One of the obligations on the liquidators of insolvent companies, whether appointed by the shareholders or the Court, is to review the books, records and affairs of the company to identify any potential causes of action that could lead to a benefit for creditors.

This could include identifying potentially voidable transactions, where an individual creditor has received a payment, giving it preference ahead of the body of creditors, or the transfer of assets or property to other parties for no, or insufficient, consideration.

It could also include identifying breaches of duties by the directors which has caused creditors of the company to suffer increased losses.

While many such causes of action are identified and settled by agreement between the liquidators and the parties concerned there are also cases where there is no agreement and the liquidator is left with the options of either initiating legal proceedings or dropping the matter.

In making that decision, the liquidator will consider the strength of the case, the likely costs to be incurred in proceeding and how these could be funded, and the level of return to creditors that could eventuate from such action.

The funding of the proceedings is the major obstacle the liquidators need to overcome and many good cases are not actioned because of the inability to raise the funds.

Broadly speaking, a liquidator has 5 potential avenues of funding available –

Realisations from the Liquidation:

If the liquidators have realised sufficient funds from the liquidation of the company’s unencumbered assets, they are entitled to use those funds to cover the costs of their investigation and any legal proceedings.

In those circumstances, the liquidators have to give careful consideration to the likelihood of success in the legal proceedings and, if those proceedings are successful, the likelihood that any amounts ordered are collectable and will result in a distribution to creditors.

It could leave a liquidator open to criticism if they use up funds, that could have been distributed to creditors, on a risky action against a director and ended up with no recovery or only sufficient recovery to cover the costs of the liquidator’s investigations and the legal costs incurred in running the case.

Liquidators’ Own Funds:

The Liquidators can decide to fund the proceedings from their own resources. This will be done by allowing their time to accumulate as unpaid Work in Progress (WIP) and by paying any legal costs from their own funds and recording those payments as a disbursement to be recovered when, or if, funds are available.

This is a reasonably common practice amongst insolvency practitioners, but the same things will be considered when making the decision. The bottom line is, will the actions lead to a return to creditors?

It is not the liquidator’s job to take proceedings that will lead to a penalty being imposed on the defendant that only pays the liquidators costs. If legal actions are not likely to lead to a benefit for the creditors, but the director’s actions warrant it, the Liquidators can, and should, report the breaches committed by the director to the Registrar of Companies, with a view to having them banned.

Creditor Funding:

Creditors of a company in liquidation can be approached by the liquidators to see if they are prepared to provide funding to allow legal action to be undertaken. Those creditors that do agree to provide funding receive a priority ahead of other unsecured creditors pursuant to clause 1 (1) (e) of the Schedule 7 of the Companies Act 1993.

This allows payment of the unsecured debt of that creditor, and the amount of the costs incurred by that creditor in helping to recover the funds, ahead of some other preferential creditors and the rest of the unsecured creditors.

Third Party Litigation Funders:

The use of 3rd party litigation funders is increasing in New Zealand but is generally limited to the larger cases, such as the Mainzeal Property & Construction Limited (in Liquidation) claim against its directors.

There have been questions raised about the ethics of this form of funding but, whilst there is no specific legislation about the use of 3rd party funding, it has been approved in various proceedings. The Law Commission is currently undertaking a review of class actions and litigation funding

The 3rd party funders provide the funding for proceedings, which would otherwise be unaffordable, in exchange for a percentage of any recoveries. If there are no recoveries, the 3rd party funder carries the cost, so there is no downside for the creditors.

Liquidation Surplus Account:

Section 316 of the Companies Act 1993 establishes, and regulates the use of, the Liquidation Surplus Account (“the account”).

Funds that represent unclaimed assets from a liquidation must be paid to the Public Trust and will, if they remain unclaimed for a period of 12 months, become part of the account.

Liquidators can apply to the Official Assignee for New Zealand for a payment from these funds to cover the cost of proceedings, advice, or expert witnesses.

To be eligible for the funds, the liquidator must prove that it is fair and reasonable for the costs to be met out of the account. There should be a public interest element in the proceedings and the application must relate to the claims of the creditors in the liquidation.

Conclusion:

It is understandable that the creditors of a failed company want to see errant directors held to account and forced to cover the losses they have incurred because of that director’s actions and they expect liquidators to do that. 

The options outlined above all include one party or another taking on the often substantial risks and costs involved in taking legal proceedings, so, while the main objective is always to recover funds for the benefit of the creditors, any actions taken have to be carefully considered and reviewed objectively. 

Throwing good money after bad, or spending money, that could have provided some return to creditors, without any recovery, is not in the best interests of either the creditors or the liquidators.

