Wednesday, 13 November 2019 13:57

Picking An Insolvency Practitioner

You wouldn’t pick a tradie on price alone so why would you pick an insolvency practitioner solely on this basis?

You expect your tradie to work to industry standards when working on your house or car so why wouldn’t you take the same care before you hand over control of a business to an insolvency practitioner, who will be dealing with your company, its assets, its creditors, and its stakeholders?

Not all insolvency practitioners are created equal. They have different levels of experience and qualifications, work in different size firms, and may or may not be accredited. If you appoint the wrong insolvency practitioners, it can be difficult to remove them. If it’s shortly after appointment, the company’s creditors may be able to appoint replacement insolvency practitioners at the initial creditors’ meeting. If not, it will likely involve a trip to the High Court. If the insolvency practitioner is not accredited, they will not have to answer to a disciplinary board.

You should expect your insolvency practitioner be law abiding and to deal with the company’s directors, shareholders, and creditors fairly and ethically. We have put together a handy list of what to look for, what to ask, and what to consider before engaging an insolvency practitioner.

WHAT SKILLS DO I NEED TO LOOK FOR IN AN INSOLVENCY PRACTITIONER?

Your insolvency practitioner should:

1. Have experience in the industry the business operates in

2. Have relevant insolvency experience, including in relation to the type of appointment you are considering and any steps you expect them to take after their appointment

3. Be an Accredited Insolvency Practitioner, either through RITANZ or CAANZ

4. Have sufficient resources behind them to properly carry out the appointment

5. Have a history of making distributions to creditors

HOW DO I CHOOSE THE RIGHT INSOLVENCY PRACTITIONER?

Ask questions, and lots of them. The more information you are able to get up front the better position you will be in when it comes time to make the decision on who you should go with.

WHAT QUESTIONS SHOULD I ASK AN INSOLVENCY PRACTITIONER?

(a) Are they members of RITANZ and Accredited Insolvency Practitioners (AIPs)? Until regulation come into force in June 2020, we recommend that you only use AIPs. AIPs are required to comply with a code of conduct that dictates the professional and ethical standards they are expected to meet. The code is enforced by Chartered Accountants Australia and New Zealand. There is a public register of AIPs on both the CAANZ and RITANZ website.

(b) What previous relevant experience do they have? There are different types of insolvency appointments (advisory, compromises, voluntary administrations, receiverships, and liquidations). If you are looking at appointing voluntary administrators, you probably do not want to appoint someone who has never done one before.

(c) What kind of qualifications and experience do they have within the firm? Depending on the type of post-appointment work that will be required, you may want to appoint AIPs that are chartered accounts, have legal knowledge, or are experienced in forensic accounting.

(d) Are they Chartered Accountants, do they have a legal background, or forensic accounting skills? The appointment may determine what kind of background you should be looking for.

(e) Do they have the resources necessary to deal with the appointment? If the business operates multiple stores across the city or the country, does the AIPs’ firm have enough staff to take on the appointment?

(f) Do they have a history of making distributions to creditors? What level of overall fees would the AIP expect to charge on the job?

FINDING THE BEST INSOLVENCY PRACTITIONER FOR YOU

It is important that the AIPs you appoint understand your personal situation and your business’ needs so they can help achieve the best result for all parties. It is important that you take your time with this decision because you will be trusting them with the business.

McDonald Vague’s directors are AIPS and Chartered Accountants. We also have three non-director AIPs and our professional staff are members of RITANZ. McDonald Vague is also a Chartered Accounting Practice and is subject to practice review.

Tuesday, 06 December 2016 15:05

Compromises with Creditors

Businesses get into difficulty for a range of reasons.  When directors have acted in good faith and react to the situation early enough, and where there is a good prospect of recovery, a compromise may be acceptable to the company’s creditors.  The purpose of a compromise proposal is to increase the likelihood of some classes of creditors receiving more than they would if the company were put into liquidation.

Often, voting outcomes rely on the creditors’ opinion of the director(s) but issues can arise when related parties, who may be seen as voting to protect their own interests, are involved.

Statutory Requirements

The statutory requirements of a compromise are set out under Part 14 of the Companies Act 1993 (“the Act”).  Sections 227 to 234 of the Act set out who may put forward a compromise (called the proponent), the information the proponent must compile and provide to creditors of the company who will be affected by the compromise, the effect of the compromise if adopted, and the powers of the Court in relation to compromises. 

The information to be provided to creditors includes –

- Names and addresses of the proponents and the capacity in which they are acting;

- Events that led to the need for a compromise;

- What the compromise proposal entails in relation to the amount and timing of the payment(s);

- An assessment of what creditors would be likely to receive in the event of a liquidation; and

- A copy of the list of creditors who will be affected by the proposal and the amount owing or estimated to be owing to each of them.

Full details of the notice requirements and the duties of the proponent are included in sections 229 and 230 of the Act.

Once approved, a compromise binds all creditors to whom notice of the proposal was given, even those creditors who voted against the proposal and, once payment has been made under the terms of the compromise, any residual balance must be written off by the creditor.

Creditor Approval

For the compromise to go ahead, it must receive the approval of at least 50% by number and 75% by value of the creditors in each class of creditor who vote on the proposal either at a formal creditors’ meeting or by way of postal votes.  A compromise generally requires the approval of all classes of creditors before it is approved.

