With the NZ election behind us and certainty of which party will maintain the lead in government, we move into a busy Christmas period. The wage subsidy is beginning to fall off. From September we are starting to see businesses having to stand on their own two feet once again.

From an industry standpoint of the economy what are we expecting to see for businesses over this time and into 2021?

As we all know the NZ government has injected massive amounts of cash into the NZ economy in a reasonable short time frame propping up a number of industries and supporting our job market. Because of this, unemployment figures continue to stay subdued with September quarter figures set at 5.3%. A large chunk of the unemployment is coming from a select few sectors that were heavily affected by the border closures and lockdowns (tourism, hospitality, accommodation, retail, entertainment).

One of the benefits of the lockdown has been that it has allowed households to save some funds over this time that has led to a bump in spending from these savings and funds normally used for overseas travel. This spending has been focused around big ticket items for around the house and domestic travel. Unfortunately, this type of spending is something that happens every few years as the big-ticket items typically last a number of years so while there will be an initial bump with the saving, it is not something that can realistically continue year on year.

From the business perspective, the low interest rates currently on offer from the banks have made access to funds easier along with the mortgage deferral scheme for those operators in need. The lower interest rates have also led to a bumper housing market across a number of regions that has a positive affect on the economy as homeowners feel equity rich. It is expected that the interest rates will remain low for the next few years to come.

If you want to have a free chat about any issues your business is experiencing or about any other insolvency matter, please contact us on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

Graphs

Corporate Insolvencies

Corporate insolvencies remain lower than 2019 & 2018 levels, with a drop in appointments in the lead up to the election which is typical.

Total Insolvencies

Out of interest we ran the total insolvencies from the 2017 election vs the 2020 election, it seems hard to believe that from an economic standpoint there have been less insolvencies in 2020 than there were in 2017. Is the 2020 economy in a better position than the 2017 economy? Probably not, so the obvious answer is that the government assistance provided to date continues to prop up a number of businesses and individuals.

Corporate Winding Up Applications

September and October saw a lift in the number of creditors initiating winding up proceedings against debtors. Of the 199 advertised in 2020, 113 have ended up with liquidators or receivers being appointed. You will note that in August, September and October there were no winding up applications advertised by the IRD which is common in the lead up to an election, along with the increased leniency they have shown as the result of Covid-19. We expect to see that backlog get remedied in the coming months.

Personal Insolvencies

The September drop off remains at odds with the projections generated by MBIE and discussed in our last article as personal insolvency figures across the board drop off. We expect to get the October figures mid-month.

McDonald Vague have a team of licenced insolvency practitioners with experience across corporate insolvencies and assisting individuals with alternative options to bankruptcy.  We can assist with company compromises, liquidations, voluntary administration, and personal proposals.

 

 

The October election is fast approaching and campaigning by all parties is underway. As policies and promises continue to be released, economic policies are likely to be front and centre for many voters. Not all parties have released their policies detailing how they plan to guide our economy through the post lockdown period, any tax policy changes they would like to see, and how they plan to pay New Zealand’s lockdown debt.

For some, the wage subsidy extension they received will have come to an end in August 2020. For other businesses who did not see a 40% downturn in their income following the end of the first lockdown period, the second lockdown period meant that they have now qualified for the wage subsidy extension. For these businesses, the wage subsidy extension will run out around the start of the Christmas trading period.

If you want to have a free chat about any issues your business is experiencing or about any other insolvency matter, please contact us on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

There were 147 new insolvency appointments in August 2020, which brings the total appointments for 2020 to 1102. Insolvency appointments in August 2020 are comparable to August 2019 levels (149) but the year to date figure is still down on both 2019 (1,290) and 2018 (1,492). There was an uptake in appointments in the last week of August 2020, which looks to be a result of non-licensed insolvency practitioners taking a number of appointments before the 1 September 2020 licensing requirements came into effect.

