28 May, 2012


Legal News & Analysis – Asia Pacific – New Zealand  Insolvency & Restructuring


Insolvency Procedures
Receiverships, liquidation and voluntary administration are the most commonly used formal corporate insolvency procedures in New Zealand. 
The three processes serve different purposes.
  • Receivership enables a secured creditor to enforce its security by appointing a receiver who takes possession of collateral that is subject to the appointor’s security.  The receiver realises a company’s assets with a view to repaying the secured party’s debt.  Where the charge is over all of a company’s assets, receivers will frequently trade a company’s business for a period in order to achieve a going concern sale.
  • Voluntary administration involves the appointment of a voluntary administrator who takes control of the company for a short period.  During the administration, a moratorium period applies and the company is protected from creditors enforcing their rights.  At the end of that period, creditors can either vote for a re-organisation plan (in the form of a “deed of company arrangement”), liquidation of the company, or the return of control over the company to its directors.
  • Liquidation (previously known as “winding up”) involves the appointment of a liquidator, whose role it is to act for unsecured creditors, to sell the company’s assets and distribute the proceeds on a pari passu basis among the creditors.  Liquidation almost always results in the termination and deregistration of the company.
In New Zealand, receivership processes are governed by the Receiverships Act 1993.  The Receiverships Act specifies the minimum requirements to be appointed as a receiver (no formal qualifications are necessary).  Receivers are either appointed by a secured creditor (as an agent of the company)1,  or occasionally by a court.
A receiver is usually appointed over all (or nearly all) of the company’s property, including its business (known as a general receivership), but can be appointed over a discrete part of the company’s property.  In general receiverships, the receiver will usually have the power to manage the company’s business in addition to the power to sell the company’s assets2 .
Except where receivers are appointed by the court, secured creditors must have a contractual power to appoint a receiver in respect of property that is charged in favour of the creditor.  The appointing creditor’s security agreement will usually grant the secured creditor the power to appoint a receiver at any time after the underlying debt is overdue and outstanding but other events of default (such as breaches of covenant) will usually entitle a creditor to appoint.
Receivers may also be appointed by the High Court3  or a District Court4   However the courts consider that this power should only be used in exceptional cases and as a last resort.  Court appointments are very rare in New Zealand and will only happen where it is necessary to preserve property at risk or to enforce a judgment5.   
Although the powers expressly or impliedly conferred by a security agreement remain the basis of the receiver’s powers, section 14(2) supplements these powers and provides that a receiver may, inter alia, demand and recover income of the property in receivership and manage the property in receivership.  The Receiverships Act confers a wide range of additional powers6.   In all cases, receivers are required to exercise their powers in good faith, for a proper purpose and in the best interests of the appointing secured creditor7
A company is placed into liquidation upon the appointment of a liquidator.  A liquidator can be appointed at the initiative of the shareholders, the directors or by the High Court on application by specified persons, including a creditor.  
The purpose of liquidation is to entitle a liquidator to sell off a company’s assets and distribute the proceeds amongst the company’s creditors.  If any proceeds remain after the creditors are paid, these are distributed to the shareholders though, in practice that will rarely eventuate.
Liquidation commences on the date and at the time at which the liquidator is appointed8.   From the date of appointment, the liquidator has custody and control of the company’s assets, and the company’s directors are effectively displaced.  
Section 253 of the Companies Act 1993 outlines the duties of the liquidator.  Those duties are to: 
take possession of, protect, realise, distribute the assets, or the proceeds of realisation of the assets of the company, to its creditors; and 
distribute any surplus funds or assets according to the company’s constitution, or, if the company does not have a constitution, in accordance with the Companies Act 1993.  