The correct identification of the different classes, based on their legal rights and their economic interests, is of great importance to the success of the compromise.  If the correct classes are not identified, the compromise may be subject to Court scrutiny pursuant to section 232 of the Act.

Case Study

In a case decided earlier this year, several creditors, who were not in favour of the compromise proposal, applied to the High Court for orders that the company’s compromise proposal approved by the company’s creditors be set aside.  In this case, a related party creditor waived a security it held over the company’s assets, which allowed it to vote as an unsecured creditor, which meant that three related entities voted as unsecured creditors on the compromise. 

All three related entities agreed that they would not take part in any distribution but still registered their votes in favour of the proposal.  The three related entities accounted for just over 75% of the total value of the debt.  By casting their votes in favour of the proposal, they had ensured that the 75% in value voting requirement was met.   

Some of the smaller creditors were unhappy with the outcome of the voting.  They alleged that the related parties’ conduct was unfairly prejudicial to the challenging creditors.  The High Court agreed and held that the related entities should have been a separate class of creditor for the purpose of voting on the compromise and that the manner in which the creditors’ meeting and voting had been structured was unfairly prejudicial to the challenging creditors.  The High Court found that the compromise would not have been approved if the challenging creditors had been put in a separate class of creditors instead of the general body of unsecured creditors.  The approved compromise was set aside as a result.

The outcome of this case shows the importance of engaging independent and experienced insolvency professionals, who can give unbiased, accurate advice and can assist with putting an accurate proposal to each class/all classes of creditors, as compromise managers.  An accredited insolvency practitioner’s involvement will give creditors confidence that they are being treated fairly and give the proponents confidence that the issues will be put to creditors in a proper manner, which lessens the likelihood of any challenge to the results of the voting.

If you are considering putting a compromise to your creditors or you need some advice on what to do next, come and talk to the McDonald Vague team.  They can discuss the options with you and guide you through the process.

Monday, 13 June 2016 12:30

Working on a creditor’s compromise

In the midst of financial difficulty, it can be hard to see a way out. Being insolvent means you’re not making enough money to pay your debts or you owe more money than the total value of your assets.

Neither situation is ideal, but there are ways around it to avoid company liquidation, receivership or administration.

Your best option is being upfront with your creditors. Trying to avoid them limits your options, and gives them more grounds to hire a debt collector or petition the court for your liquidation.

A creditor compromise is an informal agreement between you and your creditors to either reduce your debt, or alter your payment plan to something you can afford. While a creditor’s compromise is an informal agreement in that it’s not set through the courts, you will still need to approach a lawyer to help you draft one.

After finding a lawyer you will need to:

  • - Gather all relevant information about your finances.
  • - This includes statement of affairs, financial accounts, profit and loss statements, and asset portfolios.
  • - Show how much money you will be able to pay.
  • - Propose a plan to help you repay your creditors.

To be accepted, at least half of your creditors, representing 75% of the total money you owe any must agree to it. If enough creditors vote to accept your compromise, the agreement will be binding on them and on you with no need for approval through the courts. It’s a good idea to offer more to your creditors than they would receive by placing your business in liquidation.

If your business is to pay a lump sum off a reduced debt total, your creditors will write off the debt balance and cut their losses. If you’re making repayments over time, during the period of the compromise debts are frozen and creditors can’t take action against your company. You’ll be temporarily protected against liquidation proceedings, receivership and administration.

The perils of a creditor compromise

Many creditor’s compromises are based on hope and promises that can’t be delivered. Such action only delays insolvency, and isn’t helpful for you or your company. To implement a practical plan, you may appoint a compromise manager. For the sakes of both parties any manager should be independent, and not the debtor company’s director or solicitor. An independent compromise manager will help the debtor company keep trading, while ensuring the creditors receive what they are promised. This role also provides a level of oversight and accountability to ensure the terms of the agreement are met. In some cases, if your repayment plan is close to what a creditor would receive through liquidation, a compromise manager can mean the difference between a positive or negative vote.

A creditor’s compromise is a good option if your business is financially sound, but is going through a period of financial difficulty. It’s a second chance to help you keep trading and turn your company’s future around. If you would like help drafting a creditors compromise, or an independent party to act as credit manager, contact the experienced team at McDonald Vague.

For more information about options if you have a company in financial trouble, download our FREE Guide for NZ Companies in Financial Difficulty.

In the words of Fredrick Nael: “It takes both sides to build a bridge.”

An Alternative to Bankruptcy – Part 5 Subpart 2 Proposals

Insolvent individuals are often unaware that there are alternatives to bankruptcy and what the impact of those alternative options will be, so they are ill equipped to make informed decisions.

This article focuses on Part 5 Subpart 2 Proposals. There are other bankruptcy alternatives such as summary instalment orders and no asset procedures (for debts less than $47,000) as well as informal settlements, none of which are discussed here.

Resolving personal insolvency issues using a Part 5 proposal requires the insolvent to put his/her best foot forward and the creditors agreeing to a concession and giving their support to the insolvent. The trustee brings it all together.

