parties with proprietary rights against assets held by the company, such as beneficiaries of trust assets held by the company.
The priority of new money is a matter to be determined by the terms of the compromise or scheme. It is not prohibited; indeed, it is common.
In the voluntary administration process, DOCAs provide a methodology for valuing and determining creditor claims. Schemes of arrangement and creditor compromises also require a process of determining and quantifying creditor claims.
A DOCA does not require court approval. The courts, however, may set aside a DOCA if it is unfairly prejudicial (for example, if it provides for certain creditors to receive less than they would in a liquidation).
No statutory office-holders other than liquidators hold the power to disclaim contracts. However, receivers can elect not to perform pre-administration contracts, in which case the contractual counterparty will have a claim against the company, but not the receiver.
Non-debtor parties cannot be released from their obligations under a DOCA or compromise. There is scope for a non-debtor party to be released from their obligations under a scheme of arrangement, but such a release would require court consent.
A mandatory set-off applies to all claims in a liquidation where there have been mutual credits, debts or dealings between the company in liquidation and a creditor seeking to prove in the liquidation. The same mandatory set-off applies where a DOCA has been passed following a voluntary administration. The set-off is assessed at the date of the appointment of the liquidator or administrator.
The consequences of a company failing to observe the terms of a restructuring plan or agreement are typically set out in the restructuring plan or agreement. If a company fails to perform in accordance with the DOCA, a creditor may apply to the court to terminate it.
In a voluntary administration, shares cannot be transferred unless the administrator agrees or the court permits it. A DOCA or creditor compromise or scheme of arrangement may effect a debt-into-equity conversion, in which case an existing equity-holder’s interest would be diluted. An existing equity-holder objecting to the conversion may challenge the DOCA/compromise/scheme in court.
A secured creditor may enforce its security by exercising a right in a security agreement to appoint a receiver over the secured assets. The security agreement will specify when the secured creditor may appoint a receiver and the extent of the receiver’s powers.
A receiver’s primary duty is owed to the appointing creditor, but the receiver also has a secondary duty to have reasonable regard to the interests of the debtor company and its other creditors. In conducting the receivership the receiver acts as an agent of the company.
A secured creditor may appoint a receiver before or after a company is put into liquidation, who may continue to manage the business to the extent it is subject to the security. However, liquidation terminates the receiver’s status as an agent of the company unless the liquidator or the court agree otherwise.
Receivership does not prevent other secured creditors from taking steps to enforce their security interests, unless one or more secured creditor claims a security interest in the same collateral. In those circumstances, the right to possess the collateral will depend on relative priorities of the security interests.
The appointment of a receiver has no effect on the debtor company’s liability under contracts in place at the time of the receivership. The company remains liable, but a party’s ability to enforce the contract against the debtor company will usually be limited to a claim for damages that would rank as an unsecured debt.
Receivers are obliged to report to creditors on the conduct of the receivership, with reports publicly available online. An initial report must address the background of the company and events leading up to the receivership, information about the company and steps taken by receivers. After the initial report, a receiver must report on the progress of the receivership every six months.
See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
A liquidator winds up the company’s affairs and realises and distributes the company’s assets.
Shareholders may appoint a liquidator at any time by resolution of at least 75% of the shareholders. No grounds are required.
The court may also appoint a liquidator on the application of a director, shareholder, creditor, administrator, or various regulators. The court may do so where:
• the company is unable to pay its due debts; or
• it is just and equitable that the company be put into liquidation; or
• various technical breaches of the Companies Act apply.
The court may also appoint an interim liquidator while an application to appoint a liquidator is pending, where satisfied that it is necessary or expedient to do so for the purpose of maintaining the value of the company’s assets.
A liquidator will investigate the affairs of the company with the aim of maximising the pool of assets available for distribution to the company’s creditors. Liquidators have broad powers for that purpose, including the ability to commence legal proceedings against persons responsible for the company’s demise, and to avoid pre-liquidation transactions. Liquidators also have the power to disclaim unprofitable contracts and onerous property.
A liquidator or administrator has the same power as the debtor company to deal with the debtor company’s assets. To sell secured assets, the liquidator or administrator must either redeem the security or seek a release by agreement of all secured creditors’ security interests in the relevant assets.
By comparison, a sale of secured assets by a receiver automatically extinguishes all security interests that are subordinate to the security interests of the applicant creditor.
A purchaser acquiring assets from the debtor company ought to obtain a release of all security interests registered over those assets on the Personal Property Securities Register. Those security interests may be discharged by operation of law (in the case of a receivership) or by a consensual transaction (in a liquidation or administration). The purchaser will take the assets free of any unperfected security interests.
Receivers, liquidators and administrators may decide to complete pre-negotiated sale transactions if they believe the sale to be in the best interests of the secured creditor (in the case of a receiver) or the company’s general body of creditors (in the case of liquidators and administrators).
See 6.15 Failure to Observe the Terms of Agreements.
New money is prioritised in receivership, administration and liquidation. Receivers and administrators are personally liable for debts incurred in exercising their powers. In respect of liquidators, to the extent they incur further costs, those costs are to be paid ahead of preferential creditors under Schedule 7 of the Companies Act. The liquidator must agree to the new money being advanced, which typically takes place in the form of ongoing supplies required for the liquidation process.