On completion of this process, the liquidator normally sends a final report to the Registrar of Companies to bring about deregistration of the company9
In order to carry out his or her functions and duties, a liquidator is given a broad range of powers including administrative powers10 , the power to make calls on shares and enforce shareholder liabilities, the power to require supplies of 
essential services to the liquidator or company in liquidation11,  and the power to apply to the court for an order to pool the assets of related companies in liquidation or to require a related company to contribute towards the debts of the company in liquidation12
Insolvent Transactions
During the course of liquidation, liquidators may attempt to avoid transactions which they consider to be preferential or voidable in order to increase the funds available for distribution to creditors.13   An insolvent transaction is a transaction entered into by a company in the period leading up to its liquidation and at a time when the company was (or as a result of the transaction, became) insolvent.  A liquidator who wishes to set aside a transaction that is voidable must file a notice with the Court and serve that notice as soon as practicable on the other party to the transaction14.   The transaction will be automatically set aside if there is no objection by the party on whom notice is served.  However a transaction that is not automatically set aside may still be set aside by the Court, on application by the liquidator. 
Transactions may be declared void by the court if the transaction occurred within two years before the liquidation commenced, and, at the time of the transaction: 
the company was unable to pay its debts; or
the transaction resulted in a creditor receiving more towards satisfaction of a debt than the creditor would have received in the company’s liquidation. 
A defence is available where the transaction took place as an integral part of “a continuing business relationship” (such as a running account) where the company’s net indebtedness to the person was increased or reduced from time to time. 
The Act contains similar provisions relating to voidable charges.15   The Act provides that recovery may be denied wholly or in part if the person from whom recovery is sought:
received the property in good faith; and
where a reasonable person in the creditor’s position would not have suspected, and the creditor did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and 
the creditor gave value for the property or altered their position in the reasonably held belief that the transfer was valid and would not be set aside. 
The Companies Act provides for recovery in certain other circumstances including where a transaction is at undervalue 16 .   For transactions at undervalue, the liquidator may recover the difference in the value received by the purchaser under the transaction and the value that the company received from the purchaser under the transaction.
Additionally, a court may order that a security or charge created by a company that was in favour of:
a person who was a director of that company; 
a person who had control of the company; 
another company controlled by a director of the company; or
a related company be set aside if the Court considers that it is just and equitable to make the order. 17
Voluntary Administration
Voluntary Administration (“VA”) can be a powerful tool to deal with distressed companies but has been used fairly infrequently in New Zealand so far.  VA is a mechanism by which an insolvent creditor can enter into a moratorium (a temporary safe zone from creditors’ claims) pending a decision by its creditors as to whether the company should execute a deed of company arrangement, be placed into liquidation, or be returned to the control of its board of directors.  Within 20 working days of the commencement of the administration, the administrator must convene a meeting of creditors (known as a “watershed meeting”) and creditors must vote for one of these three options. 18  The convening period for the watershed meeting can be (and frequently has been) extended by the court.
A deed of company arrangement is often appropriate where creditors believe that the company can trade out of its financial difficulties, or where it is possible, for example, to restructure the company by selling off some of its business operations over a period of time.
Administrators can be appointed by: 
the company (through a resolution of its board of directors);  19
a liquidator or interim liquidator;  20
a secured creditor (if the secured creditor has a charge over the whole, or substantially the whole, of a company’s property); 21 or
the court (on the application of a creditor, liquidator or the Registrar). 22
Creditors’ rights to enforce charges over company property, repossess property leased to the company, or enforce guarantees against directors (or their spouse or relatives) are restricted during an Administration.  However it is possible for a secured creditor with a charge over substantially the whole of the assets of the company, to appoint a receiver within the first ten working days of the administration commencing.
Like a receiver, an Administrator is an agent of the company.  During the convening period, the Administrator has control of the company’s business, property and affairs, may carry on the business and manage the property and affairs of the company, and may perform any function and exercise any power that the company or any of its officers could perform or exercise if the company were not in administration. 23
Directors function during insolvency
The Companies Act 1993 expressly provides that where a company is in liquidation, its directors remain in office but cease to have any powers, functions or duties other than those required or permitted by Part 16 of the Companies Act.  24
For companies in voluntary administration, the directors also remain in office 25  until the company enters into a deed of company arrangement, at which time the powers of the directors will depend on the terms of the deed.  Once the deed is completed successfully, the directors regain full control of the company, unless the deed provides for the company to be liquidated on completion. 
