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July has mirrored the insolvency appointment figures over the last couple of months. The pressures affecting our economy have also remained fairly consistent over the last few months:
- Countries are continuing to fluctuate in and out of COVID-19 lockdowns
- Businesses and consumers are facing ongoing shipping delays and supply shortages
- Consumer demand for goods continues to exceed supply in many areas
- Labour shortages remain an issue
- Inflation remains higher than RBNZ’s targets and the affordability of goods remains an issue

To the end of July, the outlook for growth has continued to look positive:
- Unemployment rates have now fallen to pre-COVID-19 rates.
- The construction industry and the housing market continue to run hot
- Consumer spending remains strong
- The Reserve Bank has halted its Large Scale Asset Purchase programme

At the beginning of this week, most economists were predicting that the OCR would increase in the first time in 7 years. While the messaging continues to be that we should expect the OCR to increase before the end of the year, with a view to moving to an OCR of 2% by the end of 2023, subject to the impact of the latest COVID-19 lockdown. By the end of July, banks had already increased interest rates over the last couple of months, anticipating the August 2021 OCR increase that did not eventuate. We doubt that banks will decrease their mortgage rates before the next OCR update, given the indications that we should still be expecting the OCR to rise.

Data shows that 80% of residential borrowers currently have their mortgage interest rates locked in for 1 year or less, largely as a result of the historically low mortgage rates that have been on offer over the last few years. For new home owners with a 30 year mortgage, a 2% increase in mortgage rates will increase the monthly repayments on a $500,000 loan by around $550 per month. If wages do not increase in line with the cost of living, many could struggle to meet theses higher repayment obligations.

If you want to have a free chat about any issues your business is experiencing or about any other insolvency matter, 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

The number of company insolvency appointments in July 2021 were:
- Consistent with May and June this year, both by number and type of appointment
- Comparable to July 2020 but there were significantly more court appointments in 2021 (up around 68%)
- Down 20% compared to July 2019

The spike in solvent appointments is likely attributable to companies waiting for their financial statements to be prepared following the end of the 31 March 2021 financial year and other companies having a 30 June or 31 July balance date.

The number of liquidators being appointed by the Court on insolvent liquidations increased from 37% in June 2021 to 44% in July 2021. This trend is not surprising, given the number of liquidation applications that have been advertised in 2021.

Notable insolvency appointments in July:
- Receivers have been appointed over West Coast Brewery (New World Investment New Zealand (in receivership)). The business was listed for sale after one of its key people, a non-resident, could not get into New Zealand due to COVID-19 boarder restrictions. When the receivers were appointed, the business had not yet been sold.
- Many of the companies that were subject to insolvency processes this month operated in the following industries:
o Construction
o Dairy
o Forestry
o Hospitality

Personal Insolvencies - Bankruptcy

The number of personal insolvencies has been fairy consistent month on month since April 2021. Bankruptcies were around 24% higher in July 2021 than in in the previous few months, which correlates to fewer no asset procedures and debt repayment orders in July. This shift might indicate that the there has been more payment default on bigger debts.

As the cost of living continues to increase and more companies fail, we expect that there will be more payment defaults and demands made on guarantors. Personal insolvencies are likely to increase as a result.


Winding Up Applications

The IRD’s enforcement activity has continued but the numbers have eased off slightly since June 2021. It was the petitioning creditor in 66% July’s liquidation application and continues to lead the way by advertising 67% of all creditor applications in the year to date.


In the year to July 2021, 418 winding up proceedings have been advertised and 255 of the named debtors (61%) have ended up in liquidation. The IRD has advertised 161 (63%) court applications. The table below shows the number of companies that have gone into liquidation after their liquidation applications were advertised and how many of those were advertised by the IRD.


This article was prepared for RITANZ by James McMillan, Patrick Glennie and Nicole Thompson of Dentons Kensington Swan

2020 was a year of reform in the insolvency sector. Most of the provisions of the Insolvency Practitioners Regulation Act 2019 (IPRA) came into force on 1 September 2020, with several other significant reforms coming in at or around the same time. In this article, we look back at some of the key issues insolvency practitioners were readying themselves to grapple with, and trace developments since the IPRA came into force.

