There are three rescue procedures in NZ, the compromise (Part 14), the Court approved scheme of arrangement (Part 15) – an option seldom used, and Voluntary Administration (Part 15A).
Liquidation is not a rescue procedure. It is usually a terminal procedure. Liquidators typically trade only for a short term for the purposes of the liquidation. The purpose of liquidation is to realise and distribute assets, not business survival.
Some companies however advance liquidation for the purpose of restructuring and to purchase back part of the business from the liquidator (at market value). Some companies advance liquidation with a known purchaser lined up to purchase the business in a clean structure. The consideration attributed is often pre approved by the secured creditors in these cases.
Receivership can be a rescue procedure. It can result in the rescue of viable parts/businesses but the primary duty of a Receiver is to get the best return for the secured creditor (usually the bank). Business survival may be an outcome. Banks may agree to a VA proceeding to avoid the negative publicity from appointing a Receiver or to protect the value of the business goodwill achieved from the stay in an Administration.
A company compromise under Part 14 of the Companies Act 1993 is a useful method without (in theory) having to go to Court. There is however no automatic moratorium (like with a VA) so sometimes you go to Court anyway. A compromise requires the identification of classes of creditors and 75% approval by class. There is often no outside independent manager involved. The compromise is the likely least expensive option but it requires approval to essentially be assured in advance. It works well for smaller companies with lesser creditors involved.
A Voluntary Administration is advanced where the company is cash flow insolvent or likely to become insolvent. No Court application is required. The Board of directors can appoint an Administrator. If there is a winding up application (by a creditor) on foot, the Court will likely adjourn the winding up application if the Court is satisfied that it is in the interests of the creditors (Section 239ABV, Companies Act 1993).
A business must be truly viable to be successfully rehabilitated. The appointment of an administrator for any other reason apart from rehabilitation is unlikely to gain the requisite support.
A liquidator can only trade on for limited purpose of winding up. An administrator on the other hand has wide powers including the power to borrow. Some contracts will have termination clauses on liquidation but not on Administration. Both options have their advantages.
The best option is best discussed and well considered before advancing. Contact our team for advice on the options available if your business is in need of rescue, restructure or an orderly termination.
A statutory demand is a claim under Section 289 of the Companies Act 1993. Failing to comply with a statutory demand or applying to set it aside within the specified timeframes will result in your company being deemed to be insolvent and liquidation may follow.
A company is insolvent if it is unable to pay its debts when they fall due.
Non-compliance with a statutory demand served on your company allows the creditor that served the statutory demand to apply to the High Court to appoint a liquidator. The most common basis for a company in New Zealand to be placed into liquidation by the High Court is from failure to comply with a statutory demand.
If you receive a Statutory Demand you need to act quickly. You can either pay the specified sum, enter into some form of compromise to pay the debt, or offer up some form of security to the satisfaction of the creditor.
If the debt is disputed you must apply under Section 290 to have the debt set aside. You will need to engage a lawyer.
The court may grant an application to set aside a statutory demand if it is satisfied that
(a) there is a substantial dispute whether or not the debt is owing or is due; or
(b) the company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or
(c) the demand ought to be set aside on other grounds.
If no action is taken, nor a liquidator appointed voluntarily (by the shareholders) within 10 working days of the service of the Winding Up Proceeding, the Winding Up Application hearing takes place and if the High Court is satisfied that the company should be wound up, an order for the Company to be wound up is made and the Court appoints a liquidator. A liquidator is nominated by the applicant creditor and provides a consent to act prior to the hearing.
If your company does not satisfy the solvency test and is risking trading insolvently then the shareholders of the company can voluntarily appoint a liquidator so long as the appointment occurs within 10 working days from the service of a winding up application (which follows after the expiry of the statutory demand).
Your company may be closed by the liquidator or the business sold. You can save your company from facing Court liquidation proceedings with the following options:
• Voluntary liquidation (if liquidation is inevitable)
• Voluntary Administration
• Company Compromise – Part XIV Companies Act 1993
• Debt Restructuring and a workout
• Advice on your options early on
Liquidation may be inevitable and a way out of a downward spiral. Speak to an Accredited Insolvency professional. It may not mean losing your business. Some companies advance liquidation voluntarily in order to restructure.
For advice on statutory demands, liquidation, hive down, voluntary administration or compromise contact our team at McDonald Vague.
If you need a CAANZ and/or RITANZ Accredited Insolvency Practitioner to consent to act as liquidator on an upcoming court liquidation or to manage a voluntary liquidation, Boris, Iain, Colin or Peri would be pleased for the referrals and to assist.
Even in New Zealand’s currently comparatively benign economic conditions, some businesses inevitably find themselves struggling to survive. If you want your business to survive and then flourish, you need to put a business recovery plan in place.
Managing a struggling business is stressful and demanding on directors, management and staff alike. The thought of impending failure is emotionally taxing on all stakeholders. Gambling on the business’ success with money from your family or friends, or extending credit with suppliers just to get by is often a poor strategy. Hope is never a reliable method.