Background to Proposals

A Part 5 proposal is an option for an insolvent individual facing the prospect of bankruptcy to settle his/her debts. It is an opportunity for a person with significant personal debts to reach an agreement to pay his/her creditors in full or part by making a lump sum payment or advancing a deferred payment plan. A proposal must be approved by a majority in number that represents 75% in value of those creditors who vote on the proposal.

Some insolvents have the support of many creditors but face one aggrieved creditor who refuses to accept anything other than immediate payment in full, has a grudge, and is keen to advance bankruptcy proceedings for the sake of it. When you are facing bankruptcy because of one problematic creditor, you may be able to bind that one creditor with the support of the requisite majority of other creditors. It is not all doom!

Part 5 Case Study – Professional Advisor

I recently completed a Part 5 proposal for a financial advisor who was facing bankruptcy. His personal insolvency arose from serious ill health, which led to a loss of focus on his business and on maintaining his personal assets. His creditors, however, knew that he had been blessed with a full recovery to health and that, by supporting his proposal, he could continue to work as a financial advisor, earn a good income in future, and pay creditors a contribution towards their outstanding debts.

The creditors agreed the best outcome was to support the proposal and accept something instead of getting nothing. The alternative in bankruptcy would have been the end of a career and no return to creditors. The insolvent was able to borrow funds from his employer (borrowed against his future income) and contribute a lump sum to his creditors. The proposal was dealt with in less than three months and is now at an end. The result was that the creditors received more than they otherwise would have in bankruptcy. It was a “win/win” for everyone.

When Should Proposals be Considered

Proposals are not a good option for every insolvent person. Proposals require a financial outlay to cover the costs of the Court application for approval of the proposal and to cover the trustee’s costs in preparing them. They also require the support of the majority of an insolvent’s creditors. Avoiding bankruptcy is a significant incentive to some insolvent individuals, including where the insolvent’s career is at risk and when the individual clearly wants to repay what he/she can to his/her creditors in good faith.

Advancing Part 5 Subpart 2 Proposals

There must be advantages for both the insolvent and his/her creditors in a proposal arrangement or it will be a waste of time putting the proposal forward. A proposal must provide a better return to creditor than they would receive in bankruptcy.

The Advantages, in General Terms, of a Part 5 Proposal for the Insolvent are:

• avoiding the stigma of bankruptcy, the impact on your reputation, and the impact on family;
• avoiding the cost of defending bankruptcy proceedings;
• avoiding publicity of the insolvent’s insolvency (a proposal is between the insolvent and his/her creditors only);
• except in a few situations, property acquired after the filing of the proposal is not affected by the proposal;
• avoiding the restrictions faced by undischarged bankrupts, such as being required to provide information to the Official Assignee (“OA”) if changing address or job, not being able to leave New Zealand permanently without Court approval, or requiring a case managers’ approval to leave New Zealand for short time periods (personal or business);
• examinations of the insolvent are seldom conducted by the trustee; and
• the ability to be a company director and hold a management position in a family business.

The Advantages, in General Terms, of a Part 5 Proposal for Creditors are:

• avoiding the cost of Court proceedings;
• receiving a distribution from contributions made by third parties that would not be available to creditors in bankruptcy;
• receiving a greater recovery than what would be available in bankruptcy.

What Does the Insolvent Offer to his/her Creditors?

The proposed distribution to creditors usually comes from:

• funds advanced by family and friends;
• assets that would not be available to creditors in bankruptcy, for example, Kiwisaver entitlements (if approved), trust assets, assets subject to relationship property claims, funds borrowed specifically for distribution under the proposal
• contributions from future income to be paid over a period of up to five years rather than the normal three years;
• offering any windfall received for the duration of the proposal.

The insolvent’s family, friends, and related party creditors (who would be entitled to prove in the insolvent’s bankruptcy) can agree to subordinate their claims and not prove for their debts in the Part 5 proposal, which increases the return to the insolvent’s remaining creditors.

The Basic Rules when Seeking to Secure a Part 5 Proposal:

(i) Certainty of Return - creditors want certainty of a dividend. The creditor wants to know how much money they will receive as a dividend and when these dividends will be paid.
(ii) Certainty of Costs - the trustee’s costs need to be disclosed to creditors.
(iii) Disclosure - the insolvent must convince his/her creditors that he/she has disclosed all assets and interests.
(iv) Dollar Test - the insolvent must demonstrate that he or she has contributed the maximum that he or she can realistically contribute to the Proposal.

Is a Part 5 Proposal the Right Choice for You?

Bankruptcy can be the best option for an insolvent who has no ability to pay his/her debts and whose ability to provide for himself/herself and his/her family is not dependent on avoiding bankruptcy. For others, it is simply not feasible to offer a proposal.

Whether a Proposal is the right choice for you depends on:

• your ability to fund a proposal;
• whether you have the support of the requisite majority of your creditors;
• your ability to offer a sum to creditors that is more than they would receive in bankruptcy;
• your profession and your ability to secure future employment;
• the impact of bankruptcy on your employment; and
• the impact of the stigma of bankruptcy on you and your family.