Key reforms

Some of the key reforms in 2020 were:

• Unlicensed insolvency practitioners can no longer accept new insolvency assignments (and have until 31 August 2021 to complete existing assignments).
• Court consent is no longer required for the appointment of liquidators who had previously been engaged to investigate or advise on the solvency of the company or monitor its affairs.
• The restriction on companies voluntarily appointing liquidators when enforcement steps have already been taken by third parties has been varied.
• The votes of related creditors are no longer counted without a court order.
• Insolvency practitioners now have a duty to report “serious problems”, including any offence, negligence, or material breach of a director’s duties, or where the management of the company has materially contributed to it being unable to pay its debts.
• The clawback window for voidable transactions for unrelated parties has reduced from two years to six months.
• There are now prescriptive restrictions on practitioners and certain other related parties prohibiting them from purchasing company assets except in limited circumstances.
• Liquidators now have to provide an interest statement with their first report to creditors and update it every six months, disclosing any actual or perceived conflict of interest.
• The requirements for reporting to creditors are now more detailed and prescriptive.
• There are now stricter rules for keeping company money separate from that of the practitioner’s firm.
• Practitioners now need to keep accounting records and other company documents for six years after a liquidation finishes.

Developments since the reforms

A number of the reforms reflect practices that most practitioners were already complying with, but there was a fear that the reforms would lead to a greater administrative burden. While the reforms have led to some additional costs (both up front costs incurred in updating standard form documents and ongoing costs in complying with the more detailed reporting requirements), there is a sense that the changes have led to increased transparency for creditors.
Turning to some of the reforms more specifically:
• Licensing – The transitional provisions mean that RITANZ and NZICA members can continue to accept appointments provided they applied for a licence by 31 December 2020. There is a deadline of 31 August 2021 for these applications to be determined. Anecdotally, it appears there are a number of practitioners with applications outstanding, so we wait to see whether that deadline can be met. Also in relation to licensing, the industry will be aware of the case of Grant v RITANZ [2020] NZHC 2876, in which Damien Grant of Waterstone Insolvency challenged RITANZ’s refusal to grant him membership (which would have meant he fulfilled the criteria to be licensed by NZICA) on the grounds that he was not a fit and proper person. RITANZ was ordered to reconsider Mr Grant’s application and has, after further independent investigation, accepted Mr Grant as a member.

• Court consent to appointment – One of the aspects of the reforms with almost universal support was the amendment to section 280 of the Companies Act to remove the requirement for court approval for the appointment of liquidators or administrators who had provided professional services to the company as investigating accountants, or who had a prior business relationship with a secured creditor of the company. This requirement led to unnecessary cost, delays and administration time. This procedural step has now been rendered unnecessary and the amended section 280 is better focused on issues that are more likely to affect a liquidation or administration. Since 1 September 2020, there have been no reported decisions under this section.

• Voluntary appointment of liquidators when enforcement steps already taken – Initial views were that the amendment to section 241 AA of the Companies Act narrowed the existing law so that, once a company had been served with winding up proceedings, shareholders could only appoint their own liquidator with the consent of the creditor. However, in Commissioner of Inland Revenue (CIR) v Pop-Up Globe Foundation Ltd [2021] NZHC 515, Associate Judge Bell confirmed that appointment of a liquidator by shareholders would be effective if done within 10 working days of service of winding up proceedings or, if done outside the 10 working days, with the consent of the petitioning creditor.

• Related creditor voting – The move to disregard related creditor voting at creditors’ meetings unless the court orders otherwise seems to have been a sensible move. It deals with the risk of related creditors voting to protect their own interests (for example, by voting to keep a ‘friendly liquidator’ in office). This change may also mean fewer challenges to decisions made at creditors’ meetings, which will avoid the uncertainty that comes with such challenges. So far there are no reported cases of related creditors applying to the court under section 245A of the Companies Act for an order that their vote be taken into account.

• Duty to report “serious problems” – Section 60 of the IPRA imposes a duty on insolvency practitioners to report “serious problems” to the relevant authorities, with the potential for a fine of up to $10,000 for breach of this duty. The definition of a “serious problem” is wide and judicial guidance may be required on the interpretation of s 60 in the future (for example, guidance on what constitutes a material breach of directors’ duties and whether all offences, including the likes of traffic offences, need to be reported). In the meantime, practitioners are left with the cost of the additional reporting requirements and a number of questions as to the scope of the duty, including: how much information will be required; to what extent the duty applies where a settlement has been reached in respect of an alleged breach; and, what responsibility practitioners have for follow up action in circumstances where there is no benefit to creditors. The Companies Office website has an online form for reporting serious problems.

