Economic recap

May 2023 saw the Reserve Bank lifting the OCR by a final 25 basis points and stepping back saying job done in the belief they have broken the back of inflation with no further raises needed at this time, they do not anticipate any drops till 2024 however when inflation has dropped back somewhat.

Of note from the below graphs, you will see the raised levels of appointments compared to the prior two years and heightened winding up application levels that highlight the challenging economic climate and financial difficulties experienced by companies, necessitating closer attention to their financial stability and operational viability. This will likely continue for some time.

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

Company insolvency appointments for May 2023 have dropped back to the 2020/2021 levels. The drop largely coming from shareholder insolvent appointments while court liquidations levels only dropped a little.

Whether this level of court appointments will continue as the election approaches is yet to me seen with IRD action continuing at its newly elevated levels.

Total corporate insolvency figures for the year to date remain above the last 3 years but with the slower Jan and Feb 2023 and a reduced May 2023 we remain behind the 2019 total levels, This gap has widened following the April highs we were unable to maintain.

Solvent liquidations have increased on the April stats but remain below the highs seen every March. For the month however the level remains below the average of 17% of total appointments. Insolvent liquidations remain consistent and sit around their average along with Voluntary Administrations, Receiverships, and other appointments. The outlier that peaked above their average was court liquidations making up 31% where the average is normally 23% of total appointments.

Winding Up Applications

In May we have a significant increase in winding up applications compared to previous Mays. In May-21, there were 53 applications, consisting of 12 company winding up applications and 41 IRD winding up applications. In May-22, the numbers further increased to 54 applications, with 30 company winding up applications and 24 IRD winding up applications. However, in May-23, there was a notable surge in winding up applications, reaching 84 in total. Out of these, 37 were company winding up applications, and 47 were IRD winding up applications.

These figures clearly show an upward trend in winding up applications for the month. Comparing May-23 to May-22, we see a substantial increase of 56% in the total number of applications. The number of company winding up applications also rose by 23%, while IRD winding up applications witnessed a staggering increase of 96% reinforcing the narrative we have been hearing of IRD ramping up pressure on derelict debtors.

Looking at the year-to-date figures, the upwards trend becomes even more apparent. In the first five months of 2023, the total number of winding up applications has been consistently higher compared to the same period in both 2022 and 2021. This suggests an ongoing and intensifying financial strain faced by companies, as evidenced by the increased need for creditors to seek winding up procedures against debtors.

Personal Insolvencies – Bankruptcy, No Asset Procedure and Debt Repayment Orders.

Personal insolvency appointments remain at the low levels seen in the last few years. As a breakdown of appointment types bankruptcies remain above their long term average taking the full buff from No Asset Procedures.

Election Year Insolvencies

The above graph details the total corporate and personal appointments across all appointment types in this year and the last two election years.

While total insolvencies remain above 2020 due to the lockdown in place in 2020 the levels are below 2017. Personal insolvency appointment levels continue to drag down the total as you can see in the below graph they remain below 2017 and 2020 figures.

If you want to have a chat about any points raised or an issue you may have you can call on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

We all know it’s frustrating not being paid. What’s worse is that not getting paid affects your cash flow and chasing bad debts takes time that could otherwise be spent doing productive work.

If you decide that your best option for resolving the debt is to liquidate the debtor company, the process generally takes at least three months. There are a number of milestones along the way, which are outlined below.

Provided the debt is not disputed, the first step is to issue a statutory demand. The purpose of the statutory demand is to test the company’s solvency – the presumption being that, if the company is solvent and the debt is not in dispute, the company will pay the amount demanded in the statutory demand.

A company who receives a statutory demand has 10 working days from the date of service to apply to the High Court to set it aside, usually on the basis that the debt is disputed and/or the debtor company is solvent. If no setting aside application is made, the debtor company has 15 working days to pay the amount demanded in the statutory demand.

If the debtor company does not pay the amount demanded within the 15 working day timeframe, there is a legal presumption that the company is insolvent (which can be overcome if the company provides proof of solvency). The creditor can issue liquidation proceedings relying on the presumption of insolvency as the basis for its liquidation application for 30 working days from the date that the statutory demand expires.

When the liquidation proceedings are filed in the High Court, a hearing date is given. While the time between filing the application and the allocated hearing date can differ from Court to Court (if the Court is outside Auckland, Wellington, or Christchurch, the hearing date will need to coincide with the judges’ circuit sittings), the hearing date is usually between two and three months after the date of filing.

Once the processed documents are provided, they must be served on the defendant company. The application for liquidation also needs to be advertised in the paper where the company carries on business and the New Zealand Gazette. The advertising must be run at least five working days after the defendant company is served and at least five working days before the liquidation hearing date.

If the defendant company takes no steps in response to the liquidation application, the defendant company will be placed into liquidation by the High Court on the hearing date and the creditors’ nominated liquidators will be appointed. If the creditor does not produce a consent to act from its nominated liquidators at or before the hearing, the Official Assignee will be appointed as liquidator. If someone appears at the hearing on behalf of the company, the High Court can allow the proceeding to be adjourned (usually to allow time for settlement discussions or for payment of the debt to be made).