The Receiverships Act 1993 is silent on the powers of directors during a receivership but their powers are effectively suspended, and the day to day control of the company, together with the power to sell assets, will be assumed by the receiver.  Directors continue to be under specific obligations including to provide relevant books and documents to the receiver, and to assist the receiver as required.  26
Further options for companies with financial difficulties
Almost all corporate insolvencies in New Zealand are resolved under one of the three major processes above.  However various restructuring options are available to companies experiencing financial difficulties.
Part 14 compromises
Governed by Part 14 of the Companies Act 1993, a compromise is an agreement between a company and the various classes of creditors, and includes a compromise:
cancelling all or part of a company’s debt;
varying the rights of a company’s creditors or the terms of a debt; or
relating to an alteration of a company's constitution that affects the likelihood of the company being able to pay a debt.
The purpose of a compromise is to enable a company to avoid more formal insolvency procedures by trading out of its difficulties.  
Most compromises have two basic features: 
creditors will be repaid in full or in part over a period;
when they are paid in part, the creditors write off the balance of the debt. 
Compromises may be proposed by the board of directors of a company, a receiver appointed in relation to the whole or substantially the whole of the assets and undertaking of the company, a liquidator of the company, or with the leave of the court, by any creditor or shareholder of the company.  
During the term of the compromise, debts are frozen and no creditor may take action against the company.  For a compromise to succeed, it must be approved by 75% in number and 75% in value of each class of creditor voting for the proposal.
Part 15 – approval
Part 15 of the Companies Act sets out the rules for the approval of arrangements and compromises by the court.  Pursuant to section 236, a court may, on the application of a company, order that an arrangement, amalgamation or compromise be binding on a company.  Additionally, the court may, in order to give effect to an arrangement, amalgamation or compromise, prescribe terms and conditions relating to the relevant arrangement. 28
Finance companies in difficulty may propose a “moratorium” to investors as an alternative to receivership.  The practical effect of a moratorium is that investors (generally by a special majority) agree that the company will not be placed in receivership in exchange for an offer by the company to: 
restructure its affairs in a way which maximises the company’s stability; and
instigate a “repayment plan” under which investors are repaid some or all of their investment on a negotiated timeframe
To implement a moratorium, a company must put its proposals to investors for a vote.  Unlike a receivership, however, a moratorium means that the existing management of a finance company will remain in control.
Moratoria can be favoured where maximum flexibility is required, the existing management has the favour of the creditor pool and it is desirable to avoid the cost and time associated with a formal appointment or court approved scheme.
Forms of security
Personal Property Securities Act 1999 (the PPSA) 
The PPSA puts in place a national regime for the registration and enforcement of security interests in personal property.  Generally, secured creditors who wish to protect their rights in respect of personal property must either register a 
financing statement on the Personal Property Security Register (PPSR) or retain possession of the relevant collateral in accordance with the Act.
The PPSA specifies a number of default rules to govern the respective priorities of secured creditors, and various provisions which contain special rules of priority for specified types of collateral.
The consequences of not registering a security interest can effectively erode or eliminate any realistic prospect of recovering against an insolvent debtor.
What is a security interest?
The term “security interest” is defined broadly under the PPSA as being transactions which in substance secure payment or performance of an obligation, without regard to the form of the transaction.  Transactions that create a security interest include fixed charges, floating charges, chattel mortgages, conditional sale agreements, hire purchase agreements, leases and assignments.  
Section 17 also lists various types of transactions (such as retention of title arrangements) which are deemed to be security interests including certain transactions that may not secure payment or performance of an obligation but will still be regarded as security interests (known as “deemed” security interests). These are: 29 
a transfer of an account receivable or chattel paper;
a lease for a term of more than one year; and
a commercial consignment.
Section 23 contains a list of transactions which are excluded from the scope of the PPSA, most notably interests in land.
Enforcement of security interests
In order to best protect its position, a secured creditor must ensure it has a perfected security interest which is enforceable against a third party (i.e. a competing secured creditor).  Perfection 30 requires that a security interest has attached, and that the secured creditor has either registered a financing statement on the PPSR, or has possession of the collateral.