In August 2020, there were 12 winding up applications advertised, none of which were brought by the IRD. In 2020, only April had fewer applications advertised. In both these months, the country was in a Level 3 or 4 lockdown for some of it.

Of the winding up application advertised in 2020 (152), 92 of those applications (roughly 61%) have resulted in liquidators and/or receivers being appointed. Some of the applications advertised will still be before the High Court awaiting resolution. Around 70% of the applications advertised in January and February resulted in liquidators or receivers being appointed.

Personal Insolvencies - Bankruptcy

Personal insolvencies in August 2020 were at 95 (July 2020 was 81), driven largely by bankruptcies and Debt Repayment Orders. The No Asset Procedures figures remained consistent with earlier months.

All types of personal insolvencies in the year to date (642) continue to be down on the levels seen in 2018 (1,014) and 2019 (808).

Outlook

We have compared corporate and personal insolvency appointments since 2018. The graph shows that, the appointments followed roughly the same pattern and spiked and dropped at roughly the same times, with neither being a lagging or leading indicator of the other.

Earlier this year, MBIE predicted that personal insolvency appointments in the final quarter of 2020 would rise to as high as 3,200, which would be a quadrupling in appointments when compared to the same quarter in 2019. While appointments in the first quarter of 2020 were higher than 2019, this year has seen lower personal insolvency appointment numbers since April 2020 when compared to last year. While MBIE has advised that revised projections will be released in October 2020.

In the last quarter of 2019, there were 464 corporate insolvency appointments. If corporate insolvency appointments continue to follow the same patterns as personal insolvency appointments, on MBIE’s current predictions, the last quarter of 2020 could see a significant number of companies fail in the lead up to Christmas. Only time will tell whether the government measures that have been implemented to save businesses has been enough to keep corporate insolvency numbers from growing exponentially.

Monday, 24 August 2020 14:09

Funding Of Legal Actions By Liquidators

One of the obligations on the liquidators of insolvent companies, whether appointed by the shareholders or the Court, is to review the books, records and affairs of the company to identify any potential causes of action that could lead to a benefit for creditors.

This could include identifying potentially voidable transactions, where an individual creditor has received a payment, giving it preference ahead of the body of creditors, or the transfer of assets or property to other parties for no, or insufficient, consideration.

It could also include identifying breaches of duties by the directors which has caused creditors of the company to suffer increased losses.

While many such causes of action are identified and settled by agreement between the liquidators and the parties concerned there are also cases where there is no agreement and the liquidator is left with the options of either initiating legal proceedings or dropping the matter.

In making that decision, the liquidator will consider the strength of the case, the likely costs to be incurred in proceeding and how these could be funded, and the level of return to creditors that could eventuate from such action.

The funding of the proceedings is the major obstacle the liquidators need to overcome and many good cases are not actioned because of the inability to raise the funds.

Broadly speaking, a liquidator has 5 potential avenues of funding available –

Realisations from the Liquidation:

If the liquidators have realised sufficient funds from the liquidation of the company’s unencumbered assets, they are entitled to use those funds to cover the costs of their investigation and any legal proceedings.

In those circumstances, the liquidators have to give careful consideration to the likelihood of success in the legal proceedings and, if those proceedings are successful, the likelihood that any amounts ordered are collectable and will result in a distribution to creditors.

It could leave a liquidator open to criticism if they use up funds, that could have been distributed to creditors, on a risky action against a director and ended up with no recovery or only sufficient recovery to cover the costs of the liquidator’s investigations and the legal costs incurred in running the case.

Liquidators’ Own Funds:

The Liquidators can decide to fund the proceedings from their own resources. This will be done by allowing their time to accumulate as unpaid Work in Progress (WIP) and by paying any legal costs from their own funds and recording those payments as a disbursement to be recovered when, or if, funds are available.

This is a reasonably common practice amongst insolvency practitioners, but the same things will be considered when making the decision. The bottom line is, will the actions lead to a return to creditors?

