This article was prepared for RITANZ by James McMillan, Patrick Glennie and Nicole Thompson of Dentons Kensington Swan. 

2020 was a year of reform in the insolvency sector. Most of the provisions of the Insolvency Practitioners Regulation Act 2019 (IPRA) came into force on 1 September 2020, with several other significant reforms coming in at or around the same time. In this article, we look back at some of the key issues insolvency practitioners were readying themselves to grapple with, and trace developments since the IPRA came into force.

Key reforms

Some of the key reforms in 2020 were:

• Unlicensed insolvency practitioners can no longer accept new insolvency assignments (and have until 31 August 2021 to complete existing assignments).
• Court consent is no longer required for the appointment of liquidators who had previously been engaged to investigate or advise on the solvency of the company or monitor its affairs.
• The restriction on companies voluntarily appointing liquidators when enforcement steps have already been taken by third parties has been varied.
• The votes of related creditors are no longer counted without a court order.
• Insolvency practitioners now have a duty to report “serious problems”, including any offence, negligence, or material breach of a director’s duties, or where the management of the company has materially contributed to it being unable to pay its debts.
• The clawback window for voidable transactions for unrelated parties has reduced from two years to six months.
• There are now prescriptive restrictions on practitioners and certain other related parties prohibiting them from purchasing company assets except in limited circumstances.
• Liquidators now have to provide an interest statement with their first report to creditors and update it every six months, disclosing any actual or perceived conflict of interest.
• The requirements for reporting to creditors are now more detailed and prescriptive.
• There are now stricter rules for keeping company money separate from that of the practitioner’s firm.
• Practitioners now need to keep accounting records and other company documents for six years after a liquidation finishes.

Developments since the reforms

A number of the reforms reflect practices that most practitioners were already complying with, but there was a fear that the reforms would lead to a greater administrative burden. While the reforms have led to some additional costs (both up front costs incurred in updating standard form documents and ongoing costs in complying with the more detailed reporting requirements), there is a sense that the changes have led to increased transparency for creditors.
Turning to some of the reforms more specifically:
• Licensing – The transitional provisions mean that RITANZ and NZICA members can continue to accept appointments provided they applied for a licence by 31 December 2020. There is a deadline of 31 August 2021 for these applications to be determined. Anecdotally, it appears there are a number of practitioners with applications outstanding, so we wait to see whether that deadline can be met. Also in relation to licensing, the industry will be aware of the case of Grant v RITANZ [2020] NZHC 2876, in which Damien Grant of Waterstone Insolvency challenged RITANZ’s refusal to grant him membership (which would have meant he fulfilled the criteria to be licensed by NZICA) on the grounds that he was not a fit and proper person. RITANZ was ordered to reconsider Mr Grant’s application and has, after further independent investigation, accepted Mr Grant as a member.

• Court consent to appointment – One of the aspects of the reforms with almost universal support was the amendment to section 280 of the Companies Act to remove the requirement for court approval for the appointment of liquidators or administrators who had provided professional services to the company as investigating accountants, or who had a prior business relationship with a secured creditor of the company. This requirement led to unnecessary cost, delays and administration time. This procedural step has now been rendered unnecessary and the amended section 280 is better focused on issues that are more likely to affect a liquidation or administration. Since 1 September 2020, there have been no reported decisions under this section.

• Voluntary appointment of liquidators when enforcement steps already taken – Initial views were that the amendment to section 241 AA of the Companies Act narrowed the existing law so that, once a company had been served with winding up proceedings, shareholders could only appoint their own liquidator with the consent of the creditor. However, in Commissioner of Inland Revenue (CIR) v Pop-Up Globe Foundation Ltd [2021] NZHC 515, Associate Judge Bell confirmed that appointment of a liquidator by shareholders would be effective if done within 10 working days of service of winding up proceedings or, if done outside the 10 working days, with the consent of the petitioning creditor.

• Related creditor voting – The move to disregard related creditor voting at creditors’ meetings unless the court orders otherwise seems to have been a sensible move. It deals with the risk of related creditors voting to protect their own interests (for example, by voting to keep a ‘friendly liquidator’ in office). This change may also mean fewer challenges to decisions made at creditors’ meetings, which will avoid the uncertainty that comes with such challenges. So far there are no reported cases of related creditors applying to the court under section 245A of the Companies Act for an order that their vote be taken into account.

