A statutory demand can threaten your company’s very existence. Used to collect debt, they’re the most common form of evidence used in the High Court to support liquidating a company. Given how serious receiving a statutory demand is, it’s important to act fast and seek professional advice. If you do nothing, liquidation proceedings are virtually guaranteed.

Pay Up

A statutory demand requires payment of debts owing more than $1000 within 15 days. Time is not your friend. If you can settle the debt within that time period then you should be fine. It may still be worth seeking professional advice to see whether your creditor is abusing the statutory demand process, as there could be legal repercussions for them.

Dispute Payment

If there is an issue with the debt or invoice, then statutory demands cannot be served. If you have a genuine dispute over payment you can apply to the High Court to have your statutory demand set aside, but it must be done within 10 working days!

The Court can take into account any counter-claim, cross-demand or other relevant issues and set aside the statutory demand.

Out of Court Resolution

There are a number of formal and informal compromises available to help you reach a settlement with the creditor who served you notice. Any offer needs to show your creditor that for you to continue trading is in their best interests. You can offer assets as a form of security while you negotiate a payment arrangement.

Statutory demands can be costly

In a real life example, a debtor company was late paying an invoice but paid the total amount in full. While the payment was being processed, the creditor company passed the debt over to their debt collection agency. The debt collectors contacted the debtor for the full amount of the invoice plus their debt collection fee which was over $1000.

At this point, lawyers for the debtor company disputed the collection fee and advised the debt collectors the original invoice had been paid in full. The debt collectors issued a statutory demand to recover their fee, but lawyers for the debtor company successfully argued in court to have the demand set aside.

The court felt the debt collectors had abused the statutory demand process, so they failed to recover their $1000 fee and were ordered to pay costs of over $4000.

Statutory demands are complex proceedings involving the High Court and the Companies Act (1993). Your best course of action is to always seek professional legal advice, and from there figure out how to proceed. Ignoring a statutory demand or acting too late will almost certainly mean liquidating a company, so get professional advice before it's too late.

For more information, download our free Guide for NZ Companies in Financial Difficulty.

From time to time we are approached by persons or companies pursued by liquidators of other insolvency firms. We are also asked to provide guidance or opinions on how a liquidator should act, what is reasonable and how to respond to demands/requests.

Insolvency specialists take different approaches and some Insolvency Practitioners ("IP") do not always act in the best interests of the company creditors. There have been several reported instances in recent years.

At McDonald Vague our objective is to maximise the return for creditors. We do not always achieve a return for unsecured creditors but have a good reputation for taking a firm and fair approach and getting returns. Cost/benefit is always a consideration.

This blog post discusses the skills and competence required of an IP, the differing approaches of liquidators, reasons why applicant creditors or shareholders should appoint an accredited IP, or a member of CAANZ or NZLSA and what should be considered in taking an action.

Competent liquidator and principal duty

A reasonable and competent liquidator should take into account the amount owed to creditors, the prospects of recovery and consider the cost versus benefit of advancing claims and legal actions. It is a liquidator's obligation to maximise the return to creditors and to act in a reasonable and efficient manner.

Underlying principles to regard

Every liquidation is different but the underlying principals are the same. In all liquidations, the liquidators should have regard to:

1. Duties imposed on liquidators by the Companies Act 1993;
2. Schedule 6 of the Companies Act 1993;
3. Companies Act 1993 Liquidation Regulations 1994;
4. Insolvency Engagement Standards issued by NZICA;
5. Court decisions (eg. Peace and Glory Society (in liq) v Samsa [2010] 2 NZLR 57);
6. The value of the assets available to be realised (if possible);
7. The probable claims and creditors to pay from asset realisations.

Benefits of governing bodies and regulation

Liquidators who are members of the CAANZ or the New Zealand Law Society have a governing body they need to report to. The Insolvency Engagement Standards ("IES") issued by the Board of the CAANZ apply to a firm's conduct on any insolvency engagement. IES provides the required standards of a CAANZ insolvency professional.

These standards should be required of all liquidators. IES is not binding on non-Institute members. A member of the Institute acting as a liquidator is required to comply with Rule 10 of the Code of Ethics 2003 which relates to timeliness and to the Insolvency Engagement Standards SES-1 and paragraph 22 of IES. The New Zealand Law Society have their own high standards for conduct. Many IP's are now CAANZ accredited insolvency practitioners.