In the liquidation context, a liquidator can be appointed to multiple entities within a corporate group, but each appointment must be made in its own right.
A liquidator may apply for pooling orders where the assets of two or more companies are pooled as if they were a single entity. Factors the court will consider include whether the related company took part in the management of the company in liquidation, or whether circumstances giving rise to the liquidation are attributable to the related company.
A liquidator may be required to call a meeting of creditors or shareholders at any time in the course of the liquidation, for the purpose of appointing a liquidation committee.
A liquidation committee must be made up of at least three creditors or shareholders. Its primary function is to assist and supervise the liquidator. The committee has the power to call reports from the liquidators on the progress of the liquidation, call meetings of creditors or shareholders, and may apply to the court for direction on some aspect of the liquidation or for orders enforcing the liquidator’s duties.
There is no restriction on the sale of company assets during insolvency proceedings. The only requirement is that the receiver, administrator or liquidator has the necessary power, or permission from a secured creditor, to sell the assets in question. Court permission is not required.
The Insolvency (Cross-border) Act 2006 adopts a modified version of the UNCITRAL Model Law as part of New Zealand’s domestic law, which provides for the recognition of foreign proceedings.
A foreign judgment may be enforced in New Zealand by registering it under reciprocal arrangements (if any exist), or with leave of the court.
There are two aspects of cross-border co-operation under the Insolvency (Cross-border) Act 2006:
Under the communication and co-ordination articles of the Model Law, the court is entitled to communicate directly with foreign courts and representatives (or indirectly through the New Zealand insolvency administrator), and can request information from them.
The relief available from the New Zealand courts depends on whether the foreign proceeding is a foreign main proceeding, or a foreign non-main proceeding. A main proceeding will take place in the State where the debtor has the centre of its main interests (COMI). A non-main proceeding will take place in a State where the debtor has an ‘establishment’ within the meaning of Article 2(f) of the Model Law. "Establishment" means any place of operations where the debtor carries out a non-transitory economic activity with human means and goods or services.
The distinction between foreign main and non-main proceedings is important because recognition of a foreign main proceeding by a New Zealand court triggers specific automatic relief, namely:
An applicant may also apply for interim relief without notice once an application for recognition has been filed. This provides a mechanism to protect assets where there are concerns that the assets may perish, devalue or otherwise be in jeopardy.
See 5.7 Foreign Creditors.
Statutory officers appointed to companies include receivers, voluntary administrators and liquidators. It is common for any individual appointed as an administrator subsequently to become the deed administrator or liquidator, depending on the outcome of the administration.
All three of the types of officers described below are subject to the supervision of the court and may seek directions from the court.
The receiver is an agent of the company. A privately appointed receiver acts in the interests of the secured creditor that appointed him or her.
A receiver has a statutory duty to exercise his or her powers:
The administrator is an agent of the company. In exercising his or her statutory powers, the administrator must act in the interests of all the creditors.
The administrator may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not in administration.
If the creditors resolve that the company execute a DOCA, the powers of the deed administrator are as set out in the DOCA.
The liquidator is an agent of the company. The liquidator has fiduciary duties to ensure that the assets of the company are recovered and distributed. Other duties include:
Liquidators who are members of the Restructuring, Insolvency and Turnaround Association of New Zealand (RITANZ) are subject to the RITANZ Code of Professional Conduct.
A receiver may be removed by the court or the appointor. A receivership may also be terminated by court order if the purpose of the receivership has been satisfied, or circumstances no longer justify its continuation.
An administrator may be removed by the court on application of a creditor, liquidator, the Financial Markets Authority (if the company is a market participant) and the Registrar of Companies. The administrator may also be removed by a resolution passed at the first creditors’ meeting.
A liquidator appointed by the company’s shareholders must call a meeting within ten working days of appointment to allow the creditors to resolve whether to confirm the appointment or to appoint another liquidator. A 30 working-day period applies for a court-appointed liquidator.
In a receivership, voluntary administration and liquidation, the directors are displaced and have limited or no ability to exercise control over the affairs of the company. It is a matter for the statutory officer to decide if and to what extent they wish to engage a company’s existing management to continue to operate the company. The statutory officer will be required to investigate the conduct of the directors.
In most cases, statutory officers are accountants or other restructuring professionals.
Currently, no special qualifications are required in order to be appointed and the competency threshold for appointment is low. Receivers, administrators or liquidators can be disqualified on the basis of a conflict of interest. The recent Insolvency Practitioners Regulation Act will introduce a licensing regime by June 2020 for insolvency practitioners.
A borrower and its lenders will retain their own legal advisers in a restructuring or insolvency process. For the lenders it is usually the same counsel who advised on the original lending. An investigating accountant or other financial adviser may also be appointed, either by the borrower or the lenders. The extent to which investment bankers, management consultants or other financial advisers are retained will depend upon the assets and the value of the assets.