In addition to any personal reasons, there are legal and practical reasons an insolvent may want to avoid bankruptcy:

• a bankrupt is obliged to attend any meeting that the OA requires him/her to attend;
• the OA can apply to have the bankrupt examined under oath;
• a bankrupt must immediately notify the OA of any change of name or address;
• a bankrupt must deliver to the OA all documents and papers in his/her possession that might relate to any of his/her assets, dealings, transactions, property, and/or affairs;
• bankrupts who practice in certain professions (for example: solicitors, financial advisors, real estate agents, and chartered accountants) cannot act as principals or hold the positon of director;
• bankrupts who have an income surplus after living expenses may be required to contribute that surplus towards payment of their debts;
• self-employment is not often an option (there are some exceptions);
• a bankrupt cannot act as a director of a company during his/her bankruptcy (there are some exceptions);
• the OA may investigate the financial affairs of an associated entity (company, partnership, person, or trust) of the bankrupt so far as they appear to be relevant to the bankrupt or to any of his/her conduct, dealings, transactions, property and affairs;
• the bankrupt’s bankruptcy must be disclosed to anyone to from whom the bankrupt applies for credit of $1,000 or more;
• transactions, gifts, or settlements that took place in the five years before the bankrupt’s bankruptcy will be examined;
• some employers require employees to disclose whether they are or have been bankrupt as do insurance companies; and
• the impact of the bankruptcy on the family home (this is a complex issue that will need to be considered by the insolvent before becoming a bankrupt).

I will end as I started. Dr Maya Angelou said: “You may not control all the events that happen to you, but you can decide not to be reduced by them.”

It is an unfortunate fact that many companies experience financial difficulties at times.  Often the directors/shareholders do not realise that there are a number of options available to them.  This article provides an overview of the various options for distressed companies.  

Creditors compromise 

A compromise is an agreement between a company and its creditors.  The purpose is to enable a company to trade out of its financial difficulties and thus avoid administration, receivership or liquidation.  In this way the company can survive into the future and provide continuing business to creditors.  

There are two basic features of most compromises:  

  • Creditors will be repaid in full or in part over a period.  If creditors are paid in part they write off the balance of their debt;
  • During the term of the compromise the company's debts are frozen and no creditor may take any action against the company.

 

Usually, the directors of a company decide to allow the company to enter into a compromise, subject to creditor approval. Creditors will only approve if they believe that they will receive more money than in an administration, receivership or liquidation.  

Compromises are governed by Part 14 of the Companies Act 1993.  Each class of creditors affected must vote as a class.  Classes can include trade creditors, landlords, employees for preferential wages and holiday pay, Inland Revenue for preferential GST and PAYE, hire purchase creditors and other secured creditors.  

For a compromise to be approved, a majority in number representing 75% in value of each class of creditors must vote in favour of the proposal.  

A creditor's compromise can be a good option for businesses that are fundamentally sound, but are experiencing financial difficulty.  

Voluntary administration   

Voluntary administration is a relatively new rehabilitation mechanism that was introduced into the Companies Act 1993 about seven years ago.  An administrator may be appointed by a distressed company's directors, a secured creditor holding a charge over all or substantially all of the company's property, a liquidator or the Court.  

The aim of voluntary administration is to maximise the chances of the company (or its business) continuing in existence, or if this is not possible, for creditors to receive a better return than in a liquidation.  It is an interim measure during which creditors' rights to enforce charges, repossess assets or enforce guarantees are restricted.  A General Security Agreement ("GSA") holder may, however, appoint a receiver within 10 working days of the administration commencing.  It is therefore critical for the administrator to have the support of any GSA holders.  

Once a company enters into voluntary administration the directors can only act with the written permission of the administrator.  The administrator takes control of the company's business and has 25 working days to complete an investigation and provide an opinion on the most beneficial course of action for creditors.  This will be one of three options:  

  • Have the company enter into a Deed of Company Arrangement ("DOCA") with creditors;
  • Put the company into liquidation; or
  • Return the company to its directors (this is very rare).

A DOCA is an agreement between the company and its creditors.  It is the responsibility of the deed administrator to ensure that the company adheres to the DOCA's terms and conditions.  

Receivership   

A receivership appointment is made by a secured creditor who has been granted a General Security Agreement ("GSA") over the company's assets.  The GSA holder is usually a financial institution or a private lender.  

The conduct of receivers is governed by the Receiverships Act 1993.  A receiver has control over the company's assets subject to the GSA under which they have been appointed.  The receiver's primary purpose is to recover funds for the secured creditor, however, the receiver also has a duty to protect the rights of other creditors.  The receiver provides reports on the conduct of the receivership to the secured creditor and files this report with the Companies Office. 

The receiver ceases to act when the secured creditor has been repaid and at this time control of the company reverts to the directors.  However, a liquidator can be appointed if there are further assets to be realised, funds still owed to unsecured creditors or matters requiring investigation.  

Liquidation   

When the directors/shareholders of an insolvent company become aware that there is no realistic ability to trade out of their financial difficulties they can resolve to appoint an insolvency practitioner of their choice as liquidator.  This is known as a voluntary liquidation. 

In instances where the directors/shareholders do not take any action, a creditor of the insolvent company may apply to the Court for an order requiring the company be put into liquidation.  This is known as a Court appointed liquidation and it is the Court's decision as to who will be appointed as liquidator.  If a company is served with a winding up application by a creditor, the directors/shareholders have 10 working days to put the company in voluntary liquidation. 