• Duty to report “serious problems” – Section 60 of the IPRA imposes a duty on insolvency practitioners to report “serious problems” to the relevant authorities, with the potential for a fine of up to $10,000 for breach of this duty. The definition of a “serious problem” is wide and judicial guidance may be required on the interpretation of s 60 in the future (for example, guidance on what constitutes a material breach of directors’ duties and whether all offences, including the likes of traffic offences, need to be reported). In the meantime, practitioners are left with the cost of the additional reporting requirements and a number of questions as to the scope of the duty, including: how much information will be required; to what extent the duty applies where a settlement has been reached in respect of an alleged breach; and, what responsibility practitioners have for follow up action in circumstances where there is no benefit to creditors. The Companies Office website has an online form for reporting serious problems.

• Voidable transaction change – The reduction in the clawback window for voidable transactions for unrelated parties to six months (from two years) has given comfort to creditors. In our experience, this change strikes members of the community as fair. The previous two year window was considered by many to be too harsh on unrelated parties, with the passage of time and expense of litigation making it difficult to contest liquidators’ claims.

• Extended duty to keep records – Insolvency practitioners are still getting to grips with the full ramifications of this change, and we suspect that there may be rising complaints as the costs become clearer – especially as other legislation already covers specific records where there is a particular need for retention. We expect that the increased costs will ultimately be borne by creditors as practitioners will allow for it as a cost of the liquidation.
The next year and beyond

While the last eight months have given us clarity on some of the new rules and processes, we suspect that the bedding in process will continue for some time.

Let’s look at the NZ economy and the insolvency space in May 2021.

In the media, the concerns about the current labour shortages grew. While these concerns were previously focused on the horticultural sector (a shortage of pickers during harvest) and the hospitality sector, the number of industries calling out for workers is increasing. Of late, the labour shortages in the construction sector – an issues that has been around for some time – have been noticeable, as anyone who has tried to organise a tradie or become a DIY expert thanks to YouTube can attest to. Supply shortages for building materials is also biting, which is not helping New Zealand’s ever present housing crisis.

The pressure points for the economy continue to loom. While some critical issues are being addressed urgently to address their negative impact, other issues have been put to the back burner. It looks like shipping issues and materials shortages will be with us for some time. China has gone on a materials spending spree but has overwhelmed its ports in the process. China’s ports backlog has the potential to cause more shipping disruption than the March 2021 Suez Canal blockage – the canal was blocked for six days but disrupted global shipping for months plus the vessel and its $3.5 billion in cargo has not yet been released.

There is continued talk of the pressure on the NZ housing market. Although the government and others are looking to increase supply, they are constrained by both material and labour shortages. It looks like the house price projections outlined by the government in their last budget seem overly optimistic and, when looked at critically, unrealistic.

Inflationary pressures are continuing to creep into the economy. The cost of goods is on the rise as a result of supply shortages, wage increases, and government policies that have increased the cost of doing business. The Reserve Bank will likely tolerate these inflationary pressures for a time but some economists are questioning whether the projected OCR increases will be brough forward. Banks have started to price interest rate increases into their longer- term (3+ year) mortgage rates but, paradoxically to some, lowered their shorter term interest rates. As mortgage rates rise, many will start to feel the pinch, especially those who took out a mortgage after mid-2008, as we have been in an environment where the OCR has tracked down and interest rates have generally been on a downward projection. In March 2008, the average one year “new standard residential mortgage interest rate” was 9.9%, in March 2009 it was 5.76%, and in March 2021 it was 3.24%.

If you want to have a free chat about any issues your business is experiencing or about any other insolvency matter, 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

Company appointments are only slightly down on 2020 levels and the number of insolvency appointments in May 2020 and May 2021 were similar. The types of appointments are, however, quite different. Solvent liquidation have continued their upward trend, with 17.8% of the total liquidations in May 2021 being solvents.

Notable insolvency appointments in May 2021:
• Wine Industry
o Four companies in the Sacred Hill group of companies (including the parent company) had receivers appointed, one of which has also been placed into voluntary administration. Another one of the companies in the group was placed into liquidation by its shareholder.
o Villa Maria’s parent company (FFWL Limited) had receivers appointed.
• Building Industry
o Silverfern Property Services Limited, the largest recipient of emergency housing funding, was placed into liquidation by its shareholders.
o Ormiston Rise Limited, a KiwiBuild supplier, was placed into receivership.