• Voidable transaction change – The reduction in the clawback window for voidable transactions for unrelated parties to six months (from two years) has given comfort to creditors. In our experience, this change strikes members of the community as fair. The previous two year window was considered by many to be too harsh on unrelated parties, with the passage of time and expense of litigation making it difficult to contest liquidators’ claims.

• Extended duty to keep records – Insolvency practitioners are still getting to grips with the full ramifications of this change, and we suspect that there may be rising complaints as the costs become clearer – especially as other legislation already covers specific records where there is a particular need for retention. We expect that the increased costs will ultimately be borne by creditors as practitioners will allow for it as a cost of the liquidation.
The next year and beyond

While the last eight months have given us clarity on some of the new rules and processes, we suspect that the bedding in process will continue for some time.



The Income tax Act 2007 allows a company to make a tax free distribution of capital gains “on liquidation”.

The IRD issued publication QB20/03 on 11 December 2020. The publication discusses the first step legally necessary to achieve “liquidation” in both the short form (s318(1)(d) Companies Act 1993) and long-form liquidation (s241(2)(a) Companies Act 1993).

IRD have confirmed when “liquidation” occurs under each process. It reinforces BR Pub 14/09 that a short form liquidation commences (for tax purposes) when a valid resolution is passed, when the directors (and/or shareholders depending on the constitution) make the decision to wind up the business, pay all creditors, distribute surplus assets and request removal from the register of companies, and then carry out the short from liquidation process. It also confirms that the first step legally necessary to achieve a long form liquidation is not the same. A long form liquidation commences when the shareholders pass a resolution to appoint a named liquidator.

Can you lose liquidation status?

The commentary talks of the trigger for losing the “on liquidation” status under the short form method. Quite simply, if the company continues to trade after the winding up resolutions under the short form process or before the formal liquidation, there is a risk a capital distribution in that period is taxable. Also, if a company commences a short form process then there is a significant delay or does not complete the formal strike off, earlier capital distributions may be held taxable.

Directors need to be wary that when they decide to wind up their company and opt for the shortform method that they cannot be held to have traded in the winding up process and they cannot incur significant delay without reason. Refer IRD’s example 3 below. The short form liquidation process must lead to the company strike off.

Can you change process from short form to long form?

Example 1 below shows it can take time to achieve a winding up, even years.

Changing processes from short to long form is less clear. The article suggests “unforeseen processes” as a legitimate reason. It does not specify the common position where companies resolve to wind up their businesses, start to carry out that process and then appoint a liquidator to complete the process down the track. Liquidation for tax purposes starts on the winding up resolution and then the formal long form liquidation starts from the shareholder resolution appointing the liquidators by name later. It seems so long as there is a clear intention and reason to change process that this is acceptable.

These are the key clauses relating to the change of process, from my perspective are at 12 and 13 of QB20/03 :

12. Changing Processes “Sometimes, a company that has embarked on a short-form liquidation may find it necessary due to unforeseen circumstances to appoint a liquidator. This could occur, for example, where a dispute arises in the course of winding-up the business that would be better to have a third-party liquidator resolve. The Commissioner considers that the period known as “on liquidation” began when a valid resolution was passed commencing the short-form liquidation process.”

13. Time Delays “In some cases, there may be an extended period between the first step legally necessary to achieve liquidation and the removal of the company from the register. The period may even span different tax years, so that a distribution is made in a period preceding the removal of the company from the register. The Commissioner will assume that any distributions are made pursuant to a genuine intention to liquidate. However, if the liquidation is not completed or, in the case of a short-form liquidation, the company does not cease to trade after a resolution to cease to trade is passed, then such a distribution will not have occurred “on liquidation” and the distributions will be taxable.”

This suggests that a company may change processes so long as there is a genuine intention to liquidate from the outset and “on liquidation” occurs from the initial resolution (so long as further trading does not disrupt that).

The Examples provided

The key message is, so long as your client can clearly show there was no trading after the winding up resolution then there should be no issue with advancing a short form method. For certainty advancing a formal long form solvent liquidation is recommended – particularly for companies with large capital distributions. It removes the risk.

For advice on solvent or short form liquidations contact our team.


