McDonald Vague The Insolvency & Business Recovery Specialists

Voluntary Administration In New Zealand

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Introduction

Voluntary Administration provides a moratorium period during which the future of a company can be assessed by an independent third party.  That independent party then makes recommendations to creditors as to whether the company has a future and recommends the form that future should take.  In practice, the moratorium period is usually a pathway to liquidation or a compromise (Deed Of Company Arrangement).

The object of Voluntary Administration

The object of Voluntary Administration as outlined in Part 15A of the Companies Act 1993 is as follows:

To provide for the business, property, and affairs of an insolvent company, or a company that may in the future become insolvent, to be administered in a way that -

1. maximises the chances of the company, or as much as possible of its business, continuing in existence; or
2. if it is not possible for the company or its business to continue in existence, results in a better return for the company's creditors and shareholders than would result from an immediate liquidation of the company

Appointment of an administrator

An administrator can be appointed -

• by a resolution of the board of a company; or
• by a liquidator or interim liquidator; or
• by the Court; or
• by a General Security Agreement ("GSA") holder

The role of an administrator

The administrator must investigate the company's affairs and consider possible courses of action.  As soon as practicable after the administration of a company begins, the administrator must -

1. investigate the company's business, property, affairs, and financial circumstances; and
2. form an opinion about each of the following matters:
   1. whether it would be in the creditors' interests for the company to execute a Deed Of Company Arrangement;
   2. whether it would be in the creditors' interests for the administration to end;
   3. whether it would be in the creditors' interests for a liquidator to be appointed.

The advantages of Voluntary Administration

The advantages of Voluntary Administration (for the company and its creditors) are that:

• the directors are not in control during the life of the administration; it provides for the transfer of the direction of the company to an independent insolvency practitioner and this is likely to appeal to creditors who may well have lost faith in the directors
• the change of control can occur quickly and without inordinate cost;
• during the term of the administration the company is protected from attack from creditors (except where the courts specifically allow) while the insolvency practitioner formulates a proposal which he or she will put to the creditors;
• without the leave of the court, winding up cannot occur during the period of the administration;
• the administration is not lengthy, and creditors are not pre-empted for a substantial period from taking action against the company if a resolution of its affairs is not viable; and
• the company can put a proposal to the creditors without the need for the sanction of the courts and this will, if accepted, bind all creditors

The criticisms of Voluntary Administration

• Where directors appoint the administrator there is the potential for those directors to orchestrate the administration for their benefit and that of shareholders, rather than creditors
• Another criticism suggests that directors in Australia have favoured Voluntary Administration to avoid a thorough investigation of their own conduct.  The majority of creditors either attending the administrator's second meeting or reading the administrator's report are unaware of the work that needs to be performed to determine if:
  • There has been insolvent trading;
  • There have been voidable transactions with related and other parties
  • There are potential actions to be pursued against the directors
• Consequently the administrator's opinion that there are no apparent grounds for instigating action on behalf of creditors against directors and/or related parties is often accepted at face value

The cost of Voluntary Administration

There is obviously a cost to Voluntary Administration.  At the end of 28 days the company will invariably be placed in liquidation or enter into a Deed Of Company Arrangement.  The costs in respect of these will remain much the same as they have always been.  The new cost is that of the Voluntary Administration itself.  Also there is the involvement in running the company for a period of 28 days.

The very nature of the work means that costs will not be insignificant.  The hope is that the new regime will encourage companies to act sooner while there is still some substance in the company.  If this is the case then with larger companies, creditors could still be better off after costs.  In smaller cases this is less likely.  In this respect it is significant that around 84% of businesses in New Zealand employ five people or less.

Companies Act 1993 - preferential creditors

In Australia the Inland Revenue has no preference for GST and PAYE. The position in the UK is similar.

The lack of preference means there is a very real chance of creditors getting a worthwhile distribution if through the Voluntary Administration regime the company enters into a Deed Of Company Arrangement.  New Zealand has decided to retain the Crown preference, so it is harder to achieve a good outcome for unsecured creditors.

Taxation law

In Australia it is possible to transfer the company under a Deed Of Company Arrangement, rather than its business.  This means a purchaser automatically gets the benefit of any contracts the company might have.  Also, unlike New Zealand, the purchaser gets the benefit of tax losses.  This enhances the value of the company as a whole to the purchaser and consequently increases the return to creditors.

Registration of administrators

In Australia and the UK, insolvency practitioners are registered.  This gives creditors greater confidence in the appointee.  In Australia, the instance of directors appointing "tame administrators" is not uncommon.  Complaints have been made to the Australian regulatory body, resulting in many administrators (who had been in the business of offering the directors a "gentle touch") having had their licences removed and no longer being able to practice.  In New Zealand insolvency practitioners are still not registered, although a 'negative licensing' regime is currently before Parliament, which would allow unsuitable practitioners to be prohibited from taking on insolvency appointments.

DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.