The conduct of liquidators is governed by Part 16 of the Companies Act 1993.  Once a company liquidation commences the director's powers are restricted and they must provide the company's records to the liquidator.  They must also co-operate with and support the liquidator. 

The liquidator's main duty is to realise assets belonging to the company and distribute the proceeds to creditors.  The liquidator may also investigate the reasons for the company's failure, set aside insolvent transactions and take legal action where necessary.  The liquidator must report to the company's creditors every six months and file these reports with the Companies Office. 

Upon completion of the business liquidation the company is struck off the Companies Register. 

Every situation is unique and a number of factors should be taken into consideration to determine the best course of action in the event of company insolvency.  If you wish to discuss your situation please contact one of the team at McDonald Vague.

 

Alternatively, download our Free Guide to Insolvency Services

 

 

The Insolvency Act 2006 was implemented on 3 September 2006, and created a new alternative to bankruptcy called the No Asset Procedure ("NAP").  This involves a one year term, rather than the usual three year term in bankruptcy.

 

The NAP is simply a once-off reprieve for the consumer type small-time debtor who has got out of their financial depth.  To qualify, the debtor must have no assets (except excluded assets - see below), total debts between $1,000 and $40,000, no means to repay any amount, and a clean financial record (not previously bankrupt and not previously admitted to the NAP).

 

Once admitted to the NAP, the debtor enjoys a moratorium on their debts; with some exceptions these cannot be enforced while the debtor is in the NAP.  If the NAP runs for 12 months, the debtor is discharged and the debts are cancelled (excluding student loans, child support and fines).  If the NAP terminates at any time before 12 months is up, the debtor's debts become enforceable once more.

 

Assets which may be retained by a bankrupt or a person subject to the NAP are as follows:-

 

  • Tools of trade - value at Official Assignee's discretion
  • Household furniture - value at Official Assignee's discretion
  • Motor vehicle - must not exceed $5,000 in value
  • Money -  up to $1,000

 

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.

This article discusses when to accept a company compromise, and suggests what modifications and amendments can be asked for, and when to reject a compromise.

What is a compromise?

A compromise is an agreement between a company and its creditors. Most compromises have two basic features. They provide:-

  • That creditors are paid their debt in part or full over a period. If they are to be paid in part, then the creditors write off the balance of their debt
  • That during the term of the compromise, debts are frozen and no creditor may take any action against the company

A compromise as perceived by creditors

It seems to us that compromises with creditors can make otherwise rational people break out into a rash of prejudices whereby any suggestion of a compromise is met with a closed mind. On the other hand, we as insolvency practitioners have had some remarkable successes and we know of many creditors who have also been pleased with the results.

A compromise as perceived by the company

The company perceives a compromise to be an alternative to receivership, administration or liquidation, which gives the company the opportunity to survive. Although the directors may not be able to arrange for the company to pay its debts in full, they anticipate being able to provide continuing business to those creditors who have supported them.

The legislation

The legislation can be found in Part 14 of the Companies Act 1993. The following sections and schedules apply:-

  • Sections 227 - 234 (note: further sections, 235-239, deal with court involvement)
  • Fifth Schedule - proceedings at meetings of creditors

Voting requirements

Each class of creditors affected by a compromise must vote as a class. Classes of creditors can include:-

  • Trade creditors
  • Landlords
  • Other unsecured creditors
  • Hire purchase creditors
  • Other secured creditors including General Security Agreement holders
  • Employees for preferential wages & holiday pay
  • Inland Revenue Department for preferential GST and PAYE
  • Subordinated creditors

Clause 5(2) of the Fifth Schedule provides as follows:-

"At any meeting of creditors or a class of creditors held for the purposes of section 230, a resolution is adopted if a majority in number representing 75 % in valueof the creditors or class of creditors voting in person or by proxy vote or by postal vote in favour of the resolution."

Whether to accept a compromise or vote against it: some factors to consider

  • Does the compromise offer more to creditors than they would achieve in a liquidation?
  • How do you know?
  • Is there a statement of affairs?
  • Are there financial accounts?
  • Are the directors trying to avoid Insolvent Transaction claims against creditors to whom they have given a personal guarantee?
  • Are there actions which should be brought against the directors?

We comment that many compromises are based on hope, and make promises which cannot be delivered.

Compromise manager

The proposal should have an independent and experienced professional Compromise Manager. In our view, it is not appropriate to have either a complete absence of manager, or have the director or their solicitor acting as manager. An independent experienced Compromise Manager will be working for the creditors to ensure they get what has been promised. We, for example, will only accept the role if we believe the compromise will succeed and is in the best interests of creditors.

The documentation

The documentation must be professionally prepared and as provided for by the Companies Act, and there must be a separate document explaining the proposal and giving details of those affected. The documentation should be comprehensive and informative.

Compromise committee

Particularly in the case of a large company, the creditors may want there to be a committee of creditors to work with the Compromise Manager. The committee will also represent the views of creditors as a whole.

Powers of a Compromise Manager

We have seen compromises where the Compromise Manager has few powers and merely acts as a buffer between the company and its creditors.