Key standards for CAANZ members

Key standards include:

1. An Insolvency Practitioner has a duty to apply the degrees of specialised skill, knowledge, judgment and competence required to perform a job in a timely manner. A liquidator has a professional responsibility to carefully plan the liquidation and perform in an efficient and effective manner and assure quality of work performed.
2. A liquidator is required to ensure that all personnel engaged in insolvency work adhere to the principles of objectivity and integrity.

Companies Act 1993 - obligations and duties

The duties, rights and powers of liquidators are set out in Sections 253 to 279 of the Companies Act.  The principal duty of a liquidator is recorded in Section 253 as follows:

Section 253 - Principal duty of liquidator

Subject to Section 254 of this Act, the principal duty of a liquidator of a company is - 

1. To take possession of, protect, realise and distribute the assets, or the proceeds of the realisation of the assets, of the company to its creditors in accordance with this Act; and
2. If there are surplus assets remaining, to distribute them, or the proceeds of the realisation of the surplus assets, in accordance with Section 313(4) of this Act - in a reasonable and efficient manner.

In undertaking an investigation, a liquidator must bear in mind a duty to act in a reasonable and efficient manner.

Liquidators have different approaches to recovery actions often driven by creditor attitude/requirements. Some liquidators will be compelled to bankrupt directors. In the absence of other recoveries, the net costs of these actions should be borne by the liquidators or a particular creditor if that creditor has agreed to fund the cost.

A liquidator also has a duty to have regard to the views of creditors and shareholders under Section 258 of the Companies Act 1993.

Considerations for liquidators when taking actions

These are always judgment calls and a balancing of the various interests.

A liquidator should consider the financial position, the likely prospects of recovery, and public interest (if pursuing bankruptcy) and the costs in advancing an investigation and legal action.

A liquidator should consider the likely return to creditors against the costs, and if spending money that could or should otherwise be distributed to creditors the likely increased return for creditors by advancing the action.

Along with the economic factors above, there is also sometimes a feeling that other enforcement action is required, such as bankruptcy, which affects all of the creditors of the individual who owes money. A bankruptcy option should recognise that this will stop any chance of future recoveries being made.

A liquidator should therefore question whether it is reasonable to issue proceedings against an individual when there is a good prospect of bankruptcy but no likelihood of a return from bankruptcy, particularly where there are competing claims likely in the bankruptcy estate, and where the party is clearly insolvent, or where another creditor could, with minimal cost, advance bankruptcy proceedings.

Certain actions require funding. Creditors can be approached and litigation funders are an option.

Estimating costs when litigation is involved is a difficult exercise as some legal costs are reactive to positions taken by the defendants. Settlement can avoid legal costs associated with discovery, interlocutory matters and trial preparation.

While we recognise that insolvent individuals and companies are a risk to their creditors there are recovery avenues available for the insolvent. They are referred to in our articles on our website, but include:

1. Part 5 subpart 2 proposals;
2. No asset procedure;
3. Summary instalment orders;
4. Settlements.

The McDonald Vague approach to debt collection and legal action

Our approach in collecting debts is some money is better than none.  

To that end, our aim is to:

1. Assess the likely ability to collect;
2. Set a game plan and budget;
3. Write claiming as quickly as possible;
4. React/report any dispute;
5. Consider legal action if the benefit has more than reasonable prospects of exceeding the costs of pursuit and will more than likely provide a return to creditors;
6. If appropriate, appoint a professional debt collection agent; and
7. Consider settlement and repayment options.

We do not typically bankrupt individuals for overdrawn current accounts, particularly when they can show in sworn statements of position that there would be no benefit to creditors in doing so. Each case is considered on its merits and we often agree to repayment plans.

For those directors/shareholders who have acted with a clear intent to defraud creditors, we take the appropriate action. In any action, a liquidator needs to consider the cost and benefit and the public interest and risk.

To find out more about how McDonald Vague can help, or for confidential advice please contact This email address is being protected from spambots. You need JavaScript enabled to view it..

One of the first tasks facing liquidators after their appointment is to ascertain and communicate with those people and entities who can rightly register a claim in the liquidation as a creditor.