Related Article:  Ceasing to Trade a Company in New Zealand

Thursday, 29 April 2021 19:25

IRD focus on Construction Companies

IRD pressure on the Construction Industry

It is important to keep proper books and records and ensure you meet your tax obligations. IRD say “declare it all or risk everything” in a recent announcement.

Late payments and bad debts are the main triggers of insolvency in construction companies. The payment of taxes however contributes to cash flow problems.

IRD’s recent release is heavily focussed on enforcement. Winding up applications by the Revenue are also on the rise generally.

For more information on the Revenue’s latest release relating to “cashies” read here.

Dealing with IRD

We recommend communicating early and negotiating a time payment arrangement if your company falls into arrears but generally your business is viable. The IRD will likely require you to complete an IR591 (12 month cashflow forecast) to support any plan.  The IRD provide the following advice for managing tax and for gaining financial relief for companies, partnerships and trusts <read here>

If the financial position of the company is dire then contact a Licensed Insolvency Practitioner to discuss the options. The IRD may consider financial relief or an instalment plan.

There is a high risk of financial penalties for failing to take action. By making a full voluntary disclosure, IRD say you may have your penalties reduced by up to 100%, you may avoid prosecution and you may retain your good business reputation. By communicating early on, your business has more chance of survival. By taking action early as a director you are less likely to be breaching your duties under the Companies Act 1993 and to be held personally liable.

Tuesday, 27 April 2021 15:28

Why would you liquidate a company?

Voluntary liquidation allows a company to terminate its operations and sell off assets and for any shortfall to be dealt with.

Some companies are liquidated because they serve no further purpose. Some are liquidated as they have unfeasible operations or poor operating conditions or technology has moved on. Others are liquidated because the founder has retired or passed and the business cannot operate without that expertise. Some have been affected by the failure of a large customer, the loss of a major contract or an extraordinary event, like Covid-19. 

Most companies advance an insolvent liquidation because:

• The business cannot pay its debts as and when they fall due.
• Liabilities exceed total assets.
• The business is making losses and there are minimal prospects to turn it around.
• The directors are finding it hard to cope with the stress and pressure of trading.
• Trading is in decline and there is concern of personal liability for trading insolvently
• The directors would like someone else to deal with the creditors and all their claims.

Struggling companies juggle the payment of debts, are often in receipt of formal demands or statutory demands and commonly are on instalment plans with Inland Revenue or certain suppliers that they are having difficulty honouring.

When a company is facing financial distress and having trouble paying its creditors including GST and PAYE, there is a high chance that the business is already insolvent. Company directors who operate an insolvent business must act in the best interests of creditors and cease trading immediately if there is no realistic prospect of recovering from the financial difficulties being experienced.

When a company is in too much in debt to recover from a turnaround strategy or restructuring procedures such as company compromises or voluntary administration, liquidation is often the only viable course of action.

Liquidating leads to dissolving the failed company structure and bringing all activity of that company to a close. It is a way for a company that has run out of funds to deal with the shortfall to creditors.

What is the role of the liquidator?

The role of the liquidator in an insolvent liquidation is essentially to realise the company's assets, and, where possible, to make a distribution to the creditors.

The liquidator also conducts investigations into the failure of the company, the conduct of its directors and, sometimes the conduct of third parties, like creditors.

What steps do you take if your limited liability company has no future?

An insolvent company is generally wound up voluntarily by the shareholders or on a Court application by a creditor. A licensed insolvency practitioner (IP) is appointed to oversee the liquidation process.

The liquidators take steps to realise the company assets and pay outstanding creditors according to a designated hierarchy set out in the Companies Act 1993. If there is a shortfall the creditors receive their entitlement and the balance is written off or possibly pursued under a personal guarantee if one has been granted.

If the company has sufficient funds to pay all creditors, it is solvent and surplus funds are distributed among shareholders according to their percentage shareholding.

If the company is solvent, the company can be wound up following a S218(1)(d) strike off process or by way of a solvent liquidation process. The latter can provide more certainty for companies with larger capital gains.

Why would you initiate liquidation voluntarily?

The process of voluntary liquidation is less stressful than facing a winding up proceeding following a creditors application to the Court. The voluntary appointment can be planned in advance to minimise disruption and the shareholders have the opportunity to select the licensed insolvency practitioner who will manage the entire process. The appointment process is fairly straightforward.