Moreover, the ethical challenges involved in risking other peoples’ money is a major stressor for most people.
Businesses can often struggle when they grow beyond the directors’ skill set or their ability to control the business’ increasing complexity. Ill health can also pose problems for a business, as can losing interest in the business once the competition catches up or passes it by and the excitement of building something fresh and new fades.
Similarly, many businesses fall into the trap of relying too heavily on a single customer or supplier. Others find technology has eroded their competitive advantage or suffer from being poorly managed.
Returning to a healthy, dynamic commercial standing requires a thoughtfully considered strategic plan of action. There are several short-term remedial actions which are often an option:
1. Identifying redundant assets and selling them off
2. Converting stocks to cash
3. Adopting a more aggressive recovery policy for debtors
4. Negotiating extended terms from suppliers
5. Exploring debtor factoring or looking at invoice financing options
There are also three well-established restructuring or turnaround options including hive down, compromise, and voluntary administration.
This strategy is appropriate where a struggling business is being restructured in the face of potential liquidation with a new corporate owner assuming control. The proposed restructure is pre-packaged and agreed with secured creditors prior to a formal liquidation process being initiated.
The problem business is sold to a new corporate entity at market value most often based on an independent market valuation. The trading name, associated goodwill and intellectual property is safeguarded. This may take the form of a sale to the failed entity’s current management team or its existing directors. It thus demands certain steps to be taken to avoid phoenix company issues emerging at a later date.
An arms-length sale by an insolvency practitioner following formal appointment to an unrelated third party where the director is not involved either in management or a directorship role avoids creating a phoenix company situation.
This strategy falls under Part XIV of the Companies Act 1993. It is simply an offer to pay the compromised debt over an agreed time period and at an agreed rate. The debt involved is frozen at the date of the compromise agreement. This resolution requires agreement by the various classes of creditors and needs a majority of creditors representing 75 per cent of the value of each class of debt to agree.
This option provides breathing space for the company to turn its fortunes around while still being able to trade. The compromise manager may be involved in overseeing the trading on or hold a lesser position. The role is defined in the agreement and agreed by the requisite number of creditors.
This option provides a struggling company experiencing financial difficulties with some breathing space. An externally appointed administrator reviews the business fundamentals and provides a report to creditors outlining a potential rescue plan together with a recommended course of action.
The outcome may take the form of a Deed of Company Arrangement (“DOCA”), the liquidation of the business or the return of the business to the hands of its directors.
A voluntary administration arrangement tends to benefit creditors, both secured and unsecured and often leads to a Deed Administrator managing the company for a set period of time through the aegis of a rescue plan.
A voluntary administration formally begins following the appointment of an administrator by a secured creditor, by the board, or as a result of a shareholder resolution. Voluntary administration is more expensive than a compromise model due to the mandated statutory compliance and reporting requirements for formal meetings and public advertising. For this reason, they are more suited to larger businesses.
Any business can find itself is troubled financial waters. The key to surviving and thriving is to identify a strategically solid path forward, involving some form of restructuring or combined with a hive down, compromise or voluntary administration solution.
As it is in all areas of business, when you are seeking advice or input on insolvency matters it is important to go to the right source.
There are lawyers and accountants that specialise in insolvency but, depending of the circumstances, and what you are looking to achieve, who you choose is important.
Under the current legislation, the Companies Act 1993, anyone, without conflict of interest, and with a few other exceptions, can take an appointment as an Insolvency Practitioner and be appointed as liquidator or receiver of a company. They do not have to have any formal qualification and do not have to be registered or subject to any particular code of conduct. This situation is likely to change with current law changes being considered but for the time being the current provisions of the Companies Act apply.
So both lawyers and accountants can be appointed as liquidators or receivers and can be referred to as Insolvency Practitioners.
There are also Insolvency Practitioners who may be neither a lawyer or an accountant, who can also be appointed as liquidators or receivers.
Generally speaking, there are two ways that a business could be involved with an insolvency matter – either as a creditor seeking to recover a debt, or as the business owners deciding on a course of action because of the financial situation the business is in. The information or advice you would need from a lawyer and / or an accountant is different in each case.
If you are a creditor of a business that has failed to pay its debts as they fall due, you may decide to take action to have the debtor company liquidated.
To do this, we recommend you consult a lawyer experienced in the insolvency field to prepare statutory demands for service on the debtor company and, in due course, to prepare and file the application in the High Court to have the debtor company liquidated.
The lawyer will, prior to the matter being heard in Court, obtain the written consent of Insolvency Practitioner(s), to be appointed,
If you are a director/shareholder of a debtor company that has been served with a statutory demand or liquidation proceedings, you may want to consult with an insolvency practitioner to gain an understanding of your rights and obligations and the options that are available to you.
Many of the insolvency practitioners practicing in New Zealand have formal accounting qualifications or accounting backgrounds. This is understandable given that a lot of the work carried out by insolvency practitioners involves the review and analysis of accounting information.