It is not the liquidator’s job to take proceedings that will lead to a penalty being imposed on the defendant that only pays the liquidators costs. If legal actions are not likely to lead to a benefit for the creditors, but the director’s actions warrant it, the Liquidators can, and should, report the breaches committed by the director to the Registrar of Companies, with a view to having them banned.

Creditor Funding:

Creditors of a company in liquidation can be approached by the liquidators to see if they are prepared to provide funding to allow legal action to be undertaken. Those creditors that do agree to provide funding receive a priority ahead of other unsecured creditors pursuant to clause 1 (1) (e) of the Schedule 7 of the Companies Act 1993.

This allows payment of the unsecured debt of that creditor, and the amount of the costs incurred by that creditor in helping to recover the funds, ahead of some other preferential creditors and the rest of the unsecured creditors.

Third Party Litigation Funders:

The use of 3rd party litigation funders is increasing in New Zealand but is generally limited to the larger cases, such as the Mainzeal Property & Construction Limited (in Liquidation) claim against its directors.

There have been questions raised about the ethics of this form of funding but, whilst there is no specific legislation about the use of 3rd party funding, it has been approved in various proceedings. The Law Commission is currently undertaking a review of class actions and litigation funding

The 3rd party funders provide the funding for proceedings, which would otherwise be unaffordable, in exchange for a percentage of any recoveries. If there are no recoveries, the 3rd party funder carries the cost, so there is no downside for the creditors.

Liquidation Surplus Account:

Section 316 of the Companies Act 1993 establishes, and regulates the use of, the Liquidation Surplus Account (“the account”).

Funds that represent unclaimed assets from a liquidation must be paid to the Public Trust and will, if they remain unclaimed for a period of 12 months, become part of the account.

Liquidators can apply to the Official Assignee for New Zealand for a payment from these funds to cover the cost of proceedings, advice, or expert witnesses.

To be eligible for the funds, the liquidator must prove that it is fair and reasonable for the costs to be met out of the account. There should be a public interest element in the proceedings and the application must relate to the claims of the creditors in the liquidation.

Conclusion:

It is understandable that the creditors of a failed company want to see errant directors held to account and forced to cover the losses they have incurred because of that director’s actions and they expect liquidators to do that. 

The options outlined above all include one party or another taking on the often substantial risks and costs involved in taking legal proceedings, so, while the main objective is always to recover funds for the benefit of the creditors, any actions taken have to be carefully considered and reviewed objectively. 

Throwing good money after bad, or spending money, that could have provided some return to creditors, without any recovery, is not in the best interests of either the creditors or the liquidators.

 

 

 

We are expecting August and September to be interesting months with the electioneering that will be taking place, we will see promises from all parties on how they will be spending our taxes if they are elected and hopefully some more details on their plans for how they will guide the economy post covid.

The latest unemployment rate figures have been released for the June 2020 quarter showing 4.0%. This is down 0.2% on the first quarter for the year. While the politicians will crow that this is well down on treasurers estimates for the same time frame there was an additional wage subsidy extension introduced which has assisted businesses in keeping people employed with 400,000 employees still utilising the subsidy.

Unsurprisingly, the unemployment rate lines up with the Insolvency figures we have seen in 2020 which continue to be down on 2019 levels. The true litmus test is yet to come as the wage subsidy comes to an end in September.

If you want to have a free chat about any issues your business is experiencing or about any other insolvency matter, please contact us on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

There were 142 new insolvency appointments in July 2020, which brings the total appointments for 2020 to 953. Insolvency appointments in July 2020 and for the year to date are still down on both 2019 and 2018.

Out of interest we have also begun tracking winding up applications in 2020 as a guide for what may be coming for the economy and the creditors tolerance for debtors. While there will be some creditors using it as a tool to prompt debtors to make payment a reasonable number have been following through with their application.