Liquidation may not necessarily mean the end of the business. It may be that the business assets are sold at market value as a going concern and a new company takes over. The IP decides on the best way to maximise value for the creditors and whether that involves closing or trading whilst the business is marketed for sale. With a voluntary process the plan can be discussed prior to the appointment including how staff are managed and assets realised. Often directors can have an involvement or a say in the process because it is in their interests to maximise the recovery and minimise the exposure to creditors who hold personal guarantees.

What are the risks of trading an insolvent company?

Although a company structure provides limited liability, this does not mean directors can ignore matters if financial problems arise. Directors have legal obligations to adhere to certain standards. Acting earlier reduces the risk of personal liability.
Continuing to trade with knowledge of insolvency is a risk, where you could find yourself as a director being held personally liable for trading.

Once a director or shareholder knows their company to be insolvent, they must not engage in any activity which could worsen the position of creditors or increase their losses any further. Directors should not increase debt, incur further credit, dispose of assets below market value, or increase their overdrawn current account.

If you do not have sufficient funds to pay everyone you owe, you place your creditors at risk of receiving a voidable transaction if they have knowledge of the demise of your company.

What steps do you take if your limited liability company is in financial difficulty but you have a viable business?

If your limited liability company is facing financial distress but the business is viable, gain advice from a professional. A licensed insolvency practitioner will be able to talk you through the options for rescuing the company (restructuring), giving you the best chance of a successful turnaround, while also ensuring you are adhering to your duties as a director.

There are options such as a hive down process (new company structure), creditor compromises (current company structure with a repayment plan for creditors), voluntary administration (current company with a Deed of Company Arrangement).  

For advice, contact the MVP team.

Wednesday, 31 March 2021 11:01

Right of Mutual Set-Off

Generally speaking, in the liquidation of a company, creditors of equal ranking in the liquidation are treated equally. So, if there are funds to distribute, they will all receive the same proportion of the amount that they have claimed. This is known as the Pari Passu Rule.

The exception to this rule is when there is a mutual set-off between the company in liquidation and another party that is both a creditor to whom the company owes money, and a debtor that owes the company money.

The requirement for the mutual set-off is set out in section 310 of the Companies Act 1993 as follows -

310 Mutual credit and set-off

(1) Where there have been mutual credits, mutual debts, or other mutual dealings between a company and a person who seeks or, but for the operation of this section, would seek to have a claim admitted in the liquidation of the company,—

     (a) an account must be taken of what is due from the one party to the other in respect of those credits, debts, or dealings; and
     (b) an amount due from one party must be set off against an amount due from the other party; and
     (c) only the balance of the account may be claimed in the liquidation, or is payable to the company, as the case may be.

Note that the wording of the section includes the use of “must”, meaning, in a liquidation, if the conditions for a mutual set-off are met, then it is mandatory and cannot be contracted out of.

There are further provisions in S 310 that place restrictions on the ability to claim the mutual set-off because of the timing of the relevant transactions, in relation to the date of the company’s liquidation, or the other party’s relationship to the company in liquidation.

The key legal requirements for set-off in liquidation are:

• The claims must exist at the start of the liquidation. At that time, there must be mutual dealings capable of being subject to an accounting between the parties.

• The claims must be measurable at the commencement of the liquidation. In effect, there must be money claims each way. The claims must be provable in liquidation but need not be for a liquidated amount or an amount due at the date of liquidation. This would include damages, whether liquidated or not, contingent claims, secured debts and future debts due to mature after the commencement of the liquidation.

• The parties must be the same and the claim must be in the same right. No set-off can be asserted against a person in different capacities, for example, debts due from a person in their capacity as a trustee or partner cannot be set-off against a claim against that person in a personal capacity.



The requirement to use the mutual set-off provisions in a liquidation is an exception to the pari-passu rule. It is there to avoid the injustice that could occur if a liquidator could require a person, who is both a debtor and a creditor of the company, to make payment in full of the amount they owe to the company in liquidation, when the same person, as a creditor of the insolvent company, may potentially receive nothing at all.

If you would like more information about mutual set-offs, or any other matters relating to insolvency procedures, please contact one of the McDonald Vague team.


Thursday, 15 October 2020 14:17

Supreme Court Judgment – Directors Duties

On 24 September 2020, the Supreme Court delivered its judgment on a case taken by the liquidators of Debut Homes Limited (In Liquidation) (Debut) against its director, Leonard Wayne Cooper.