A security interest will attach to collateral when value has been given by the 
secured party, the debtor has rights in collateral and, assuming the creditor wishes to enforce its rights against other secured parties, the secured creditor has a security which is enforceable against third parties in accordance with section 36 31 .  Section 36 provides that a security agreement will be enforceable when a secured party has possession of collateral or the debtor has assented in writing to the terms of a security agreement which contains a proper description of the relevant collateral.
Perfection alone will not guarantee that a secured creditor has better priority over other secured parties, and the PPSA contains a number of rules dealing with 
priority between security interests.
Priority of security interests
The PPSA sets out a comprehensive regime for determining the relative priority of competing creditors. 
The default position is that the first secured party to register a security interest in collateral on the PPSR (by way of a financing statement) will have priority in that collateral.  Perfected security interests will prevail over unperfected security interests.  32 For unperfected security interests, priority will be determined in the order of attachment. 
In addition to the priority rules outlined above, Part 7 of the PPSA provides for further rules in relation to, amongst others, purchase money security interests (PMSIs), accessions, and security interests in processed or commingled goods.
Purchase money security interests (PMSIs)
While the default rule of the PPSA provides that the first secured party to register a security interest in collateral on the PPSR will have first priority in that collateral, special priority (known as “super priority”) is afforded to a purchase money security interest (PMSI).  A PMSI is a security interest taken in personal property to the extent it secures the purchase price of that property.
Under the PPSA, the holder of a PMSI has a period of ten working days from the delivery of the goods to the borrower to register or perfect the security interest.  In practical terms, this means that a lender advancing money for the purchase of goods will take priority over a general security interest.
The purpose of this super priority is to recognise that, as a matter of policy, lenders who take general charges over all of a company’s assets should not take priority over individual suppliers of specific goods.  This enables suppliers to supply on credit terms under a retention of title provision while at the same time being protected on an insolvency event.
In practice, however, it is frequently the case that suppliers fail to register in the requisite timeframe and lose their PMSI super priority.
Accessions and Commingled Goods
When goods become an accession, section 78 allows for the continuation of a security interest in the goods, despite their having become an accession.  However if the goods are processed, manufactured or mingled with other like goods, such that they lose their identity, there will be no accession in which to continue the security interest.  As such, section 82 provides for the security interest in the original goods to continue into the product or mass which results from the manufacturing, processing, assembling or commingling. 33
The rules for resolving the resulting priority conflicts are subsequently provided for in sections 83-86, and override the residual priority rule of section 66.  This suggests that goods which are the product or mass of other goods need to be treated separately from other goods, as the rights of a secured party arising as a 



consequence of section 78 appear to prevail over the rights of other creditors for whom the processed or commingled goods are original collateral. 
The Land Transfer Act
Security provided over real estate (for example, a mortgage of land) is not governed by the PPSA.  Instead, the Land Transfer Act governs land and provides a system under which most of the privately owned (and some publicly owned) land in New Zealand is held and transactions are recorded.
The Torrens system of registration of title to land is the basis of the Land Transfer Act.  It was introduced over a hundred years ago to simplify and minimise the costs of transferring interests in land and to provide security of title. 
Under this system, the state maintains a central register of land title holdings.  The register is deemed accurately to reflect the current facts about title so that those wanting to deal in the land need not look beyond it to establish ownership.  The person whose name is recorded on the register holds state-guaranteed title to the property in all but the most exceptional circumstances. 
The notion that the registered proprietor has “an indefeasible title against all the world” (except in cases of fraud) forms the basis for New Zealand’s land transfer system and provides that registered proprietors hold their titles secure from attack in the absence of fraud.
A person deprived of land, or any interest or estate in land, by any error or omission in relation to any entry in the register may bring an action against the Crown for the recovery of damages.  However, they cannot bring an action for possession or for the recovery of that land, estate or interest.
Creditors Options of Enforcement 
The ability of, and options available to creditors seeking to recover unpaid debts will depend on whether that creditor is secured or unsecured.
Secured Creditors
Following an event of default by a debtor, creditors are typically entitled to:
sell or take possession of the secured assets in their own capacity; or 
depending on the terms of the security agreement, appoint a receiver over the secured assets to recover the debt on behalf of the secured creditor.
The procedure for selling secured assets will differ according to the type or property over which a security interest has been created.