Generally, this information will be provided by the directors of the company, along with copies of unpaid invoices or statements on the individual accounts, but not all eligible creditors are that easily identified.

Section 303 of the Companies Act 1993 ("the Act") sets out the admissible claims in a liquidation -

1. Claims admitted - Subject to subsection (2) of this section, a debt or liability, present or future, certain or contingent, whether it is an ascertained debt or a liability for damages, may be admitted as a claim against a company in liquidation.
2. Claims not admitted - Fines, monetary penalties, and costs to which section 308 of this Act applies are not claims that may be admitted against a company in liquidation.

As you can see from the definition in section 303(1), claims can be filed in relation to contingent matters and this could include things like potential costs and awards made against a company in legal proceedings and guarantees provided by the company for the debts and liabilities of other companies or individuals.

Consideration also has to be given to debts that are disputed by the company. The fact that the directors don't think a creditor is entitled to claim does not always mean that they aren't.

We are currently working on a liquidation where the company directors were of the belief that all external creditors would be paid in full in the liquidation. This was based on their belief that funding provided to the company by a third party could not be clawed back under the terms of the agreement under which the funding was provided.

Legal advice obtained by the liquidators after the commencement of the liquidation established that the third party was entitled to claim in the liquidation for some of the funding.

In this case, the decision had been made to proceed with the liquidation on the basis that the company was insolvent but the claim received from the third party means that all creditors will not be paid in full.

When a decision is being made by the directors and shareholders about liquidating a company, and whether or not the company is solvent, these potential contingent and disputed claims have to be taken into account.

If you would like more information about liquidations and who can file claims please contact one of the team at McDonald Vague.

An increasing number of building firms "went bust" in 2014 despite the building boom in Christchurch and Auckland, leaving homeowners, contractors, and the taxman out of pocket.  As the construction boom in Auckland gathers pace the situation is going to get worse.

Nearly 100 rebuild-related companies have gone into liquidation or receivership in Christchurch alone since the February 2011 earthquake. We see the same trend occurring in Auckland.

People often ask us why so many building firms are going under as they should be making a fortune.  The simple answer is that the good ones are, but there are many that have been caught out by over trading (transacting more business than the firm's working capital can normally sustain), thus placing serious strain on cashflow and risking collapse or insolvency.  Some of these companies shouldn't be in business in the first place.

This trend could worsen as mismanagement woes continue and big ticket construction projects open new avenues for white collar crime. 

More than half of the failures came in 2014

Construction-related liquidations more than tripled between 2013 and 2014 (mainly in Christchurch). Subcontractors were heavily represented in the liquidation numbers and the Serious Fraud Office ("SFO") received 29 complaints about suspect dealings in the rebuild and has launched six investigations.  As a result, the Government introduced new laws in 2015 to protect consumers, including mandatory written contracts, and builder requirements for residential building work costing $30,000 or more.

With an increasing number of small operators who were previously working as employees deciding to go out there and do it themselves there is increasing concern that many don't have the skills needed to run a business.  Many are good tradesmen, but not good businessmen.  Some don't manage their cashflow well and don't file PAYE returns, GST returns, or get their invoices out on time.  We often see overdrawn current accounts where the tradesman has operated the business account as their own personal bank account.

As the building boom gathers pace, tradespeople with varying levels of skills have poured into the industry as they see it as a cash cow. They often have little or no capital.  Many of them "gear up" with the latest tools and ute all purchased on HP.

New Zealand is an extremely expensive country in which to build houses.  McDonald Vague has recently been appointed over two large building companies (eHome NZ Limited and Shears and Mac Limited), both employing over 100 people and both manufacturing in a factory and then installing onsite.  eHome NZ Limited built houses in a factory and Shears and Mac Limited did commercial and shop fit-outs in New Zealand and Australia.  They operated in different sectors of the building industry but failed for similar reasons including:

• High overheads and slim margins;
• Missed deadlines;
• Contract disputes;
• Cost overruns;
• Unhelpful bureaucracy and compliance costs.

High costs driving failures

We provide consultancy and turn-around advice to a number of building firms and often the problems are the same.  Fixed price contracts stay constant but the cost of labour and materials constantly increases in a construction boom.  The costs of labour and materials will continue to increase until there is a slowdown in demand. 