In this case, the liquidators alleged that the director had been in breach of duties as director under the Companies Act 1993 (the Act) and were seeking orders against the director.

The liquidators were successful in the High Court, but that decision was overturned by the Court of Appeal. The liquidators were then granted leave to appeal to the Supreme Court, where they were successful, and the orders made in the High Court were restored.

The background to the case was that Debut was a property developer and Mr Cooper was its sole director. At the end of 2012 Mr Cooper decided to wind down Debut’s operations. It would complete existing projects but would not take on any new ones. At the time the decision was made, it was predicted there would be a deficit of over $300,000 in GST once the wind-down was completed.

Section 135 of the Act relates to reckless trading and contains duties of particular relevance to insolvency situations. Section 135 states –

135 Reckless Trading

A director of a company must not-

(a) Agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; or

(b) Cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.

Mr Cooper submitted that continuing to trade in circumstances of insolvency can be a legitimate business risk, not a breach of duty, if there is a probability of improving the position of most of the creditors, as was the case in this matter. He submitted that the reasonableness of such actions must be assessed in terms of the benefit to the company as a whole and not by reference to any detriment to individual creditors.

The Supreme Court found that there was a breach of section 135. It was known by Mr Cooper that there would be a GST shortfall of at least $300,000, which is a serious loss. It also said that it was not possible to compartmentalise creditors and held that it was a breach whether or not some creditors were better off and whether or not any overall deficit was projected to be reduced.

Section 136 of the Act also relates to insolvency situations and provides as follows-

136 Duty in relation to obligations

A director of a company must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.

The liquidators accepted that by continuing to trade, Mr Cooper may have reduced the company’s obligations to secured creditors. However, continuing to trade caused the company to incur new debt to the IRD and 10 new unsecured creditors who had supplied goods and services to complete the properties.

They submit that Mr Cooper knew, when signing the sale and purchase agreements, that the GST obligation at least would not be met and that therefore he had breached the duty under section 136.
The Supreme Court decided that it is clear from the existence of section 136 that it is not legitimate to enter into a course of action to ensure some creditors receive a higher return where this is at the expense of incurring new liabilities which will not be paid.

Section 131 of the Act requires the directors to act in good faith and in the best interests of the company and provides –

131 Duty of directors to act in good faith and in best interests of company

(1) Subject to this section, a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company.

The High Court held that Mr Cooper breached this duty in two respects. First, when he applied the funds realised from the sale of properties to fund further work and to satisfy secured debts which he had personally guaranteed. In doing so, the High Court said, he was not acting in good faith as he was not considering the obligations Debut owed to all its creditors. Secondly, Mr Cooper was acting in his own interests above those of Debut as, by failing to pay GST to the IRD, Mr Cooper was creating a new debt for Debut which would be subject to penalties and interest, while limiting his own liability for debts guaranteed by himself.

The Supreme Court held that Mr Cooper had breached his duties under section 131 because he failed to consider the interests of all creditors and acted in his own interests in direct conflict with Debut’s best interests.

The Judgment also includes decisions in relation to a possible defence for Mr Cooper under section 138 of the Act, whether or not a security in favour of a related trust should be set aside in part or in full, and the level of compensation to be ordered under section 301 of the Act, which we have not summarised.

As can be seen from the Judgment of the Supreme Court, which resulted in the restoration of the High Court orders against Mr Cooper to pay $280,000, there is a strong requirement on the directors of insolvent companies to consider the interests of the company, and all of its creditors, ahead of their own best interests.

It is also clear, when considering the interests of creditors, that a director has to consider them individually – not lump them together and say that while some creditors have lost more than they would have if trading hadn’t continued, overall the creditors are better off.

The practice of “robbing Peter to pay Paul” is not legitimate and can lead to directors facing allegations of breach of duty and, potentially, substantial orders to compensate the company and its creditors.


If you would like more information on the duties of directors, please contact one of the team at McDonald Vague.

Link to the Judgment Of The Court 

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.


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.




The country is in the process of working its way back from the economic standstill that most industries experienced as a result of the Level 4 lockdown. For those that traded at Level 3 and Level 2, they had to shift their business models to meet the COVID-19 trading requirements. Many of those requirements squeezed margins.