IP's often then engage lawyers. Some of the larger accounting firms will have an insolvency practice as part of their firm’s structure. McDonald Vague, are Chartered Accountants specialising in business recovery and insolvency
If you are the shareholders or director of an insolvent company, your business accountants, who prepare your annual financial reports etc, may identify the fact that you are technically insolvent but, under those circumstances, they cannot be appointed as liquidator of your company. You would need to appoint an independent insolvency practitioner.
Accreditation for insolvency practitioners acknowledges IPs with appropriate experience. The main benefit is, accredited IPs are subject to the code of ethics, CAANZ rules and standards, CPD, practice review and a disciplinary body. If the practitioner is a CA and accredited, the designation is CAANZ accredited IP, whereas a non-CA but member of RITANZ is RITANZ IP Accredited by CAANZ. Dealing with an accredited practitioner provides more assurance to the appointor that the appropriate actions will be taken.
Getting the right advice at the right time and from the right person can make a big difference to the final outcome in any given situation.
If you need legal advice in relation to an insolvency issue, then see a lawyer with expertise in that area of law.
If you need practical advice in relation to insolvency options and processes and the related accounting issues, then speak to an experienced insolvency practitioner.
The team at McDonald Vague are experienced and independent insolvency practitioners with the formal qualifications and experience to be able to provide good practical advice on your situation.
McDonald Vague is one of New Zealand's leading turnaround, insolvency and business recovery firms, with 20 years in the industry and a variety of different services that can slow, minimise or reverse the impacts of financial trouble. Our team is well-versed in the legal and practical complexities of business turnaround, and can help you and your company negotiate the situation and arrive at the best possible outcome.
Discovering that your business, or one that you represent, is in financial trouble can be a stressful situation. However, it's important to remember that there are solutions available, and that can turnaround your business to either trade out of loss or restructure for a sale. The key to achieving these outcomes and avoiding liquidation is to seek out the right advice from experts who have seen these situations before, and who have the experience to find an appropriate solution.Download our free guide for NZ companies in Financial Difficulty
Business turnaround is all about taking a proactive approach - recognising the symptoms of a financially unhealthy company and taking the appropriate steps in response. Regardless of whether or not you've had prior experience in recognising and combating the warning signs of insolvency, it's worth seeking an expert opinion if you have any doubts about the financial health of your business.
Is your business profitable? Are you achieving your key goals and objectives? How sustainable are your current structure and operations? If any of these questions are setting off alarm bells, the chances are pretty high that a company is in financial distress. If this is the case, then business turnaround should be your first priority. The longer you wait, the harder it will be to reverse the damage, and the greater the likelihood of insolvency occurring
Here at McDonald Vague, we focus exclusively on business recovery, business turnaround and insolvency services. This focus on a few key areas allows us to operate independently and free from the conflicts of interest that arise with larger firms. Within business turnaround, there are several different services that our team can provide.
Forensic Reviews: Our forensic accounting reviews find anomalies in a business and compile discrepancies in your accounts. McDonald Vague's team of investigators have the ability to identify insolvent set-offs, uninvoiced transactions and fraud with discretion and confidentiality.
Financial Due Diligence: Before signing an unconditional contract, our team will conduct a comprehensive check that includes general company data, environmental matters and litigation history.
PPSR Advice:The Personal Property Securities Register (PPSR) is a crucial tool for business owners looking to minimise their financial risk. Registering on the PPSR gives owners a much higher chance of recovering debts and provides a defence against insolvent transactions claims. McDonald Vague can assist with registering for the PPSR, ensuring the process is completed as quickly as possible to minimise business risk.
Terms of trade: In the event of insolvency, the clauses in a business's terms of trade take on critical importance. If these don't provide security over your goods, the insolvency process can become far more costly. Our team works closely with lawyers to ensure that your terms of trade provide priority over other creditors in the event of liquidation or receivership.
Defending Voidable Transactions: Sometimes referred to as insolvent transactions, these are situations where a liquidator reclaims a payment made by a company prior to insolvency. These claims are becoming more and more common, and our team are increasingly seeing voidable transaction challenges from liquidators. McDonald Vague can assist by providing a potential defence strategy, or by negotiating on your behalf during settlement.
Pre-lending Reviews: Borrowing is a complex business, but before approaching a financier it's well-worth getting some expert advice. The dynamics of finance change from situation to situation, and our team can provide a comprehensive pre-lending review that focuses on structure, management, market trends and business plans, as well as the raw numbers.
Business Valuations: Valuing a business involves a variety of different methodologies, encompassing not just performance, but forecasts and the market as well. With extensive experience in business valuations, our team has the expertise necessary to ensure an accurate and fair figure is reached.
McDonald Vague is a member of, and is regulated by, Chartered Accountants Australia & New Zealand. We are also a member firm of NZCA, and have offices throughout New Zealand, so are always nearby no matter your location. Situations of financial distress are always challenging, and come with a lot of emotional complexity as well as practical and legal issues. A clear head is essential, and with our team having seen it all before, we can provide a solution that ensures the best possible outcomes for business owners, members of staff and creditors.
For more information, get in touch with us today.