Why so many fail

• Out of control pricing;
• Characterised by small businesses (a ute and a dog);
• Aggressive tendering trying to increase market share at the expense of margin;
• Poor estimates/pricing - running a project at a loss;
• Poor variation analysis;
• Undercapitalised balance sheet;
• Lack of building knowledge, the level of education in the industry is poor;
• Leaky buildings (warranties and guarantees) ongoing issue without provision;
• Desperate to climb the ladder - egos prevail in a testosterone dominated industry;
• Poor documentation/record keeping leads to failure (PAYE, GST, creditors);
• Variation sign-offs not formally completed leading to further costs borne by contractor;
• Low margins;
• Businesses are easy to establish and easy to close, with no capital requirements.

What can your clients do to protect themselves?

There are a number of things they can do, including:

• Register on the PPSR;
• Stop work when they don't get paid;
• Be familiar with remedies under the CCA;
• Do due diligence on developers or head contractors before doing work;
• Take personal guarantees;
• Enforce credit limits;
• Look at liquidated companies on the Companies Office;
• Be aware of phoenix companies;
• Make credit checks;
• Do directors' checks for liquidations;
• Get money held in trust where possible.

We can help

Please contact the team at McDonald Vague Limited if you would like to learn more about how your client can protect/mitigate the risk of a customer going into liquidation.

Creditors of companies that fail are often shocked and angered by the ability of directors of the failed company to start up a new business and carry on as though nothing happened.

They cannot accept that they are suffering because of the losses they are facing whilst the people they see as being responsible for the losses appear to suffer no ill effects.

Who is at fault?

It is important to note that the debt owed to the creditor is owed by the company, not the directors personally.  A limited liability company has its own separate legal identity and it is generally only when the directors have given personal guarantees in favour of particular creditors that they become personally liable for the debts concerned.

Furthermore, company failures are not always attributable to actions of the directors.  Failures come about for a variety of reasons including economic downturn, natural disasters, default in payments from customers and major clients changing supplier.

Starting over

There is no automatic bar to a director of a failed company starting up a new business on the failure of the old one.

There are provisions within the Companies Act 1993 in respect to starting and operating phoenix companies within five years of the commencement of the liquidation of the failed company.

Section 386B(1) of the Companies Act 1993 defines a phoenix company as follows:

A phoenix company means, in relation to a failed company, a company that, at any time before, or within five years after, the commencement of the liquidation of the failed company, is known by a name that is also -

1. a pre-liquidation name of the failed company; or
2. a similar name

A pre-liquidation name means any name (including any trading name) of a failed company in the 12 months before the commencement of that company's liquidation.

A similar name means a name that is so similar to a pre-liquidation name of a failed company as to suggest an association with that company.

There are some exceptions to the rules regarding phoenix companies, for instance Court approval can be obtained (Section 386A(1)) or a Successor Company Notice can be issued (Section 386D).

You can see more detail regarding phoenix companies in the article on our website written by Peri Finnigan, Phoenix companies:  what exactly are the rules here?

What can be done to stop them?

Directors don't always just walk away unscathed by the failure of their company.

There is a personal toll in the stress that they have been under leading up to the failure, the personal loss they may have suffered through funds they had put into the company or through personal guarantees provided to financiers or suppliers, and the sense of failure that most feel when their company is liquidated.

Their actions will also be subject to scrutiny by the liquidator of their company.

Liquidators will investigate, among other things, the activities of the directors to establish if the directors have breached their duties.  This can lead to legal proceedings being taken against the directors if they are considered to have acted in breach of those duties and caused loss to creditors by doing so.

If found to have been in breach of their duties or reckless in their actions the Court can impose monetary penalties on the directors to the level it thinks is appropriate to the circumstances.

One of the statutory duties imposed on liquidators is to report to the Registrar of Companies where they suspect the company or any director of the company has committed an offence that is material to the liquidation against the Companies Act 1993, the Crimes Act 1961, the Financial Markets Conduct Act 2013, the Takeovers Act 1993 and the Insurance (Prudential Supervision) Act 2010.

The liquidators will also report to the Registrar of Companies on any director who they believe should be banned from being director because of the belief that their actions were wholly or partly responsible for the failure of the company or because they have had two or more failed companies in the previous five years.

Breaches of the banning orders and operating a phoenix company can, on conviction, lead to penalties of up to five years' imprisonment or a $200,000 fine.

