Insolvency Law Reform

Kirsty McDonald was a member of the Commercial/Dispute Resolution team at Harkness Henry. Kirsty has a background in Construction, Property, Commercial and Insolvency Law. She has practised in the United Kingdom in the area of commercial development and local authority law. Kirsty is a specialist in the construction and insolvency area. She has written articles and recently conducted national seminars on various aspects of construction law and insolvency law.

Recent scandals, particularly in the building industry, caused by the collapse of companies leaving a trail of unpaid creditors, have expedited a major review of New Zealand’s insolvency law. The Government, over the past 18 months, has announced a number of decisions about changes to New Zealand Insolvency Law.

Business Rehabilitation

On 18 February 2003, the Associate Minister of Commerce, Lianne Dalziel, announced the decision to introduce the business rehabilitation system. Its purpose is to provide companies which are insolvent or about to become insolvent with an opportunity to avoid liquidation by coming to an arrangement with its creditors. The aim is to enable companies to continue to trade and provide a better return to creditors than they would have received had the Company gone into liquidation.

Problems with the Existing Law

The existing New Zealand law does provide limited opportunities for a debtor to enter into a compromise with its creditors under Parts XIV and XV of the Companies Act. However, the existing provisions are expensive and do not allow an automatic stay against proceedings being taken against a Company by its creditors while it is trying to put together a compromise proposal. In order to obtain a stay an application must be made to the High Court, this means increased cost and increased delay.

Under current law, a stay is only available after the compromise has been put together. However, it is during the time that the compromise is being put together that a stay is most beneficial.

The Australian Approach

Under Australian legislation, the Business Rehabilitation regime is the appointment of an Administrator by:

1. The company; or
2. A major chargeholder; or
3. A liquidator.

As soon as the Administrator is appointed, both secured and unsecured creditors are prevented from taking any proceedings against the company to recover monies owing to them.

Length of the Stay

Under the Australian provisions, no creditors can take action for 21 days. This period is extended in certain holiday times.

At the end of the stay period, creditors can decide which of the following options is most appropriate:

1. That the company execute a Deed of Company Arrangement recording the agreement reached with its creditors; or
2. That the administration should end; or
3. That the company be wound up.

Management

Under the Australian legislation, the administrator takes control of the company’s property and affairs. The business is carried on and managed by the Administrator who may terminate or dispose of any part of the business or property. The Administrator can do anything the directors could do or exercise any power of an officer of the company.

The introduction of a Business Rehabilitation Scheme will mean a fundamental change in the way insolvent companies are dealt with. It is hoped that the availability of a rehabilitation scheme will encourage companies which are facing insolvency to deal with its financial problems at an early stage in order to increase its chances of survival.