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The biggest change to New Zealand insolvency law in at least 20 years came into force at the start of this month, giving creditors wider-reaching powers which should give them better returns while also saving businesses and jobs.
A company which can't pay its debts can use a new method to try to solve its problems by resorting to "voluntary administration".
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.
What it will mean
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 see them repaid more of their debt 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 company's directors, but in some cases creditors can start the process.
Potential problems
One of the potential problems with voluntary administration is that directors may try to use it to avoid their own personal liability for the company's debts. That liability is often investigated only if the company goes into liquidation. Australian evidence shows some cunning directors will try to ensure that voluntary administration allows the company to continue.
Two common tricks are:
* Appointing a "friendly" administrator, who favours their interests.
* 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.
Bankruptcy numbers
Changes to individual bankruptcy law in the Insolvency Act 2006 will also come into force on December 3.
The act 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 towards their debt of up to $40,000, to go in and out of bankruptcy in 12 months. This compares with the present three years.
An enhanced "summary instalment order" procedure for up to $40,000 worth 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 the oversight of a supervisor. This compares with the maximum for summary instalment orders of $12,000.
It is likely these changes will lead to an increase in the number of debtors choosing to enter into one of the options.
* Peter Hattaway LLB, a director of Hattaway & Associates, advises and trains credit staff throughout New Zealand and Australia. www.hattaways.com
Case study: Costly collapse
In July 2006, at the start of its busy season, one of the directors of a Christchurch company disappeared, along with the cash. 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 angry creditors. Keiran Horne and David Crichton, of Crichton Horne, were appointed as liquidators. "If this had been a VA," says Keiran Horne, "we would have been able to continue trading the business." A voluntary administration would have given breathing space to put in new management and allow the administrators to put a plan to creditors to let the business 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," says Horne.