Personal Insolvencies - Bankruptcy

Personal insolvencies have continued to decline year on year and the 2021 figures are lower than comparable periods in the pre-Covid-19 disruption period. Notably, May 2021 figures are only slightly above May 2020. Bankruptcy figures to decline, with many individuals in trouble opting to submit to a No Asset Procedure or Debt Repayment Order. Is this a positive sign that individuals are taking early action in response to financial pressure rather than burying their head in the sand and letting the debt blow out? We will continue to monitor the position.

Winding Up Applications

Winding up applications for the year to May 2021 have picked up slightly month on month. Since the start of the year, the IRD has been applying pressure to those in default and who were given a grace period in 2020. While the IRD was lenient following the Covid-19 outbreak and quiet in the period leading up to the election (which is common), the IRD has advertised over half of all the liquidation applications in the year to date and was the petitioning creditor in more than 80% of all liquidation applications advertised in May 2021 .

To date, 260 winding up proceedings have been advertised. Of those, 160 (61%) have ended up with the debtor company being placed in liquidation. The IRD was the petitioning creditor in 88 of the 160 (55%) of the court ordered liquidations so far this year. This is another trend we will continue to monitor.

The Income tax Act 2007 allows a company to make a tax free distribution of capital gains “on liquidation”.

The IRD issued publication QB20/03 on 11 December 2020. The publication discusses the first step legally necessary to achieve “liquidation” in both the short form (s318(1)(d) Companies Act 1993) and long-form liquidation (s241(2)(a) Companies Act 1993).

IRD have confirmed when “liquidation” occurs under each process. It reinforces BR Pub 14/09 that a short form liquidation commences (for tax purposes) when a valid resolution is passed, when the directors (and/or shareholders depending on the constitution) make the decision to wind up the business, pay all creditors, distribute surplus assets and request removal from the register of companies, and then carry out the short from liquidation process. It also confirms that the first step legally necessary to achieve a long form liquidation is not the same. A long form liquidation commences when the shareholders pass a resolution to appoint a named liquidator.

Can you lose liquidation status?

The commentary talks of the trigger for losing the “on liquidation” status under the short form method. Quite simply, if the company continues to trade after the winding up resolutions under the short form process or before the formal liquidation, there is a risk a capital distribution in that period is taxable. Also, if a company commences a short form process then there is a significant delay or does not complete the formal strike off, earlier capital distributions may be held taxable.

Directors need to be wary that when they decide to wind up their company and opt for the shortform method that they cannot be held to have traded in the winding up process and they cannot incur significant delay without reason. Refer IRD’s example 3 below. The short form liquidation process must lead to the company strike off.

Can you change process from short form to long form?

Example 1 below shows it can take time to achieve a winding up, even years.

Changing processes from short to long form is less clear. The article suggests “unforeseen processes” as a legitimate reason. It does not specify the common position where companies resolve to wind up their businesses, start to carry out that process and then appoint a liquidator to complete the process down the track. Liquidation for tax purposes starts on the winding up resolution and then the formal long form liquidation starts from the shareholder resolution appointing the liquidators by name later. It seems so long as there is a clear intention and reason to change process that this is acceptable.

These are the key clauses relating to the change of process, from my perspective are at 12 and 13 of QB20/03 :

12. Changing Processes “Sometimes, a company that has embarked on a short-form liquidation may find it necessary due to unforeseen circumstances to appoint a liquidator. This could occur, for example, where a dispute arises in the course of winding-up the business that would be better to have a third-party liquidator resolve. The Commissioner considers that the period known as “on liquidation” began when a valid resolution was passed commencing the short-form liquidation process.”

13. Time Delays “In some cases, there may be an extended period between the first step legally necessary to achieve liquidation and the removal of the company from the register. The period may even span different tax years, so that a distribution is made in a period preceding the removal of the company from the register. The Commissioner will assume that any distributions are made pursuant to a genuine intention to liquidate. However, if the liquidation is not completed or, in the case of a short-form liquidation, the company does not cease to trade after a resolution to cease to trade is passed, then such a distribution will not have occurred “on liquidation” and the distributions will be taxable.”

This suggests that a company may change processes so long as there is a genuine intention to liquidate from the outset and “on liquidation” occurs from the initial resolution (so long as further trading does not disrupt that).

The Examples provided

Takeaway
The key message is, so long as your client can clearly show there was no trading after the winding up resolution then there should be no issue with advancing a short form method. For certainty advancing a formal long form solvent liquidation is recommended – particularly for companies with large capital distributions. It removes the risk.

For advice on solvent or short form liquidations contact our team.

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