The IRD has for 2020 advertised the liquidation of 49 companies, of these companies 35 or 71% have subsequently entered liquidation as at the date of writing. The conversion rate on non IRD creditors being set lower with only 45 of the 90 advertised winding up applications ending in liquidation. Presumably an alternative satisfactory outcome was reached, or the liquidation may be included in next months figures and is only delayed.

Personal Insolvencies - Bankruptcy

Personal insolvencies in July 2020 saw a drop in bankruptcies but a lift in both No Asset Procedures and Debt Repayment Orders.

Numbers across the board though continue to be down on the levels set in 2018 and 2019.

After last month it looked like bankruptcy figures were tracking back to 2019 level but that only looks to have been a blip with figures again dropping off in July.

 

 

 

 

 

June 2020 saw the New Zealand Government declare the country “virus free” after 17 days of no new COVID-19 cases and a move to Level 1 on 9 June 2020, ahead of schedule. With the exception of border control restrictions, all COVID-19 related restrictions imposed during Lockdown were lifted.

The post-Lockdown experience for SMEs has been varied. Some have seen incredible community support and are feeling confident about their futures, notwithstanding the difficult quarter they have just experienced. Others are struggling to adjust to the post-Lockdown economy and many are being confronted with difficult decisions on what their businesses will need to look like, if those businesses are to survive in the medium term.

If you want to have a free chat about any issues your business is experiencing or about any other insolvency matter, please contact us on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

Moving Forward – What Might Be On The Horizon?

The second half of 2020 is likely to be just as unpredictable as the first half. While the difference in corporate insolvency figures between the first half and second half of 2018 and 2019 were only marginally different (less than 5%), the decrease in insolvency activity caused by Lockdown is unlikely to repeat itself in the second half of 2020.

The first quarter of 2020 saw corporate insolvency rates decrease by 8% and personal insolvency rates increase by 9% when compared to 2019 while the second quarter of 2020 saw corporate insolvencies decrease by 23% and personal insolvencies fall by 34% when compared to the same period in 2019.

The economy is likely to be a hot topic over the next quarter, as political parties launch their election campaigns ahead of the General Election on 19 September 2020. The steps taken by the Government in response to COVID-19 saw huge borrowing and spending by the Government to support the economy during and post-Lockdown. This debt will need to be repaid at some point in the future but by who, how and when is still an unknown.

  • The next quarter should be an interesting one. Some of the factors at play suggest we should see a decrease in insolvency activity ahead of us while other considerations suggest an increase in activity is on the horizon:
  • Historically, insolvency appointments in June have been lower than in both May and July so, if the patter holds true, we expect the insolvency figures to increase in July 2020.
  • Insolvency appointments tend to slow in the quarter leading up to a General Election, as many Government Departments ease back on recovery action.
  • Banks and other lending institutions usually slow their recovery actions and insolvency appointments leading up to an election and again in the period leading up to Christmas.
  • The wage subsidy and the wage subsidy extension periods will come to an end for many businesses in the next quarter. The Government has announced that the wage subsidy will not be extended further. Businesses whose revenue has not recovered sufficiently will likely be considering redundancies, restructurings, and/or closing their doors.
  • Decreases in many people’s disposable income when compared to 12 months ago means that many are not able to spend to support SMEs.
  • Many people who took mortgage holidays in response to COVID-19 will have those mortgage holidays end in the second half of 2020 and, while interest rates are low, serviceability will remain an issue because of decreased incomes and revenues.
  • The application deadline for the Government’s COVID-19 Small Business Cashflow Scheme has been extended to 31 December 2020.

Looking Back

We are now through the first half 2020. Here’s what the insolvency space looked like over this period. Note: Figures were correct as at date of publishing.

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

There were 122 new insolvency appointments in June 2020, which brings the total appointments for 2020 to 795. Insolvency appointments in June 2020 were 23% lower than in June 2019 (150) and 54% lower than in 2018 (188).