In conclusion, whilst it may seem unfair that the directors of a failed company can just carry on with business as usual after the failure, there are provisions available to have them brought to task and penalised where appropriate.

The solvency test is not required to be met each day a company trades.  It is required for certain transactions including distributions and dividends and requires the company to demonstrate it can meet two tests.  These tests are the trading solvency/liquidity test and the balance sheet solvency test.  

To satisfy the solvency tests, a company must be able to pay its debts as they become due in the normal course of business; and the value of its assets must be greater than the value of its liabilities (including contingent liabilities).

One objective of the solvency test is to control all transactions that transfer wealth from a company.  In a liquidation context, where transactions have occurred when the company did not satisfy the solvency test, creditors may be able to recover from directors personally.

CONCERNED ABOUT YOUR PERSONAL LIABILITY?
TALK TO US IN CONFIDENCE

• If you are concerned you have authorised distributions while not able to meet the solvency test;
• or are worried about your personal liabilities as a director if your company goes into liquidation,
• contact us now for free, confidential, expert advice.
• The sooner you contact us the more options are open to you.

This email address is being protected from spambots. You need JavaScript enabled to view it.

Peri Finnigan

Director

Phone: (09) 303 9519

Mobile: 021 900 657

Email: This email address is being protected from spambots. You need JavaScript enabled to view it.

The solvency test 

The solvency test consists of two parts:

1. Trading solvency/liquidity - the company is able to pay its debts as they become due in the normal course of business; and
2. Balance sheet solvency - the value of the company's assets is greater than the value of its liabilities, including contingent liabilities.

The Companies Act 1993 requires that in some situations directors sign a solvency certificate.  Sometimes this considers only the ability to pay debts as they fall due.  

The situations requiring a signed solvency certificate are: 

• Distributions by the company for the benefit of a shareholder, including a dividend, and incurring a debt to or for a shareholder's benefit, solvency to apply before and after distribution ;
• Share purchases;
• Share redemption options being exercised;
• Financial assistance to acquire share is offered by the company;
• An amalgamation; and
• 20 days prior to a Solvent liquidation.

The considerations

Directors need to consider all circumstances that the directors know or ought to know that affect the value of the company's assets and liabilities.  In the case of contingent liabilities consideration is required to be made on the likelihood of the contingency occurring and any claims the company may reasonably be expected to meet to reduce or extinguish the contingent liability.

Contingent liabilities to be factored in

Contingent liabilities can impact a solvency certificate and impact the validity of a distribution.  If directors are aware of a contingency, action must be taken to determine projected costs and probable outcomes.  Directors must be realistic when assessing solvency and take reasonable steps to obtain all information relevant to forming an opinion.  The Courts have confirmed the solvency test should be applied with a sense of commercial reality.

Contingent liabilities can include obligations under guarantees, letters of credit, bills of exchange, current or pending litigation, eg. leaky building claims, performance bonds, leases, tax assessments, deferred purchase agreements and underwriting adjustments.

Section 4(4) of the Companies Act 1993 - Meaning of Solvency Test - says:

"In determining, for the purposes of this section, the value of a contingent liability, account may be taken of -

1. The likelihood of the contingency occurring; and
2. Any claim the company is entitled to make and can reasonably expect to be met to reduce or extinguish the contingent liability". 

Risk of personal liability

Directors who do not fulfil their obligations under the Companies Act 1993 are subject to penalties and personal liability. The liability of a director will be determined by his or her involvement in the decision.  Failing to vote on a board matter should be carefully considered as directors are collectively responsible for any decision made by the board.

Directors should ensure all workings support solvency certificates and contain all necessary information and support for decisions made.  This detail can provide vital defence when a liquidator challenges a distribution made.

Directors should be aware that they should not sign a certificate as to solvency if there is doubt as to the existence of reasonable grounds for such belief.  If they do not take reasonable steps, they can risk being held personally liable for any non-recovery of the distribution made to the shareholders.

Directors can rely on information and professional or expert advice, but only if they act in good faith, make proper inquiry or have no knowledge such reliance is unwarranted (Section 138 of the Companies Act 1993).