In the coming months, many business owners will need to look at their businesses and decide whether to continue to trade going forward. While the Government has provided some support, recovering from lockdown is just one more hurdle for businesses that have been experiencing year on year increases in operating expenses and the minimum wage, both of which have made tight margins even tighter.

How lockdown and decreases to many people’s take home pay has affected consumer spending is not yet known.

As business owners look to the future, what can they do if they find themselves in a spot of financial hardship and what options do they have available to continue to operate while the economy recovers?

Business Restructuring and Turnaround

If a business addresses the stumbling blocks that it is facing at an early stage, many are able to work through those obstacles though decision making and implementing change.

A business restructuring or turnaround can be done by the business owners, usually with the assistance of third parties. The fact that a business is going through a restructuring or turnaround is usually only known to the company’s directors, its lenders, and its key stakeholders.

The process includes:
- assessing/reviewing the business
- identifying areas of strength and weakness within the business
- determining what areas of the business need to be changed
- assessing what changes are best suited to the business and its stakeholders
- making an action plan and implementing the decided upon changes

By undertaking a financial and strategic analysis of the company, you have the tools you need to create an action plan that maximises the return on investment in the business and improves the business’ performance.

It is important to have stakeholder buy in around the timeframes for the turnaround, the KPIs being measured, and the responsibilities of those involved in the turnaround. It is also important that the key stakeholders monitor the plan to ensure that the objectives and milestones are met and that corrective action is taken to get back on track, if targets are not met.

Business Debt Hibernation (BDH)

If a business was doing well before COVID-19 hit and now needs some breathing space to get itself back on track, entering into a BDH scheme may be the right option. While BDH does not compromise any of the business’ debts, it gives the business extra time to pay those debts off.

Creditors Compromise

If a business needs the support of its creditors as well as its lenders and key stakeholders to continue and it is not in a position to pay its creditors in full, the business’ creditors may agree to a creditor compromise. The key ingredient to a successful compromise is for the business to have a credible and achievable plan that, when implemented, is likely to result in a better return to creditors than they would receive if the company was put into liquidation.

Compromises can propose that specified unencumbered assets be sold and the net proceeds of sale be paid to creditors and/or for a third party to inject funds into the business so that creditors can receive an agreed payment in satisfaction of their debts.

Voluntary Administration (VA)

The aim of entering into a VA is for the business to enlist outside assistance to provide the business with an opportunity to restructure its debt and ultimately trade out of difficulty. VA gives a business a way to maximise the chances of the business recovering or, if that is not possible, for it to be administered for a time so that creditors receive a better return than they would from immediately liquidating the company.

A voluntary administrator may be appointed to a company by the directors, a liquidator or interim liquidator, a creditor holding security over the whole or substantially the whole of the company's property, or the Court.


Receivers can be appointed by a creditor that holds security over the whole or substantially the whole of the company's property, which means that receivers are usually appointed by banks or private lenders. The aim of the receivers is always the same - to protect the interests of the secured creditor and ensure that the secured creditor’s debt is repaid as quickly as possible.


Both solvent and insolvent companies can be put into liquidation.

A company can be placed into liquidation by its shareholders (by shareholders’ resolution) or by the High Court (usually at the request of a creditor but can also be at the request of a shareholder or director of the company).

A solvent company might be placed into liquidation by its shareholders after the business has been sold, closed down, and/or reorganised for tax and/or management purposes.

An insolvent company can be put into liquidation by its shareholders by resolution, usually after the directors and/or shareholders have identified that the company is insolvent and that it is in all stakeholders’ best interests for there to be an orderly winding-down of the business’ affairs.

If a company owes an undisputed debt, the creditor can issue a statutory demand for that debt. If the debt is not paid within 15 workings days, the creditor can apply to the High Court for the company’s liquidation. If the High Court puts the company into liquidation, the liquidators nominated by the applicant are usually appointed.

If a company is facing liquidation by a creditor, the shareholders can put the company into liquidation themselves as long as they do so within 10 working days of being served with the liquidation proceedings. Some shareholders choose this option because they consider that liquidation is inevitable and liquidation by shareholder resolution allows them to appoint liquidators of their choosing.

Practical Considerations For Businesses Facing Tough Times

Early Intervention: The earlier issues are acknowledged and addressed, the more options a business has to tackle those issues and the easier they are to deal with. If you need outside assistance, seek it. In our experience, issues left unaddressed for too long can become insurmountable.