June 2020 saw a 30% decrease in insolvency appointments when compared to May 2020 (158). A similar drop (29%) in appointments occurred between May 2019 and June 2019 (193 cf 150). While June 2018 saw few appointments than May 2018, the decrease was only 9% (204 cf 188).

Court appointments in June 2020 (30) were also back to levels consistent with March 2020 (27) and May 2020 (34), with April 2020 (2) – when the Court suspended all non-urgent hearings – being the outlier.

 

Insolvency appointments for the first half of 2020 are 20% lower than the same period in 2019 and 40% lower than in 2018. By comparison, insolvency appointments decreased by 16% in the first half of 2019 when compared to 2018.

Personal Insolvencies - Bankruptcy

Personal insolvencies in April 2020 (50) were the lowest number recorded since at least July 2003 (the earliest records we sighted).

May 2020 saw a 32% increase (66) on April 2020 and June 2020 figures were up by 20% (82) when compared to May 2020. The number of personal insolvencies in June 2020 (82) was similar to June 2019 (81) but the number of NAPs (75) was 39% lower than in 2019 (104).

 

With the exception of April 2020, debtor initiated bankruptcies between March 2020 and June 2020 were between 64% and 68% of all bankruptcies. The only High Court to make adjudication orders in April 2020 (when Lockdown restrictions started to ease) was Auckland, with 10 adjudications being made.

Tuesday, 12 May 2020 13:57

Directors Dilemma

The directors of a company have all the powers to decide what will be done, when it will be done and how – but with that power goes the responsibility to the company and its shareholders, to the company’s creditors and last, but not least, to themselves.

The Responsibility to Others

As a director, whether that be as the sole director of a small company or one of many in a large company, you have duties imposed on you under legislation, such as the Companies Act 1993 (“the Act”), and the company’s constitution.

In any circumstances, you must firstly comply with the duties imposed by legislation, which are set out in sections 131 to 138A of the Act. Your first duty is to act in good faith and in what you believe to be the best interests of the company – not your own.

In tough times, if the company is insolvent, then the focus changes and you must act in the best interests of the company’s creditors by ensuring the company doesn’t incur debts and liabilities that it cannot pay.

If you do not fulfil your duties as a director, you could be held personally liable for those breaches and face monetary penalties or imprisonment and you could be ordered to contribute funds to the company to pay creditors.

Where you are the sole director, the thought process is simple.

  • Am I complying with my duties as a director? If the answer is “yes” then carry on. If the answer is “no” change what you are doing so that you do comply.
  • If the company is technically insolvent can it be rescued. If the answer is “yes”, then take the necessary actions to recover. If the answer is “no” then cease trading to avoid increasing the amount owed to creditors.

The Responsibility to Yourself

Where you are not the sole director, and your company is insolvent, then the thought process is the same but (and it’s a big but) being able to put into effect any actions you think are the correct and proper thing to do is dependent on the majority of directors agreeing with you.

If you do not get that agreement, you need to start making decisions about what is best for you personally.

"Should I Stay or Should I Go" is a song by English punk rock band the Clash and one of the verses is as follows -

Should I stay or should I go now?
Should I stay or should I go now?
If I go, there will be trouble
And if I stay it will be double
So come on and let me know

The 3rd and 4th lines of the verse highlight the issue for you, as the director holding the minority view, of what you should do.

Do you remain as a director to try and bring about the changes you think are required to get the best results for the creditors of the company or do you accept the other directors will not change their point of view.

That is a decision for you to make, based on the circumstances of your company and on any professional advice you may take but, if you do not see any way that you can stop the company failing because the other directors won’t take the course you are proposing, there is no obligation on you to “go down with the ship”.

To protect yourself, you should keep good records of the events that occurred, the proposals you put to the Board and responses you received and seek independent professional advice.

 

Barring a major disaster, a business doesn’t go from being perfectly fine to insolvent overnight. There is usually a whole list of precipitating events that go overlooked or aren’t managed correctly in order to get to the point of no return.

