Peter Hattaway, a leading New Zealand credit expert answers questions about new insolvency laws introduced this month.
KEY POINTS:
Q. What are the major changes with the law?
A. Voluntary administration is aimed at rescuing companies. From November 1, a board of directors which sees its company is in trouble can put it in the hands of an independent administrator, who has five weeks to find a solution the company's creditors will support. At the end of five weeks, creditors vote on whether the company should continue under a "deed of company arrangement", which will usually require them to accept a compromise and to wait for at least some of their money. Until the end of five-week period, there is a moratorium - creditors can't take back their goods, take legal action against the company, or take legal action against against directors under personal guarantees. This is a different option to a liquidation. If the creditors don't like the rescue plan, or the company cannot be saved, it goes into liquidation.
Q. Will the new laws make going into liquidation a harder option?
A. No. This is an alternative to liquidation. Directors who can see the situation is hopeless should put the company into voluntary liquidation rather than administration. But other changes to the Companies Act - are designed to prevent the use of so-called "phoenix companies" - also came into force on November 1. These should make it harder for the directors to strip the business and transfer the assets to a new company under a similar name. The new laws will stop directors from using a similar name to that of the failed business for five years. Those who do so are personally liable for the debts of the phoenix company for the period it trades in the unacceptable name. This is an attempt to force directors to use above-board processes, particularly voluntary administration, to continue the business.
Q. Who will run a business when it's in voluntary administration, and when is it best to go into it?
A. Administrators are likely to be experienced insolvency practitioners. They take over the business for the five- week term of the administration. The Australian experience shows directors often wait too long before using the process. The earlier they face up to the problem, the more likely is the voluntary administration (VA) to succeed. Rescue plans under VAs work best with companies which are profitable but which, for some reason, have run out of money. Ideally, there is an identifiable problem.
Q. As a creditor, will it be in my best interests to put a company into voluntary administration?
A. Unlike the Australian VA process, our law gives creditors power to trigger a VA. Many creditors will use the threat of appointing an administrator to get their account paid, as they use the threat of liquidation. Any unsecured creditor can ask the High Court to put a company into VA on the grounds "the company is or may become insolvent and that an administration is likely to result in a better return for the company's creditors and shareholders than would result from an immediate liquidation of the company, or that it is just and equitable to do so". We don't yet know how easy it will be to convince the court to do so.
Q. How do these voluntary administration laws work overseas?
A. New Zealand's VA law is based on Australia's, where the process is moderately successful at best. Often it's used for the wrong reasons. The directors really want to put the company into liquidation immediately, but liquidation takes two to three weeks in Australia whereas VA takes 10 minutes. So they use the VA process as a short-cut to liquidation. The Australian practitioners we work with say that about 20 per cent of VAs end in the creditors voting to continue the company under a deed of company arrangement, and about half of those rescue plans don't actually succeed.
* This article is not legal advice. Do not make decisions on legal matters based on a brief commentary. Instead, you should seek professional legal advice.