Real Property (Land)
Before a mortgagee of real property can exercise its powers to sell the secured property following a debtor’s default, notice must be provided under section 119 of the Property Law Act 2007 (PLA) to the debtor, any subsequent mortgagee, any former mortgagor and any covenantor. 
The PLA notice must give the debtor a minimum of 20 working days to remedy the default that has been stated in the notice and the mortgagee cannot sell or enter into possession of the land before the expiry of that period.
Personal Property
The enforcement of security interests over personal property is governed by Part 9 of the Personal Property Securities Act 1999 (PPSA).
Section 109 of the PPSA allows a secured creditor to take possession of or sell personal property that is subject to a security interest when the debtor is in default under the security agreement, or that property is at risk.
If a security interest has been created by a mortgage over goods and the secured creditor intends to sell those goods, the requirements for giving notice to the debtor will be governed by section 128 to 136 of the PLA.  A “mortgage over goods” is any charge over tangible personal property (not chattel paper, money or investment securities etc) for securing the payment of amounts or the performance of obligations.
If a secured creditor intends to sell other than by a mortgage over goods, section 109 of the PPSA will apply instead of the PLA provisions.  Under section 109, creditors must give 10 working days notice to the debtor, to any person who has registered a financing statement in respect of that property and to any other person that has notified the secured creditor that they claim an interest in that property.  This notice period does not apply in a number of circumstances, including if the property will perish or decline substantially in value within the 10 working days.
Accordingly, in most cases where a mortgagee wants to sell personal property, a section 128 PLA notice must be served on the mortgagor, which gives the mortgagor 10 working days to remedy the default before the mortgagee can exercise their power of sale.  This notice period does not apply to a number of circumstances, broadly analogous to the exceptions under the PPSA, such as when there are perishable goods. 
The most important exception to the notice period is that it does not apply to mortgagee sales of goods under a “mortgage debenture” being a charge over all or substantially all of the assets of a body corporate.  Accordingly, a GSA holder is not required to give notice and wait the minimum prescribed 10 working days before taking possession of and selling goods.
Appointing a receiver
Secured creditors are frequently entitled, as a matter of contract under the relevant security agreement with the debtor, to appoint a receiver.  The appointment of a receiver is often the preferred option as it exposes the secured creditor to less risk and less administrative burden than proceeding in their own capacity.
Unsecured Creditors
Where the debtor is a company, and a debt is outstanding, the easiest option for a creditor is normally to file a statutory demand on the company.  This allows the debtor 15 working days to pay the debt, enter a compromise arrangement or provide the creditor with security to their satisfaction.  At the expiry of this period, an application can be made to the High Court for the appointment of a liquidator.  A liquidator will be appointed if it is satisfied that the company is unable to pay its debts.
Statutory demands cannot be used where there is a substantial dispute between the parties as to the existence of the debt.  Where such a dispute exists, the party seeking enforcement will be required to obtain judgment before proceeding to enforcement.  Non-satisfaction of a judgment debt is a further ground for issuing a statutory demand.
In the case of an individual debtor, a creditor can make an application to the High Court for a bankruptcy notice.  Once this notice is served, the debtor has 10 working days to repay the creditor, following which a formal application can be made to the High Court to make the debtor bankrupt. 
Liquidation or Bankruptcy
An unsecured creditor of a company that has been placed into liquidation, or of someone that has been adjudicated bankrupt, is entitled to file a claim in the liquidation or bankruptcy estate.  The amount of debt able to be recovered will depend on the number of creditors, the amount of debt and any preferential rankings.
No Asset Procedure (NAP)
An individual debtor who is unable to pay their debts may enter the NAP as an alternative to bankruptcy.  A creditor is unlikely to receive any money in this scenario as the debtor has no realisable assets and therefore no means of making payments to creditors.  The NAP procedure may only be used once by an individual debtor.
Summary Instalment Order (SIO)
SIOs are a formal arrangement between a debtor and their creditors allowing the debtor to pay back all or part of their debts in instalments.  These are usually over a period of 3 to 5 years and the amount received by a creditor will depend on the proposal put forward.  Creditors are given the opportunity to object the terms that are proposed.


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