Sometimes, you can be so involved in the day-to-day running of the business that signs of financial trouble can pass you by. Usually, your accountant should pick up on these signs, as we discussed in a previous article, but sometimes these signs slip through the cracks.

In this article we look at three different risk stages for business owners. What are the signs you need to look out for to recognise financial trouble? What can you do right now to help avoid insolvency?

Stage 1: Your business could be heading for financial trouble if you’re:

  • - meeting your current tax obligations, but have tax arrears.
  • - struggling to pay your creditors within their normal terms.
  • - increasing your overdraft facility in order to pay your creditors or meet payroll.

What to do: Don’t ignore the problems and hope they go away. Start working toward solutions now before these problems become overwhelming. Speak with your accountant to get an accurate picture of your finances and plug the holes.

Stage 2: Your business could already be in trouble if you’re:

  • - struggling to fulfil current or new orders as you don’t have the available funds to purchase raw materials.
  • - being cut off by creditors for not paying within their terms.
  • - can’t accept new orders.
  • - being threatened with legal action.
  • - under risk review by the IRD.
  • - having a conversation with your accountant and he/she looks very grim.
  • - fighting with the bank, who are trying to rescind your overdraft facility.
  • - forced by your bank or creditors to undergo a review.

What to do: Negotiate creditors compromises, and work towards paying down/paying off business debt. Speak with a qualified professional – like the team at McDonald Vague – about your options to avoid insolvency and improve cash flow.

Stage 3: Your business is in serious danger of insolvency if you’re:

  • - unable to raise working capital and are on stop with key suppliers.
  • - consistently under break-even point with turnover.
  • - not able to meet your outgoings with revenue.
  • - being put under formal review by the IRD.
  • - unable to take a company loan secured over company assets without a personal guarantee too.

What to do: Your business is in emergency mode. You need to act fast to salvage your company. Contact the professional team at McDonald Vague to find out your options.

You can avoid insolvency by catching the warning signs early on, and solving problems before they grow too big.

If you think your business is in financial trouble or have a client who may be, you may benefit from our free Guide to Options for Companies in Financial Difficulty.

Being the Director of a company looks good, it's prestigious, and looks good on business cards. But it’s not all glamour and cocktail parties. By becoming a company director, you are exposed to the business’ risks and responsibilities that go with a directorship.

If business isn’t going so well, when is trading-on an option and when do you run the risk of breaching director duties?

First and foremost, look at the Companies Office director requirements.

If continuing to trade will end with you filing for bankruptcy, you’ll lose the ability to be a company director for three years. You can be discharged from bankruptcy after three years, but court orders can still prevent you from running a business.

How are you managing your insolvency risk? Will you find yourself lying to creditors about when they will be paid, shifting money from tax accounts to settle debts or perhaps working cash-jobs or paying employees under the table?

The New Zealand Companies Act (1993) requires directors to act in good faith in the best interests of the company. Essentially without malice, dishonesty and avoiding conflicts of interest by putting your own interests ahead of the company. When you apply that litmus test to most situations, you should have a clear idea whether or not you should continue trading or pause for thought.

If you are convicted of a crime involving dishonesty, this will prevent you from being a company director for 5 years, while a criminal record may stop you working in your industry altogether.

What’s happening in your industry? Prior to recent changes in New Zealand Health & Safety legislation, Sir Peter Jackson resigned as a director of Weta Workshop – the creative studio behind The Lord Of The Rings films. The law changes required him to be more involved on a daily basis, and Sir Peter didn’t feel he could deliver.

Health & Safety changes affect some businesses more than others, so it’s a good idea to keep up-to-date with issues in your field.

Each business is unique, and workplace codes of conduct may apply. Check your company’s Constitution, which should set out the rights, powers and duties of company directors. That important document may provide some framework around whether to continue trading or when you might be in breach of your directorial duties. It’s worth noting that if your company does not have a constitution, you’re governed by the New Zealand Companies Act (1993).