We are expecting August and September to be interesting months with the electioneering that will be taking place, we will see promises from all parties on how they will be spending our taxes if they are elected and hopefully some more details on their plans for how they will guide the economy post covid.

The latest unemployment rate figures have been released for the June 2020 quarter showing 4.0%. This is down 0.2% on the first quarter for the year. While the politicians will crow that this is well down on treasurers estimates for the same time frame there was an additional wage subsidy extension introduced which has assisted businesses in keeping people employed with 400,000 employees still utilising the subsidy.

Unsurprisingly, the unemployment rate lines up with the Insolvency figures we have seen in 2020 which continue to be down on 2019 levels. The true litmus test is yet to come as the wage subsidy comes to an end in September.

If you want to have a free chat about any issues your business is experiencing or about any other insolvency matter, please contact us on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

There were 142 new insolvency appointments in July 2020, which brings the total appointments for 2020 to 953. Insolvency appointments in July 2020 and for the year to date are still down on both 2019 and 2018.

Out of interest we have also begun tracking winding up applications in 2020 as a guide for what may be coming for the economy and the creditors tolerance for debtors. While there will be some creditors using it as a tool to prompt debtors to make payment a reasonable number have been following through with their application.

The IRD has for 2020 advertised the liquidation of 49 companies, of these companies 35 or 71% have subsequently entered liquidation as at the date of writing. The conversion rate on non IRD creditors being set lower with only 45 of the 90 advertised winding up applications ending in liquidation. Presumably an alternative satisfactory outcome was reached, or the liquidation may be included in next months figures and is only delayed.

Personal Insolvencies - Bankruptcy

Personal insolvencies in July 2020 saw a drop in bankruptcies but a lift in both No Asset Procedures and Debt Repayment Orders.

Numbers across the board though continue to be down on the levels set in 2018 and 2019.

After last month it looked like bankruptcy figures were tracking back to 2019 level but that only looks to have been a blip with figures again dropping off in July.

On 1 September 2020, the remaining provisions of the amendments to the Companies Act 1993, and Insolvency Practitioners Regulation Act 2019 (IPRA) will come into force.  Some changes that creditors, directors, shareholders, and their advisors need to know about are:

Restriction on Shareholders or Board Appointing Liquidators

The 10-working day window for shareholders to appoint liquidators from service of winding up proceedings is gone.

Once a company has been served with Winding Up proceedings brought by a creditor, the company’s shareholder(s) or board will be unable to appoint liquidators unless they have the consent of the creditor who is pursuing the winding up proceeding.

For shareholders needing or wishing to appoint liquidators we encourage them to start the process as soon as they are concerned about insolvency, and at the latest following an unsatisfied statutory demand.

Introduction of Voidable Dispositions Regime

If a company disposes of property after the company is served with a winding up application but before it is placed into liquidation by the High Court and that property was disposed of other than:

(a) In the ordinary course of business (eg sales of inventory); or
(b) By an administrator, a deed administrator, or a receiver (who will need to be a LIP); or
(c) Under an order of the Court;

the Company’s liquidators will have the ability to set aside those dispositions as voidable. The procedure is broadly similar to the insolvent transactions regime.

Licensing of Insolvency Practitioners

Only Licensed Insolvency Practitioners (LIPs) will be able to accept insolvency appointments from 1 September 2020. Transition arrangements mean that current CAANZ/RITANZ Accredited Insolvency Practitioners (AIPs) can be treated as LIPs for the period up to 1 September and the AIP will be able to continue to accept appointments while their LIP application is decided.

Anyone who is not an AIP by 1 September 2020 and who does not become a LIP in the meantime, will be able to continue to act on their existing insolvency assignments until 31 August 2021. If the insolvency practitioner does not become a LIP by 31 August 2021, any insolvency assignments that have not been completed by this date will need to be taken over by a LIP.

McDonald Vague employs 5 current AIP’s with a further AIP as a consultant. We are well placed.

Related Party Voting at Creditors’ Meetings

If an administrator or liquidator considers that a related creditor is voting on a resolution, the related creditor’s vote must be disregarded unless the related creditor has given written notice to the administrator or liquidator that the creditor is a related creditor and that it intends to apply to the Court for an order that its vote be taken into account. The related creditor must make the application to the Court within 10 working days of [after] the creditors meeting in which the vote is held.

If you or your clients are facing insolvency issues or have received a statutory demand that is unable to be paid or settled, email us on This email address is being protected from spambots. You need JavaScript enabled to view it. to request a phone call from or Zoom meeting with one of our accredited insolvency practitioners.