Section 56(3) of the Companies Act 1993 - Recovery of distributions - says:

"If by virtue of section 52(3) or section 70(3) or section 77(3), as the case may be, a distribution is deemed not to have been authorised, a director who -

1. Ceased after authorisation but before the making of the distribution to be satisfied on reasonable grounds for believing that the company would satisfy the solvency test immediately after the distribution is made; and
2. Failed to take reasonable steps to prevent the distribution being made, - 
   is personally liable to the  company to repay to the company so much of the distribution as is not able to be recovered from shareholders".

Under Section 56, a distribution may be clawed back from the shareholders unless the shareholders received the distribution in good faith, without knowledge of the company's failure to satisfy the solvency test, and the shareholder has altered their position in reliance on the validity of the distribution and it would be unfair to require repayment in full or at all.  As the tests are cumulative, failure to satisfy any of the above will likely result in clawback of distributions. 

When can directors be held personally liable?

Directors can be held personally liable in the following circumstances:

• They fail to complete a solvency certificate when it is required;
• The procedure for authorising the relevant transaction has not been followed;
• Reasonable grounds for believing that the company would satisfy the solvency test did not exist at the time the solvency certificate was signed; or
• Between the date of approving the transaction and its date of execution, there has been a change in circumstances in relation to the company's ability to meet the solvency test but the distribution occurs anyway.

Apart from the obvious consequences of clawback, any director who signs a certificate knowing that it is false or misleading commits an offence and is liable on conviction to a fine not exceeding $200,000 or imprisonment not exceeding five years.  A director who votes in favour of a distribution, but fails to sign a certificate to the satisfaction of the solvency test also commits an offence and is liable on conviction to a fine not exceeding $5,000.  The risks are too high to not take reasonable care. 

Conclusion

If a company is marginally solvent, directors need to take particular care to satisfy themselves, for certain transactions, that the transaction is properly authorised and that the company will meet the solvency test immediately after the transaction is implemented.

It seems like a typically Kiwi thing to do - a couple of mates decide to go into business together and start up a company to operate the business.  Everything is split down the middle - each director owning 50% of the shares and all agreed on a handshake.

What could go wrong?

The recent liquidation of a small business shows just what can happen.  Things went well for the first couple of years.  Business was going okay and making a small profit but then things started to go wrong.

The relationship broke down between the shareholders and got to the stage where they couldn't agree on anything to do with the business including staff management and business direction.

Legal advisors became involved and an attempt was made to resolve the issues by one of the shareholders buying out the other's interest.  Unfortunately, they couldn't agree on the value of the business.

As a result, the decision was made and agreed to by both shareholders to liquidate the company.  The liquidation process was made more protracted and costly by the sniping between the shareholders leading to higher liquidation fees and therefore a reduced payment to creditors.

There are no guarantees of course but this situation may have been avoided, or at least the damage mitigated to a certain extent, if there had been a shareholders' agreement put in place at the time the company was incorporated.

Shareholder agreements usually include

A shareholder agreement is like a business pre-nuptial agreement.  It sets out the basis of the relationship between the shareholders and can include matters such as:

• Defining the type of business the company will engage in;
• How the business will be managed and who will be responsible for particular areas of management such as staff employment etc;
• What types of decisions can be made by individuals alone and what types need majority or unanimous agreement;
• How any of the parties leaving the business will be handled - what happens to their shares etc;
• How any disagreements or disputes that arise will be handled.

It can contain confidential information as, unlike a company's constitution, it does not have to be filed with the Registrar of Companies and be available for public viewing.

Shareholder agreements may also include

They may also cover:

• Non-competition restrictions;
• Appointment and retirement of directors;
• Professional indemnity insurance;
• Transfer of shares and pre-emptive rights;
• Disability and insurance - what happens in the case of a trauma or death to insurance proceeds - does it pay company debts or does it go to the estate?  Who is the policy owner?
• Shareholder approvals, consent and voting.

The complexity and size of the shareholders' agreement will depend to a certain extent on the size of the business, the number of shareholders involved and the areas to be covered.

It will be different for every company and shareholders should seek proper legal advice when putting together any such agreement and before signing one.

How McDonald Vague can help

We regularly see the result of fallouts between company directors and shareholders.  We would advise all company directors and shareholders to put together a Shareholder Agreement at the time the company is incorporated to avoid prolonged and unnecessary expense to shareholders and their creditors.

