Tuesday, 02 March 2021 13:03

When Things Go Wrong

Murphy’s Law (or one version of it) states "whatever can go wrongwill go wrong" and that can appear to be the case when you are running a business in the current environment.  If it’s not a lockdown, it’s a shortage of supply, or it’s a major client failing, or it’s another of the myriad of things that can go wrong. 

While having good contingency plans in place, including cash reserves or access to a fighting fund, can help your business get through the hard times, when these problems come at you one after another in quick succession, things can turn to custard very quickly. 

When that happens, there are things that, as a director of the company, you should be doing and, equally as important, things that you shouldn’t be doing. 

What to Do:

The first thing to do, when you have run out of ideas on what can be done to rescue your business, is to seek professional advice.  Sometimes, all it needs is for someone who has the required expertise and experience and is one step back from the frontline, to look at what is happening and come up with viable rescue options.  These could include –

  • A compromise with creditors in which the creditor agrees to receiving an agreed percentage of the amount owed to them, with the balance written off, allowing the company to continue trading.
  • A Hive-down which transfers the valuable or profitable parts of a failing business to a new entity with the market value of the assets transferred paid to the failing business for the benefit of its creditors.

Consider your duties as a director of the company – to act in the best interests of the company or, if the company is insolvent, to consider the interests of the creditors. Take steps to ensure that you don’t allow the company to continue operating if it is going to increase the risk to creditors of the company.

What Not to Do:

Don’t put your head in the sand and decide that the only option is to keep working harder in the hope that things will come right in the long run.  All you may be doing is digging the hole deeper.

Don’t put your personal interests ahead of those of the company or its creditors. 

  • It is not a legitimate transaction to move all of the assets out of the failing company into your own name, or into the name of a new company that you have set up, without making payment to the failing company of the true market value of the assets moved.
  • It is not appropriate to use company funds to repay yourself, for unsecured funds advanced to the company, ahead of making payment to the company’s other creditors such as the employees, IRD and trade suppliers. 
  • Do not continue to operate the company so that you can repay creditors who may have a personal guarantee from you but, at the same time, increase the amount that is owed to other creditors.

If liquidators are appointed to the company, either by the shareholders or by the High Court, the liquidators will look at the steps you have taken, as director, and consider how your actions have impacted on the creditors.

If you took actions that were to the detriment of the creditors, you may be held personally liable for the losses they incurred.


The failure of the company may not have been as a result of anything that you did, or didn’t, do, but your actions once the issues have arisen can have a marked effect on the outcome for creditors and on any personal liability you may face.

As soon as you identify that your company is, or will become, insolvent, you need to get the professional advice required and take the appropriate actions required of you as a director. 

If your company is facing solvency issues, please contact one of the team at McDonald Vague for a free initial discussion about your company and the options available.

The regulation of insolvency practitioners has been welcomed by most, if not all, reputable insolvency practitioners and most of the matters covered in the Insolvency Practitioners Regulation Act 2019 relate directly to the practitioners.

The Insolvency Practitioners Regulation (Amendments) Act 2019 made amendments to various related legislation, including the Companies Act 1993 (“the Act”).

In this article we look at one particular amendment to the Act, which came into force on 1 September 2020 and has a direct impact on the ability of company shareholders to appoint a liquidator in specific circumstances.

Old Position:

Generally speaking, there are two sets of circumstances in which the shareholders appoint liquidators of an insolvent company –

• The company is insolvent, and the shareholders appoint a liquidator to wind the company up; or
• The company is insolvent, and a creditor makes an application to the High Court to wind the company up and appoint the creditor’s choice of liquidator. Within 10 working days of being served with the winding up proceedings, the shareholders can appoint the liquidator of their choice pursuant to Section 241AA of the Act.

The ability of the shareholders to appoint a liquidator of their choice has sometimes resulted in allegations of “friendly liquidators” being appointed to the detriment of creditors.

The New Position:

From 1 September 2020, the amendment to section 241AA took effect. In cases where a creditor has filed an application with the High Court for the company to be liquidated and has served a copy of those proceedings on the company, the shareholders will only be able to appoint their choice of liquidator with the approval of the applicant creditor.


While it could be argued that the regulation and licensing of insolvency practitioners should mean that there is no difference, in terms of the approach taken to the liquidation, between the liquidators chosen by the applicant creditor and those chosen by the shareholders, we think this amendment is a good one.

The amendment reinforces the need for directors and shareholders to take action early if their company is failing to meet its obligations to creditors.

If you would like to discuss the solvency of your company and the options that are available to you please contact one of the team at McDonald Vague.

The Government is introducing legislation to change the Companies Act to help businesses facing insolvency due to COVID-19 to remain viable, with the aim of keeping New Zealanders in jobs.

The temporary changes are outlined here

A safe harbour is granted to directors of solvent companies, who in good faith consider they will more than likely be able to pay its debts that fall due within 18 months. This would rely on trading conditions improving and/or an agreed compromise with creditors. It essentially provides certainty to third parties of an exemption from the Insolvent transaction regime.

The changes allow directors to retain control and encourage directors to talk to their creditors and will if needed enable businesses which satisfy some minimum criteria to enter into a debt hibernation scheme with the consent of creditors.

The following article on the Company Law changes released by Martelli McKegg provides more detail read here 

In summary:

  • Debt hibernation is binding on all creditors (we are uncertain about whether related party creditors can vote, or whether their votes are challengeable) providing that a vote of 50% by number and value is obtained
  • Creditors will have 1 month from the date of proposal to vote during which time there is a moratorium on the enforcement of debts
  • If passed, a further 6 months moratorium will be available
  • To access debt hibernation a threshold will need to be met 
  • It will not apply to Sole Traders


Warning for insolvent companies and directors

Directors considering trading on their company need to be careful and cautious and should have their decisions supported by accounts as at 31 December 2019 (as a minimum), and reliable cashflow projections. Companies that cannot satisfy the solvency test at 31 December 2019 or pre Covid-19 impacts should not be advancing a debt hibernation scheme and directors of those companies will not have protection from S135 and S136 claims.

Insolvent companies that are now facing further financial harm as a result of the lockdown should be seriously considering ceasing to trade and entering into either a formal company compromise under Part XIV of the Companies Act 1993, liquidation, or in some cases voluntary administration. The options depend on the viability of the business.

We consider directors of companies on the brink of insolvency should seek independent advice on whether the company meets the debt hibernation criteria and as a minimum we would recommend that financial accounts are being prepared now to 31 December 2019 along with forward looking cashflow projections to support the decision to trade. We expect creditors being asked to vote will require that sort of information to be available. We urge directors to get their Chartered Accountants involved.

Directors need to be aware that the safe harbour provisions may not protect you. For example, if your company has not been able to meet a statutory demand immediately pre-covid, then your company may be deemed insolvent.

McDonald Vague Consulting Support Services

The McDonald Vague team offer the following services as a cost-effective and efficient form of employer assistance in these challenging times.

  • Independent Assessment of solvency to satisfy the Debt Hibernation scheme (requires financials to 31 December 2019)
  • Assistance with Debt Hibernation arrangements, offers and documentation.
  • Company Compromise (for insolvent companies) 
  • Liquidation 
  • Voluntary Administration (recommended for larger companies seeking to compromise with creditors).



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.


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


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.


(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?


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 this 2016 case, several creditors 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 Debt repayment orders (DRO) formally known as the summary instalment orders (SIO) and no asset procedures (for debts less than $50,000) 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.  


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.  


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 a Licensed 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 cannot appoint voluntarily unless with the consent of the applicant creditor. 

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



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


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.

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.

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