It seems extraordinary to us that creditors will vote for a compromise where there is no external supervision of the compromise by an independent party with experience in this area. If the directors want a second chance they must be prepared to relinquish some of their powers to a Compromise Manager acceptable to creditors. The compromise itself can provide for the Compromise Manager to oversee the terms of the compromise and provide regular reports to creditors on progress and likelihood of success.

A Compromise Manager must have the power to bring a compromise to an end if he or she perceives it is not going to work. Never vote for a compromise which, for example, provides for a first payout after a year if there is no power to monitor progress. On the other hand, there should also be a power to extend the compromise for say three months, or a longer period with the consent of creditors.

Meeting of creditors

There should be a meeting of creditors at which they get the opportunity to exchange views and ask questions of the proponents of the compromise. At that meeting, creditors should be given the opportunity to ask for modifications to the compromise.

We were consulted some time ago about a failed compromise. In that case, we had the following major criticisms:-

  • Documentation was sparse and did not comply with the Companies Act
  • There was no Compromise Manager
  • There was no meeting of creditors (postal voting was used)
  • There were no scrutineers in respect of the voting

Conclusions

Compromises are capable of working well for creditors and at the same time can give a company a second life. If you have clients in financial difficulty who have a fundamentally good business, a compromise might be the answer. If you have to vote on a compromise, do so with an open mind. At the same time, be prudent and be satisfied before voting that the compromise is genuine and deserves to succeed.

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.

Thursday, 01 December 2011 13:00

An alternative to bankruptcy - Part 5 proposals

When a person is faced with a bleak financial situation, bankruptcy may appear to be the only outcome. However, there are certain circumstances where this may not have to be the case. Part 5 of the Insolvency Act 2006 provides for alternatives for individuals facing bankruptcy - and the Subpart 2 proposal option can be very beneficial to affected parties.

Potential benefits of the Part 5 Subpart 2 proposal

As an insolvency practitioner with extensive experience in this area, I have acted as trustee for a large number of individuals and successfully negotiated terms with their creditors to the advantage of all concerned. I have found that the Part 5 Subpart 2 proposal option has become more popular for:

  • insolvent individuals who face significant personal guarantee obligations arising from the failure of an insolvent company, and
  • individuals who face bankruptcy proceedings and do not wish to face the restrictions involved in bankruptcies which include the inability to act as a director of a company, the loss of control of financial affairs, and restrictions to international travel let alone the stigma attached to bankruptcy.

Outcome of the proposal

The proposal must offer an outcome that would be better for creditors than that achieved in bankruptcy. The offer requires funding, which can be from any number of sources, including future earnings, third party lenders and existing assets. The formal proposal documentation is required to set out the offer to creditors, and provides for unsecured, preferential and secured creditors. The preferential creditors are required to be paid in priority to all other debts to the extent of such preference defined by the Insolvency Act 2006.

The proposal itself records a commitment to pay off a percentage of debt and can be either by way of an upfront lump sum payment shared pro-rata amongst creditors (after taking into consideration the priority provisions of the Insolvency Act 2006) within a short time period (usually timed within a fixed time period from date of High Court approval) or can be payable over time.

The proposal offer is a full and final settlement of all personal debts and obligations. It is a way for an insolvent person to reach a formal agreement that enables the individual to undertake business activities and have essentially the freedom to work without the consequences and restrictions of bankruptcy.

The procedure

The formal documentation includes the proposal offer and the individual's statement of affairs and affidavit which provides the details of the insolvent's assets, debts, and liabilities and provides a background statement with an explanation on how insolvency occurred and the benefits of the proposal and why creditors should support the proposal.

Voting at meetings

A proposal must be approved by requisite majorities in number and value and then sanctioned by the High Court to be valid. This requires 50% in number and 75% in value of creditors voting on the matter to pass a resolution agreeing to the proposal. Following the creditors' meeting, the provisional trustee seeks Court approval for the proposal.

Approval of proposal by the court

At the Court hearing, the Court considers the merits of the proposal and provides an opportunity for opposing creditors to be heard. The grounds for refusal of the proposal are set out in the Insolvency Act 2006. These include non-compliance with the Insolvency Act 2006, the terms of the proposal not being reasonable or not calculated to be for the benefit of the general body of creditors or that it is not expedient that the proposal be approved. Public interest and commercial considerations are also taken into account by the Court. There is no benefit in putting forward a proposal when the insolvent is aware that more than 25% by value of their creditors would oppose the proposal in any case.

The Court generally accepts the views of the majority of creditors. However, this is not a pre-determinant of the proposal. The wider public interest consideration is relevant and unless it is clear that the creditors are better off under the proposal than in bankruptcy, then the proposal can be rejected at the Court approval stage.

General comments

If bankruptcy proceedings have been lodged and are pending, a proposal can be presented to creditors at this late stage and an adjournment sought. It is, however better to be pro-active rather than reactive and to propose a Part 5 proposal to creditors prior to bankruptcy notices being served.

No enforcement or bankruptcy proceedings can be taken during the period from filing the proposal and the Court application for approval of the proposal. On the completion of the proposal the insolvent person is released from any liability whatsoever to the participating creditors whether personally as guarantor or otherwise.