Personal Guarantees: While directors are not automatically liable to pay company debts, most directors will have some exposure to a company’s creditors because they have given personal guarantees. As a director, it is important to know what your personal exposure could be, if the company fails.

Have Up to Date Business Records: If your company’s financial information is not up to date, it is harder for you to make accurate financial decisions. If the information is up to date, you will be able to see where your money is going and where you might be able to make savings.

Review Your Business Model: Now is a good time to look at where your revenue comes from, who your ideal customer is, and whether you are catering to that customer’s wants/needs. If there is a mismatch, what changes can you implement to reach that market?

Landlords and Leases: For many businesses, rent is a large portion of their fixed outgoings. In response to COVID-19, the Government has made some amendments to the Property Law Act that affects landlords and tenants’ rights, including in relation to timeframes for terminating leases for non-payment of rent and introducing a fair reduction in rent term for some small businesses (this amendment has not yet been enacted). If you are concerned about steps being taken by your landlord, seek professional advice.

Our Offer of Support to You

If you are working through the effects of the lockdown on your business and you have questions about the Government support available or your recovery and restructuring options and you want some specialist advice, we are offering free 30-minute consultations with one of our recovery specialists. We can be reached on 0800 30 30 34 or at This email address is being protected from spambots. You need JavaScript enabled to view it..

There has been a lot of commentary around what the COVID-19 global pandemic is doing to countries’ economies.  Some economists are predicting a global economic downturn to be the worst recession since the Great Depression and most are expecting this downturn to be worse than the GFC.

Today, 14 May 2020, New Zealand is moving from Level 3 to Level 2 and a lot of businesses are re-opening for the first time since the Level 4 lockdown came into effect seven weeks ago.  In the weeks and months ahead, we will find out what effect the lockdown has had, so now would be a good time to look at the NZ insolvency figures to April 2020 and how those figures compare to the last couple of years.

Today is also budget day and Jacinda Ardern has signalled that the government will be spending to support businesses and keep people connected to their jobs.

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

Between 1 January 2020 and 31 March 2020, there were 421 formal insolvency appointments.  Appointments were down over this period when compared to the same periods in 2019 (454 appointments) and 2018 (559 appointments).

In April 2020, there were 94 appointments, which was just over half the number of appointments in April 2019 (159) and April 2018 (160).

When the April 2020 figures are added to the previous months, insolvency appointments in the year to date are down by roughly 16%+ when compared to April 2019 and April 2018.

As at 30 April 2020, there were 652,033 companies registered on the Companies Register.


Personal Insolvencies - Bankruptcy

Many people will be feeling the financial impact of COVID-19.  Many have lost their businesses and/or their jobs.  The number of people on a benefit has increased, as has the number of people receiving food parcels.

The number of bankruptcies between January 2020 and March 2020 are similar to the same period in 2019 (268 and 281 respectively).  The number of bankruptcies in 2018 was roughly 33% higher over this period.

The number of bankruptcies in April 2020 dropped to 50, of which 80% were debtor applications, which is a significant decrease in the number of bankruptcies when compared to March 2020 as well as April 2019 and April 2018.  The decrease in creditor applications was probably because the Courts were operating at reduced capacity so creditor's applications were held off.  In April 2019 and 2018, roughly 73% of the 109 bankruptcies were debtor applications.


Moving Forward - What Might Be On The Horizon? 

We expect to see both company and personal insolvency numbers start to increase, especially in the second half of 2020. 

The Government’s 12 week Wage Subsidy scheme is approaching its end, and many are now looking at whether they can access the next stage of support via the Small Business Cashflow (Loan) Scheme (SBCS) available from 12 May 2020 Link Here

The announcements made in today’s budget are likely to provide further targeted stimulus probably for infrastructure and tourism, as the country's balance sheet is not limitless. We will need to wait and see what those announcements and the timing of further spending are...  

We hope that for the many business owners and employees returning to work today their day is productive and safe.  Day by day we will all need to deal with the effects the lockdown has had on our businesses and the ability to restart, especially those who have not been trading at all, and will now need to look at how to deal with seven weeks of expenses and no income over that period.

As a firm we have been working through these situations with a range of clients for the last few weeks.  There are many ways to address those issues. 

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