If your relationship with fellow director(s) and/or shareholder(s) is breaking down contact us for free and confidential advice to find out how we can help.

Alternatively, download our Free Guide to Avoiding Business Failure

On 15 September 2014, insolvency and business recovery specialists McDonald Vague advised 288 former employees and unsecured creditors totalling $13.112 million that a total dividend pay-out of 100 cents in the dollar had been made to most of them.

Given that this was a large corporate failure with initial unsecured claims in excess of $25 million this is a significant pay-out.

Early on in the liquidation it looked like creditors would face a nil dividend.  The steps taken to achieve this result include:

1. Engaging in, and winning, a significant arbitration award relating to DML's mining operations at Waihi.
2. Establishing the unsecured creditors' position by disputing and settling several significant unsecured claims for amounts primarily owed by other companies related to DML.
3. Settling all voidable preference claims by agreement where some unsecured creditors were preferred over others when receiving payments prior to liquidation, which led to the establishment of a Preference Trust.
4. Taking High Court proceedings against the directors of DML.  This case settled just before a lengthy trial was to begin.

A novel element to the liquidation which had a positive result on the outcome is the solution to a number of voidable preference claims.  These challenges can be costly and take time to resolve.  The liquidators' advisers had proposed a cost-effective solution to resolve the preference issues, as some parties had been paid (preferred) ahead of the others.  The proposal was accepted by both the liquidators and the preferred parties.  McDonald Vague as a result established and oversaw a Preference Trust.  The operation of the settlement agreements meant that the payments to remaining unsecured creditors have been significantly topped up by funds paid into the Preference Trust from the preferred creditors.  The purpose of that trust has now been met.

The funds received into the liquidation in future will, after meeting liquidation costs and expenses, see dividends paid to the creditors that contributed to the Preference Trust to bring their dividends up.  The expecation is that they will not in the end reach 100 cents in the dollar but they may be close.

"Whilst the liquidation has been a long process the outcome is one McDonald Vague is very satisfied to have reached", says Peri Finnigan, director at McDonald Vague.  "Special thanks go to the liquidators' barrister, Kerry Fulton, who has worked tirelessly on this liquidation".

McDonald Vague would like creditors who have not received a distribution cheque to contact them at This email address is being protected from spambots. You need JavaScript enabled to view it. or 09 303 0506.

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

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

There are two basic features of most compromises:  

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

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

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

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

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

Voluntary administration   

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

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

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

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

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

Receivership   

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

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

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

Liquidation   

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

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

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

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

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

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

Alternatively, download our Free Guide to Insolvency Services

Question:

Liquidators have different views regarding proxies and representatives of company creditors at creditors meetings. What is the correct procedure?

Legislation:

The legislation which applies is:

• The Companies Act 1993, Section 314
• The Fifth Schedule to the Companies Act 1993, Clause 6 and Clause 9
• The Companies Act 1993 Liquidation Regulations 1994, Regulations 23 and 27.

Answer:

An examination of the legislation shows that a company may be represented at a meeting of creditors in two separate ways (refer the legislation for full details): -

Formally by proxy (in writing):

1. • The company may appoint a proxy.
   • The proxy may be any person including the liquidator or if there is no liquidator, the chairperson of a meeting.
   • Where the person appointed as a proxy is proposed as liquidator, then the person holding the proxy may use the proxy to vote in favour of himself or herself as liquidator, if it is not inconsistent with the terms of the proxy to do so.
     
     

By representation:

1. • A body corporate [company] which is a creditor may appoint a representative to attend a meeting of creditors on its behalf.
   • The chairman of the meeting (in most cases the liquidator) is entitled to ask and receive proof that the company has appointed the representative.
   • If satisfactory proof is not forthcoming then if the person present could show that they were connected with the company most chairpersons would allow that person to remain at the meeting but would not let them exercise a vote.

Summary:

A Company is entitled to attend a meeting of creditors: -

• By appointing a proxy
• By appointing a representative

We enclose a suitable letter which could be used by a representative who attends several meetings. It is to be noted that Clause 19 of the Companies Act 1955 Liquidation Regulations 1994 provides as follows: -

A person shall not be entitled to vote as a creditor unless, by the time the vote has been taken the creditor has filed a liquidation claim form.

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.