McDonald Vague has assisted many insolvent people over the years with presenting Part 5 proposals under the Insolvency Act 2006 and prior to that, Part XV proposals under the Insolvency Act 1967.

We have provided advice to individuals and have completed many successful proposals. These proposals have been for a range of percentages in the dollar of the debt owing and have been over time periods of up to three years. We have found that creditors generally prefer proposals that offer lump sum payments up front or over short time periods. Often the percentage in the dollar is less relevant than the physical amount paid.

Insolvent persons with debts less than $40,000 can also consider No Asset Procedures as other alternatives to bankruptcy.

If you have a client who you think may benefit from a Part 5 proposal - particularly a client who has a vested interest in remaining in business and not being restricted from a director's position - please contact us to discuss their situation and we would be happy to advise further.

Please also see our more detailed article on this topic headed 'Personal insolvency - Part 5 proposals'.

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.

Friday, 16 December 2011 13:00

Personal insolvency - Part 5 proposals

A Part 5 Subpart 2 proposal under the Insolvency Act 2006 gives a debtor an alternative to bankruptcy.  If the proposal succeeds, then the insolvent is bound by the proposal and does not have to comply with the usual provisions of a bankruptcy.  For example, the debtor may carry on in business and have more than one bank account, and is not prevented from leaving the country.

Proposals are called Part 5 proposals because they fall under Part 5 Subpart 2 of the Insolvency Act 2006.  The person who is subject to a proposal is called "the insolvent."

A proposal is in effect a contract between a debtor and his or her creditors.  The insolvent may put an offer to his or her creditors.  If the creditors agree to the offer with a requisite majority, and the Court approves the proposal, then so long as the debtor fulfills his or her obligations under the proposal that is the end of the matter.

During the course of the proposal no creditor may take any action against the debtor to make the debtor bankrupt, and at the end of the proposal residual debts, if any, are extinguished.

Legislation

The legislation applying is as follows:-

  • Insolvency Act 2006
  • The Insolvency (Personal Insolvency) Regulations 2007
  • The High Court Rules, Part 24

What may be in a proposal

Section 326 of the Insolvency Act 2006 states as follows:-

An insolvent may make a proposal to creditors for the payment or satisfaction of the insolvent's debts

A proposal may include all or any of the following:

  • an offer to assign all or any of the insolvent's property to a trustee for the benefit of the creditors
  • an offer to pay the insolvent's debts by installments
  • an offer to compromise the insolvent's debts at less than 100 cents in the dollar
  • an offer to pay the insolvent's debts at some time in the future
  • any other offer for an arrangement for the satisfaction of the insolvent's debts

 

The proposal may include any other conditions for the benefit of the creditors and may be accompanied by a charge or guarantee

 

The procedure

A proposal is drafted.  To this is attached a statement of assets, debts and liabilities of the insolvent and a background statement.  This statement is verified by affidavits.

  • The proposal is signed by the insolvent and also by some person willing to act as trustee for the creditors
  • The proposal is then filed in the High Court
  • Upon the filing of the proposal, the trustee named in the proposal becomes the provisional trustee and has an obligation to forthwith call a meeting of creditors by posting to every known creditor, at their last known address;
    • Notice of date, time and place of meeting
    • Statement of the assets and liabilities of the insolvent
    • A copy of the proposal
    • A formal proof of debt
    • A voting letter in the prescribed form

Meeting of creditors

The next step is there is a meeting of creditors at which the provisional trustee is the chairperson, unless creditors elect their own chairperson.

The creditors have a right to examine the insolvent and may accept the proposal or may ask for modifications to the proposal.  Any such modifications have to be agreed to by the insolvent.

Voting at meeting

The resolution to approve the proposal is decided by a majority in number and 75% in value of those creditors who vote.  The same majority is required for any modifications to the proposal.

Approval of proposal by the High Court

Upon acceptance of the proposal by the creditors, the trustee completes detailed minutes and then applies to the Court for approval of the proposal.  It is the Court that approves the proposal - not the creditors.

The Court, however, has no power to approve the proposal unless the necessary threshold has been met.  A notice of the Court hearing is sent by the provisional trustee to the insolvent and to every known creditor.

The Court, before approving a proposal, will hear any objection that might be made by or on behalf of any creditor.  If the proposal is in order, the Court will usually approve the proposal.  An approved proposal is binding on all creditors listed in the proposal, not just those who voted.

The Court has no power to approve the proposal if the proper procedure has not been followed.  The Court also has discretion not to approve the proposal on various grounds.  The most common ground would be that the terms of the proposal are not reasonable or are not calculated to benefit the general body of creditors.

Variations from normal insolvency law

The law regarding the Part 5 proposal differs in many ways from the law applying to normal insolvency matters.  For example; in a Part 5 proposal preferential creditors are not entitled to vote.  In other insolvency procedures (liquidation or compromise), preferential creditors are entitled to vote.

Also, secured creditors are allowed to vote for the full amount owing to them.  Under normal insolvency law, secured creditors must first deduct the value of their security.

