The biggest change to New Zealand insolvency law in at least 20 years came into force last Thursday, giving creditors wider-reaching powers, which should give them better returns while also saving businesses and jobs. 

A company that cannot pay its debts can try a new method to solve its problems — “voluntary administration” to sort out a rescue plan. This is a similar process to that used in most other Western countries and has become widely used in Australia since its introduction in 1993. New Zealand’s law closely follows that of Australia.

So what will it mean to creditors and company directors? In simple terms a voluntary administration puts the company into the hands of an independent administrator for a month. During that time, creditors generally cannot enforce their debts. The administrator has breathing space to look at whether it is possible to put together a plan to save the business. The business is out of the hands of the directors for this period.

After a month, the creditors meet to vote for or against a deed of company arrangement. The deed will often require creditors to forgive some of their debt and accept payment over a number of years on the balance. The creditors will look at whether the result is likely to get more of their debt repaid than if the company went into liquidation. If a majority votes against it, the company goes into liquidation. If they vote in favour, the company survives. The administrator will often be brought in by a companies directors, but in some cases creditors can start the process.

This is an example of how it works. In July 2006, at the very start of the busy season for a marine business, one of the directors of MacPherson Marine disappeared, along with the business’ cash. Fraud was suspected. The business was fundamentally sound and viable but suddenly it had no money to pay its bills. Because the voluntary administration regime was not law at the time, the only real option was for the business to go into liquidation. Creditors lost more than $2 million and six staff lost their jobs.

There were a lot of very angry creditors, many of whom were selling their boats through the company and who were now out of pocket. Keiran Horne and David Crichton of Crichton Horne were appointed liquidators. “If this had been a voluntary administration, we would have been able to continue trading the business,” Mr Home says. A voluntary administration would have given breathing space to put in new management and to allow the administrators to put a plan to creditors to allow the business to trade on. The business may well have survived. At the very least, creditors would have got more money. The stock would have fetched retail prices rather than liquidation auction prices. “Jobs would have been saved and the creditors would have been much better off.” Mr Home says.

But there are potential problems with voluntary administrations. One of them is that directors may try to use them to avoid their personal liability for the company’s debts. That liability is often only investigated if the company goes into liquidation. Evidence from Australia shows that some cunning directors will try to ensure the voluntary administration allows the company to continue. Common tricks are appointing a “friendly” administrator, who favours their interests, and manufacturing documents that show that members of their family, or other related parties, are owed large amounts of money by the company. This gives those related parties the right to vote in favour of the option the directors prefer.

The new voluntary administration regime could be called “involuntary administration”. Though the law is largely a copy of Australia’s voluntary administration law, the Personal Property Securities Act will make a crucial difference in this country. New Zealand research shows that 38 per cent of trade creditors, and 81 per cent of finance companies lending to businesses for equipment, are taking general securities. This gives them the right to put many of their non-paying customers into administration in spite of the directors’ wishes. This has the potential to be dramatically different from Australia where, in practice, the banks are the only creditors that take general security. This gives them the power to put companies into administration, but they seldom use it. They put them into receivership instead.

In New Zealand under the Personal Property Securities Act, it is easy for creditors who take security to add a clause that gives them a general security. New Zealand’s lawmakers clearly didn’t understand that many creditors have done this. It means that the law will work differently here. New Zealand creditors have a power that their Aussie counterparts don’t have.

Changes to individual bankruptcy law will also come into force shortly. The Insolvency and Trustee Service expects the law to be introduced on December 3. The law is aimed at making it easier for debtors to sort out their debt problems and make a fresh start. A new “no asset procedure” will allow debtors with no assets and no way of paying any amount toward their debt of up to $40,000 to go in and out of bankruptcy in 12 months. This compares with the current three years.

An enhanced “summary instalment order” procedure for up to $40,000 of unsecured debt will allow a willing debtor to pay off all or part of his or her debts in instalments, usually over three years, under a supervisor. This compares with the current maximum for summary instalment orders of $12,000.

It is likely that these changes will lead to a significant increase in the number of debtors choosing to enter into one of the insolvency administration options. Similar changes to insolvency law were introduced in Britain on April 1, 2004, leading to a dramatic leap in numbers. The combination of automatic discharge from bankruptcy after a maximum of 12 months and a dramatic increase in individual voluntary agreements (the equivalent of New Zealand’s summary instalment orders), have led total bankruptcy numbers in England and Wales to increase from 43,534 in 2003 to 139,309 in the year to June 2007.

• Peter Hattaway, LLB, is a director of Hattaway & Associates. www.hattaways.com
The Dominion Post 5 Nov 2007