In any scenario, the best course of action for managing insolvency risk is to seek advice from the experienced team at McDonald Vague. Our business advisors can guide you, helping you avoid paths that might lead to bankruptcy, insolvency, or criminal activity. If you’re unsure, seeking help now can save you time, money, and a lot of stress in the long run.

Did you know that not using the Personal Property Securities Register (PPSR) could expose your business to unnecessary risk? 

Despite the fact that the online register celebrated its 10th anniversary in May this year, a surprising number of small business owners are not aware of the reduced financial risk that comes with registering security interests on the PPSR. 

Registering your security interest on the PPSR may give you a better chance of recovering a debt if your debtor defaults. (Note:  Suppliers of stock need to register before delivery and suppliers of equipment need to register within 10 working days of delivery)

What a lot of people don't realise is registering on the PPSR is a valid defence against Insolvent Transaction (voidable preference) claims. 

To date, you or one of your clients has probably never had to pay money back to a liquidator on a debt you have already collected.  If you do it's going to hurt as it feels like you are being penalised for doing your job properly! 

Insolvency Practitioners are increasingly using Insolvent Transactions as their only means of recovering funds for creditors. 

 

What is an Insolvent Transaction? 

Insolvent Transactions can only arise when the debtor goes into liquidation and are covered in Section 292-296 of the Companies Act 1993. 

A transaction is voidable on the application of the liquidator if: 

  • At the time the payment was made the company was unable to pay its due debts; and
  • The payment was made within the specified period (up to two years prior to commence of the liquidation); and
  • The creditor received more than they would have been likely to receive in liquidation.

 

We are suggesting that if the company was unable to pay its debts within terms of trade, and if the payment was made in the specified period, it may be pursued as an Insolvent Transaction but if you have registered a specific security to cover your supplies (a purchase money security interest "PMSI") then you will have a valid defence. 

The reason for this is that the payment was simply settlement of a PMSI with a "super priority" and that consequently the secured creditor received no more than they would have been likely to receive in liquidation. There were no creditors with a higher priority.   

Please be aware that this has not been tested in Court.  There are ways in which a liquidator may seek to challenge this. 

As insolvency practitioners, McDonald Vague constantly sees what happens when people do not register on the PPSR correctly, or don't use the PPSR at all.  We can assist in mitigating the risk of Insolvent Transactions for you or your client losing priority to another creditor by implementing a PPSR policy.  We can also review terms of trade to ensure there is a right to register a PMSI or a General Security Agreement before goods are supplied. 

Call Tony Maginness for a free consultation about registering on the PPSR and terms of trade.

Are you likely to be forced to repay to a liquidator money previously received from a customer?

It has become relatively common for suppliers and others to be challenged by liquidators to repay funds that they have previously been paid.

Prior to the change of rules in late 2007, the contentious issue was determining what "the ordinary course of business" meant. The decisions surrounding liquidators' challenges did not discourage conventional or usual debt collection measures.

Since the McEntee Hire decision in August 2010 we have observed an increase in liquidators sending out letters seeking to challenge transactions.

It is disappointing that some liquidators seem to take an approach of challenging all payments made, rather than first considering whether there has been an actual preference to the creditor, any continuing business relationship (ie whether the contract was ongoing at the time of payment), industry practice (which may tolerate delays of payments), evidence and knowledge of credit concern, the nature of payments and trading history.

Consequently, we are sometimes asked to assist in reviewing Insolvent Transaction challenges taken by other liquidators.

As a result of such challenges, the Insolvent Transactions regime can be seen by suppliers in particular, to be at odds with prudent credit management. This is a conclusion that could be reached in light of the McEntee decision, but is that conclusion right?

We have also observed that suppliers are belatedly endeavouring to patch up holes in their procedures, in particular by late PPSR registrations of additional security rights to secure past indebtedness.