General comments

For a Part 5 proposal to succeed the following elements must be present:-

  • There must be some goodwill between the debtor and his or her creditors
  • The provisional trustee and the solicitor involved must be able to work effectively with each other
  • Creditors must be convinced that the Part 5 proposal will give them a better result than if the insolvent were to be adjudicated bankrupt

Conclusion

Part 5 proposals can be very effective:-

  • They can enable a person to continue to be self-employed
  • They can enable creditors to get back more than would be achieved in a bankruptcy
  • They can enable creditors to get continuing work from the debtor

In short, a good Part 5 proposal will benefit both the debtor and the creditor.

Please also see our further article on this topic 'An alternative to bankruptcy - Part 5 proposals'

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.

When a company fails one of four things usually happens:-

  • A receiver is appointed
  • An administrator is appointed
  • It enters into a compromise with its creditors
  • It is put into liquidation (this will be covered in Part 2)

This article seeks to explain the rights that creditors have in each of the above insolvency proceedings. It is written from the perspective of the ordinary unsecured creditor.

1 - Receivership

The purpose of receivership is to repay the debt owed to the General Security Agreement ("GSA") holder.  GSA holders tend to be banks but can also be private lenders (including directors and family members). The receiver's obligations are primarily to the GSA holder who appointed them. If a receiver holds surplus funds after repaying the GSA holder these must be returned to the company or paid to a liquidator to distribute. Receivers have no powers to make distributions to unsecured creditors. There are also no meetings of creditors in a receivership.

The main option for unsecured creditors is therefore to apply to the Court for a liquidator to be appointed (assuming the shareholders are not willing to appoint a liquidator voluntarily). Although a liquidator cannot take control of charged assets until the GSA holder has been repaid, he/she can do the following:-

  • Examine the validity of the GSA and of the receiver's appointment
  • Examine the receiver's acts and ensure that he/she has obtained the best possible price for the assets
  • Take actions not available to a receiver, the commonest being:-

- Insolvent transactions (previously known as voidable preferences), and insolvent setoffs
- Voidable charges
- Transactions for inadequate or excessive consideration with directors

However, legal action can cost many tens of thousands of dollars and if there are no surplus funds a liquidator may well need funding to bring such actions.

2 - Voluntary administration

The voluntary administration procedure was introduced in New Zealand in November 2007. Its stated aims are to either:-

  1. maximise the chances of the company continuing in existence or;
  2. achieve a better return for creditors than would be achieved in a liquidation

Appointment
An administrator can theoretically be appointed by the Court on a creditor's application. However, this is unlikely in practice given the amount of knowledge that is required for the court application. The administrator is much more likely to be appointed by the company.

The right to have a first meeting of creditors
The administrator must hold a meeting of creditors within eight working days of their appointment. Creditors can vote at this meeting on whether to appoint a creditors' committee or whether to replace the administrator. A vote is passed if approved by a majority in number, representing 75% in value, of the creditors or class of creditors voting in person or by proxy/postal vote. The creditors' committee has the right to consult with the administrator and to receive and consider reports by the administrator.

The right to have a 'watershed meeting'
This meeting must be convened within 20 working days of the administrator's appointment (unless the Court extends this period) and then held within a further five working days. Voting rules are as above. Creditors have the right to vote on the following:-

  1. to resolve that the company execute a Deed of Company Arrangement ("DOCA") with creditors
  2. to resolve that the administration should end
  3. to appoint a liquidator (which also ends the administration)

The administrator will become the deed administrator (where a DOCA is approved) or the liquidator (where creditors vote to put the company into liquidation), unless creditors specifically nominate another person for this role.

The deed administrator can later be replaced by the Court on a creditor's application. A DOCA is binding on all creditors (excluding secured creditors), whether or not they voted in favour of its execution.

The right to request amendments to or termination of a DOCA
Creditors owed a total of at least 10% of the combined amount owing to all creditors can require the deed administrator to convene a meeting to either vary or terminate the DOCA.

The right to review the administrator's accounts
The administrator is required to file receipts and payment summaries at the Companies Office every six months. Any creditor can view these accounts online.

3 - Compromises with creditors
Compromises with creditors are the one situation where power is technically in the hands of the unsecured creditors. For a compromise to succeed it must be approved by a majority in number and 75% in value of each class of creditor voting for the proposal. The same rules apply for voting as to any proposed variations to the compromise terms.

One of the difficulties with compromises is that every compromise is different and there is less integrity in some compromises than others. This is where the power to ask for amendments is invaluable. Before voting, creditors need to be satisfied that the following questions have been answered satisfactorily:-

  • Will the proposal give them a greater return than they would achieve in a liquidation? To give some degree of comfort on this issue it may be necessary for an independent accountant to examine the company's books and records
  • Is there a professional Compromise Manager in charge of the process? It would seem to be relying on blind faith to assume that the director, who was the architect of the company's difficulties, can independently manage the compromise arrangement
  • Is there a creditors' committee to work alongside the Compromise Manager? If creditors want to be involved with the process they must be represented
  • What happens if the compromise does not work out? For instance, will the Compromise Manager hold a signed resolution by the shareholders to place the company into liquidation, to be exercised if the company does not fulfil its obligations under the compromise?

Our article 'Company creditor compromises - worthwhile or not?' covers this topic in greater detail.

Note: This is an expanded and updated version of an earlier article written by John Vague and was subsequently revised by Jonathan Barrett.

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.