Creditors other than the creditor who brought the liquidation proceedings can appear at the liquidation hearing as either a creditor in support or in opposition to the liquidation application. If you are a creditor in support and the creditor who brought the liquidation proceedings decides to discontinue its proceeding (usually because some arrangement as to payment has been made), you can ask to be substituted as plaintiff. A substituted plaintiff can continue with the previous creditor’s liquidation application instead of having to start a new liquidation application and preserves the filing date of the application, which is used for calculating time periods for voidable, undervalue, and related party transactions.

If you are a creditor and want to discuss the liquidation process further, give our Licensed Insolvency Practitioners on 09 303 0506. 

Rescuing Struggling Companies in New Zealand: The Power of Creditors Compromise under Part XIV of the Companies Act 1993

Introduction

In the challenging business landscape, many companies in New Zealand find themselves facing financial distress and struggling to meet their obligations. Fortunately, the Companies Act 1993 offers several mechanisms to facilitate the recovery of such companies. One option available to financially troubled companies is to consider a creditors compromise under Part XIV of the Act. This article aims to shed light on the benefits of a creditors compromise and highlight its differences from the voluntary administration process.

Understanding the Creditors Compromise

A creditors compromise is a process that enables a financially distressed company to reach an agreement with its creditors regarding the payment of debts and the restructuring of its financial affairs. Part XIV of the Companies Act 1993 governs this mechanism in New Zealand. The objective is to provide an opportunity for struggling companies to regain their financial stability and continue operating, while also ensuring fair treatment for their creditors.

Benefits of a Creditors Compromise

1. Breathing Space: The creditors compromise offers struggling companies a much-needed breathing space to evaluate their financial situation and develop a comprehensive restructuring plan. During this period, the company is protected from legal action by its creditors, allowing it to focus on implementing the necessary changes.
2. Enhanced Flexibility: a creditors compromise provides significant flexibility. The company has the freedom to propose various alternatives to address its financial challenges, such as debt rescheduling, debt-to-equity conversions, or partial debt write-offs. This flexibility ensures that the proposed arrangement aligns with the company's specific needs and circumstances.
3. Stakeholder Involvement: A creditors compromise encourages active participation from both the company's management and its creditors. It requires the company to develop a restructuring plan, which must be approved by a majority in number and 75% of its creditors in value of those creditors voting on the matter.  Creditors voting  is completed by class (for example secured, unsecured, employees etc). This collaborative approach fosters transparency, promotes stakeholder engagement, and allows creditors to have a say in the future of the company.
4. Avoiding Liquidation: By opting for a creditors compromise, struggling companies can potentially avoid the drastic step of liquidation. Liquidation often leads to the closure of the business, loss of jobs, and minimal recovery for creditors. A creditors compromise, on the other hand, offers a chance for the company to restructure and continue operating, thus maximizing the potential returns for all parties involved.

Creditors Compromise vs. Voluntary Administration

While a creditors compromise and voluntary administration both aim to provide relief to financially distressed companies, they differ in significant ways.
1. Legal Framework: The creditors compromise is governed by Part XIV of the Companies Act 1993, while voluntary administration is regulated by Part 15A of the Act. Each mechanism has its own set of rules, procedures, and requirements. The VA regime requires two formal meetings, statutory advertising and is more costly as a result.
2. Timing and Control: In a voluntary administration, the directors voluntarily hand over control of the company to an independent administrator, who takes charge of the entire process. In contrast, a creditors compromise can allow the company's existing management to remain in control throughout the process, under the supervision of the compromise managers.
3. Stakeholder Involvement: In voluntary administration, creditors are generally not involved in the development of the restructuring plan, as the administrator prepares and presents the proposal. However, in a creditors compromise, the company works collaboratively with its creditors to develop a plan that meets the needs of both parties.

Conclusion

For struggling companies in New Zealand, a creditors compromise under Part XIV of the Companies Act 1993 offers a viable pathway to overcome financial distress and chart a course towards recovery. This mechanism provides struggling companies with the necessary tools to negotiate with creditors, restructure their debts, and create a sustainable future. By embracing the benefits of a creditors compromise, companies can benefit from breathing space, enhanced flexibility, stakeholder involvement, and the potential to avoid liquidation.

It is important for struggling companies to understand the distinctions between a creditors compromise and voluntary administration. While both mechanisms aim to address financial difficulties, they differ in terms of legal framework, timing and control and stakeholder involvement. These differences highlight the unique advantages of a creditors compromise, particularly in allowing companies to maintain control over their operations and actively engage with creditors to develop a mutually agreeable restructuring plan.

In conclusion, struggling companies in New Zealand should consider the option of a creditors compromise under Part XIV of the Companies Act 1993 as a means to navigate financial challenges and secure a brighter future. Seeking professional advice from legal and financial experts can help companies understand the intricacies of the process, assess its feasibility, and develop an effective restructuring plan. By leveraging the power of a creditors compromise, companies can regain financial stability, preserve jobs, and foster a successful path forward in the dynamic business landscape of New Zealand. For more information contact our team here