In our opinion, in some circumstances knowledge of a debtor's insolvency may be hard to avoid. It follows that the longer a debt goes unpaid the more likely it is that the supplier will be considered to be aware of the customer's inability to convert non-cash assets into cash, ie insolvency.

We consider that the consistent use of proper terms of trade, normal timely debt collection procedures, and asset protection mechanisms may protect a supplier from successful Insolvent Transaction challenges.

The regime therefore can be seen to encourage stricter credit terms and management, well defined trading terms and better security management. The mere fact of applying pressure to get payment does not in itself compel the conclusion that the payment is an Insolvent Transaction.

Insolvent Transactions regime

In an insolvent liquidation, unsecured creditors are treated equally and the company's assets are shared on a pro rata (or 'pari passu') basis. The term that is often used is to stop a creditor from 'stealing a march' on others. Where payments give individual creditors a preference, the regime enables a liquidator to set aside and claw back payments made within the two years before liquidation.

One feature of the current regime is the running account concept. This allows for the net effect of a series of invoices and payments in a "continuing business relationship" to be considered as one transaction. This is designed to stop liquidators challenging a series of payments to the same supplier, instead putting the focus on what the overall effect of the transactions was.

A continuing business relationship is established through a background of trading between the supplier and the customer. Factors such as the basis for the relationship, the business purpose and the character of the relationship, length of the relationship and frequency of transactions will usually be taken into account.

In McEntee Hire, it was agreed that a continuing business relationship existed, as McEntee had traded with its customer for over three years, with many sales and payments regularly in that period. However, the Court found that the continuing business relationship ended when McEntee issued a stop credit notice and referred the debt to a collection agency. It was noted that this was done four months after the last invoice for supply had been issued, and in circumstances where its policy in cases of suspected insolvency was to refer the debt to a collection agency.

McEntee argued that the stop credit notice was not the end of the continuing business relationship but more to "rebalance" and "preserve" the trading relationship, and did not reflect any concerns about the company's solvency. The liquidators successfully argued that payments were not being made to induce further supplies, and the relationship had shifted to one of pure debt collection.

We speculate that had the right to stop credit been with regard to a credit limit or other credit terms, and the referral to a debt collection agency been earlier and as a routine referral, the continuing business relationship may have endured.

Running account

An Insolvent Transaction claim is calculated in a number of ways; firstly where there is no running account, as a sum of payments, secondly when there is a running account, the net difference between the opening and closing balances and lastly, at the point of peak indebtedness - being the difference between the peak and the closing balance. This is illustrated as follows:-

Month Supply $ Payment $ Net Balance $
Nov-11 30,000   30,000
Dec-11   20,000 10,000
Jan-12 20,000   30,000
Feb-12   20,000 10,000
Mar-12 60,000   70,000
Apr-12   60,000 10,000
May-12 30,000   40,000
Jun-12   20,000 20,000

Possible scenarios:-

  1. No running account - sum of all payments $120,000
  2. Simple running account (opening - closing) $10,000
  3. Peak indebtedness (point of peak indebtedness - closing balance) $50,000

In this example, a supplier commenced trading with a customer in 2010. By November 2011, the customer owed the supplier $30,000. Six months later the customer owed $40,000. In June 2012, the company is placed into liquidation owing the supplier $20,000. Using this example, a liquidator could argue peak indebtedness and say the supplier was preferred by $50,000. The liquidator cannot cherry- pick a transaction (eg the April 2012 $60,000 payment) when there is a running account, and ignore that the creditor continued to trade with the company as a result of the payments made. Australian authorities have said, however, that liquidators ought to cherry-pick a date of peak indebtedness that best suits the general body of creditors. Section 292(4B) of the Companies Act 1993 does not limit a liquidator's ability to do so.

Summary

Insolvent Transactions will be a contentious but necessary feature of insolvency law for the foreseeable future. Creditors should review trade terms, and ensure that they have policies and debt collection processes and procedures that minimise the ability for liquidators to claw back valuable funds.

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.