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Corporate insolvency in New Zealand will soon be radically affected by the introduction of a voluntary administration regime. The reforms will impact greatly on creditors, who will be unable to enforce debts against companies in administration, but should ultimately recover more than they would have in a liquidation. Insolvent companies will also benefit from the changes, which provide an opportunity for rehabilitation. This regime has proven effective in Australia, and should be operational in New Zealand by November 2007.
The procedure
If a company is insolvent or likely to become insolvent, an administrator may be appointed by either the board of directors, the liquidator or a substantial secured creditor (a creditor with security over the whole or substantially the whole of a company's property) or by application of a creditor, liquidator or the Register of Court Order to the Court.
The administrator gains control of the company's affairs, and in order to preserve the company's position, a moratorium is placed on creditors' abilities to enforce debts. A Court or the administrator may authorise exceptions to this.
The moratorium continues throughout the administration, which ends when either a liquidator is appointed, a Deed of Company Arrangement (DOCA) is executed, or the creditors resolve it should end. This allows the administrator sufficient time to determine whether the company can be saved and to seek creditor approval. Creditors not bound by the moratorium are:
- substantial secured creditors who enforce their security within 10 working days;
- creditors with a charge over perishable property;
- owners and lessors of perishable property;
- creditors that have commenced enforcement prior to administration; and
- owners or lessors of property who have enforced a right to take possession prior to administration.
A Court may, however, restrict these creditors’ enforcement rights.
A first meeting of creditors must be convened within 8 working days of the administration. Notice of this meeting and all subsequent meetings must be issued to as many creditors as reasonably practicable, not less than 5 days before the meeting. At this first meeting, creditors can vote to replace the administrator or to appoint a creditors’ committee to consider reports and consult with the administrator. A majority in numbers and a 75% majority in creditor value is required to pass a resolution at any creditors’ meeting.
The administrator will then convene a 'watershed meeting', to be held within 25 working days of his or her appointment. This period may be extended by application to the Court. At this meeting the creditors may place the company in liquidation, return it to the directors, or execute a DOCA.
DOCAs' are essentially the compromise reached between a company and its creditors, allowing the company to continue trading. These may vary from a mere moratorium to a major structural reorganisation. The terms will usually include:
- the identity of the deed administrator;
- the property available to creditors;
- the extent to which the company will be released from its debts;
- conditions precedent to the deed's operation;
- the order of priority between creditors;
- circumstances in which the deed terminates; and
- the 'cut off day' before which creditors' claims must have arisen, to be admissible under the deed.
Where creditors vote on the adoption of a DOCA, there may be a division between the majority in numbers, and the majority in value. The administrator then has a casting vote, to be exercised in the best interests of the creditors as a whole.
If executed, all creditors voting in favour of the deed are bound by its terms, along with all unsecured creditors. Secured creditors who vote against the DOCA are not bound and are free to enforce their security. However, if this threatens the viability of the entire deed, a Court may prevent enforcement.
A DOCA can be terminated by a Court order, creditors’ resolution, or an event specified in the deed itself. The company is then returned to its directors or placed in liquidation.
What this means for creditors
Substantial secured creditors may choose between supporting the administration or enforcing their charge (which may include appointing a receiver). They will need to ensure that their internal systems allow them to make enforcement decisions within the 10 working day decision period.
Although receivers are usually entitled to run the business and sell it as a going concern, claims by lessors, suppliers and landlords often frustrate this process. The moratorium under administration prevents this and may therefore be preferable.
Most creditors will be unable to enforce debts during an administration. Where a Court allows the watershed meeting to be postponed beyond the 25 day period, the length of the administration and resulting moratorium may be extended significantly. This may often be the case with large publicly listed companies. Interim liquidation may therefore be more appropriate in some cases.
Creditors with security over certain assets only, are at a relative disadvantage to substantial secured creditors. Given the stay on their rights during administration, earlier enforcement action is sometimes preferable.
Unsecured creditors should recognise that administration may compromise their position. If a company in administration borrows money, the liability for repayment of that debt has priority over the company's existing unsecured creditors (and certain secured creditors). Further, a DOCA is binding on all unsecured creditors, whereas secured creditors voting against it are not bound.
Creditors supplying goods, services, funding, and property by hire or lease can (in most cases) deal safely with companies in administration. The administrator is personally liable for these debts, which also take priority over many existing creditors. Further, any payments made during an administration are not voidable transactions.
What this means for debtor companies
There is now greater opportunity to restructure and continue business where a company might previously have been forced into liquidation. Although administration will be ineffective where a supplier refuses to continue supply, this is not expected to occur frequently. As companies will still be allowed to seek compromises with creditors under s230 of the Companies Act 1993, an agreement will usually be reached with suppliers.
Directors should note that voluntary administration is more successful if the process is invoked early. The amendment to s301 of the Companies Act provides an incentive, as the appointment of an administrator will be taken into account when enquiring into the director’s conduct and making an order to repay or restore money or property or contribute a sum to the assets of the company.
Directors will also have to provide the administrator with a statement of the company's position and are required to attend the watershed meeting. If a DOCA is executed it will bind the company and all directors, officers, and shareholders.
This newsletter is produced by Simpson Grierson. It is intended to provide general information in summary form. The contents do not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.
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