Wednesday, 13 November 2019 13:57

Picking An Insolvency Practitioner

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

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

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

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

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

Your insolvency practitioner should:

1. Have experience in the industry the business operates in

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

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

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

5. Have a history of making distributions to creditors

HOW DO I CHOOSE THE RIGHT INSOLVENCY PRACTITIONER?

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

WHAT QUESTIONS SHOULD I ASK AN INSOLVENCY PRACTITIONER?

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

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

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

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

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

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

FINDING THE BEST INSOLVENCY PRACTITIONER FOR YOU

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

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

When financial difficulties strike it can seem like everyone needs answers all at once.

If you have a company in financial trouble and need to buy some critical decision-making time to deal with your creditors, shareholders, and the IRD, you can place your company into voluntary administration.

The aim of voluntary administration is a short-term freeze on your company’s financial position while an administrator and your creditors determine the future of your business. It’s a relatively new corporate rescue measure introduced through changes to the Companies Act (1993) in 2007.

Voluntary administration: getting started

To start voluntary administration proceedings, an administrator can be appointed by the board of directors, a liquidator, or by applying to the High Court. The administrator is then given full control of the business, and acting independently of the company and creditors tries to work out a way to either save the company, or get a better return for creditors than they would have received from liquidation proceedings.

After the short voluntary administration period, control of your company is either returned to the directors, is placed in liquidation, or enters into a company arrangement to prevent liquidation proceedings.

While your company is under voluntary administration, it cannot be placed into liquidation and creditors cannot take action against you to recover debts. Your business premises or company property also cannot be seized or reclaimed. Essentially, voluntary administration grants time to find a way forward for your business.

Since 2007, very few businesses have opted for voluntary administration as it does come with some downsides. It’s an expensive process, and while the business may survive, shareholders have almost certainly lost their investment while the IRD gains preferential creditor status.

What to expect during voluntary administration

After voluntary administration is declared, the first creditors’ meeting must be called within eight working days, followed by a watershed meeting usually within 20 working days.

At the first meeting the administrator will declare any conflicts of interest, and their relationship, if any, with the company in administration. At this stage the creditors can vote to replace the administrator. The directors’ must hand over all relevant financial information, and cooperate with the administrator as they investigate the company’s activities. Depending on the number of creditors, they can choose whether to appoint a creditor’s committee to consult with the administrator in an effort to simplify the reporting process.

The administrator can make recommendations, restructure the company or make changes as they see fit if they believe it will make the business more profitable and give a better return to creditors.

The watershed meeting is for creditors to decide the future of the company. Depending on the administrator’s findings and feedback creditors can vote to:

  • - Give control back to the directors and end the administration.
  • - Organise a company arrangement, to ensure certain debts are repaid.
  • - Appoint a liquidator.

If your company is struggling and creditors are demanding answers, your best option is to seek independent advice and learn about all your options. At McDonald Vague we can advise whether voluntary administration is right for your situation, or whether another course of action is better for you.

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

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

Creditors compromise 

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

There are two basic features of most compromises:  

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

 

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

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

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

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

Voluntary administration   

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

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

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

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

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

Receivership   

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

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

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

Liquidation   

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

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

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

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

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

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

 

Alternatively, download our Free Guide to Insolvency Services

 

 

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

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

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

1 - Receivership

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

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

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

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

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

2 - Voluntary administration

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.