Creditors will typically expect that their legal costs will be met by the borrowers on the basis that the need for the legal advice was created by the borrower’s default. Lawyers and investigating accountants charge on a time-and-attendance basis. Success fees or bonuses are not usual.
There are no authorisations or judicial approvals required in order to retain professional advisers.
Legal advisers owe duties to their clients. Where an investigating accountant is retained by the borrower, at the request of the lenders, their reports are provided to the lenders. This seems to be a New Zealand anomaly, out of step with the rest of the world.
Arbitration and mediation have rarely been used in a restructuring and insolvency context in New Zealand, but recent market experience suggests that may be changing.
A court may order the parties to attempt to settle their dispute through mediation or other dispute resolution method, with the consent of the parties. However, it has not been known for the court to make such an order in an insolvency or restructuring proceeding.
The Farm Debt Mediation Bill, likely to be passed in 2020, would require creditors with security interests in farm property to offer mediation to farmers before enforcing that debt. It would also allow farmers to initiate statutory mediation with a secured creditor.
A pre-insolvency agreement between parties to arbitrate a dispute would not be enforceable following the commencement of an insolvency process, except with the consent of the insolvency practitioner.
Arbitrations in New Zealand are governed by the Arbitration Act 1996. There are no statutes that govern mediations but the usual law of contract applies.
Arbitrators or mediators are appointed by agreement of the parties. In some instances, that takes place via an agreed mechanism in the contract between the parties.
There is no restriction on who may serve as an arbitrator or mediator.
Core director duties owed to the company include:
While the Companies Act imposes on directors no express duty to creditors, where a company is approaching insolvency or is insolvent, directors are obliged to take creditors’ interests into account. It is the creditors’ rather than the shareholders’ money at risk at that stage.
The relevant question in assessing solvency is whether a company is able to pay its debts when due. Directors may be subject to civil and criminal penalties or to compensate the company if they breach their statutory duties. They may also be disqualified from acting as directors. Remedy for a breach of duty by a director can be sought by the company, a liquidator on behalf of the company, or by a shareholder on behalf of the company.
Claims are primarily brought against directors by an insolvency official but they can also be brought by an individual creditor, effectively, on behalf of the company, if the company is in liquidation.
Chief restructuring officers are not a typical feature of New Zealand restructuring and insolvency practice.
A “director” includes a person in accordance with whose directions and instructions an appointed director may be required or accustomed to act. A shadow director owes the same duties and carries the same level of personal liability as a duly appointed director.
In New Zealand, shareholders are not potentially liable to creditors, save via orthodox claims by the company, such as recovery of debts.
The Companies Act permits a liquidator of a company to set aside a wide range of transactions:
A liquidator seeking to set aside an insolvent transaction must show that:
The key requirement for a voidable charge being set aside is that the charge was given within the specified period and that the company was unable to pay its due debts. An exception is where the charge secures funds advanced or goods supplied after the giving of the charge.
Proof of the company’s insolvency at the time of the relevant transaction is also necessary for a transaction at undervalue claim. However, it is not necessary to prove insolvency in order to set aside transactions with or charges granted to insiders.
Subpart 6 of Part 6 of the Property Law Act 2007 (PLA) enables a court to order that property acquired or received as a result of certain prejudicial dispositions by a debtor (or its value) be restored for the benefit of creditors. It also apples to property disposed of at an undervalue or by way of gift.
A general defence is available under s 296 of the Companies Act to a creditor facing any of the above claims. The transaction should not be set aside if:
Transactions can only be set aside under the Companies Act if they fall within what is known as the “specified period”.
The specified period for insolvent transactions, voidable charges and transactions at undervalue under the Companies Act (ss 292, 293 and 297) is two years from the date of liquidation. If the company was put into liquidation by the court, then it is two years from the date the application was made.
The specified period for transactions with insiders (s 298) is three years from the date of liquidation (or the application to the court).
A restricted period of six months prior to the date of liquidation or of a liquidation application being made exists for the purposes of ss 292, 293, 297 and 298. There is a presumption that the company was unable to pay its due debts in this period.
There is no specified period in relation to the setting-aside of securities and charges granted in favour of insiders (s 299).
Similarly, there is no specified period or equivalent for setting aside transactions under the PLA.
Only a liquidator may attempt to set aside transactions under the Companies Act provisions previously discussed.
Under the PLA, an application to set aside dispositions may be made either by the liquidator of the debtor company, or a creditor who claims to be prejudiced by the relevant disposition.
The role of valuations is primarily limited to validating sales by insolvency office-holders. A receiver, administrator or liquidator will ordinarily obtain a valuation (typically a third-party valuation) in order to be satisfied the contemplated sale is for market value. Receivers are subject to a statutory duty to take all reasonable care to sell an asset for the best price reasonably obtainable at the time of sale.
The debtor or relevant insolvency officer typically commences the valuation process, given they have access to the necessary records and assets of the company.
Common practice is to compare the sale price that is achieved through a competitive market process to the valuation obtained in order to demonstrate that the officer has discharged the duty to obtain the best price reasonably obtainable at the time of sale. There is no specific court process that outlines who must render valuations or the relevant valuation methodology to be applied.