NZ to get Australia-lite version of voluntary administration law

NZPA's SIMON LOUISSON backgrounds the law.

Friday 26th October 2007

The Insolvency Law Reform Act comes into force on November 1 allowing stressed companies to voluntarily go into administration to recover and trade out of difficulty.

The new law will help end what McGrath Nicol partner Kerryn Downey calls New Zealand's "Third World" insolvency laws. But changes to the law may water down its effectiveness.

Currently, creditors of troubled or failing businesses can demand liquidation or receivership and funds are recovered by selling assets with no thought for the survival of the company.

Receivers and liquidators have mandates only to look after the interests of secured creditors, and have no mandate to consider employees, shareholders, suppliers or the company itself.

The new law will allow an intermediate possible survival step. Commerce Minister Lianne Dalziel notes VA is the Downunder version of Chapter 11 in the United States.

Many famous American names including Chrysler, Delta and United Airlines have gained temporary respite from creditors under Chapter 11 of the bankruptcy code and later emerged intact or restructured.

Insolvency expert at law firm Chapman Tripp, Michael Harper, said the law until today had been skewed in favour of creditors.

"This is a real shift in favour of debtors. This is the first time in law a company can put its hand up and saw `hey I need some breathing space'. It's a significant shift."

He supports the law but says it is deeply flawed.

New Zealand's law essentially mimics Australia's 1993 law with important variations -- the tax department has had its preferred creditor status removed and directors here are excused personal liability for tax.

In Australia, most VAs are triggered when a company fails to pay its GST or PAYE taxes and the company is sent a notice from the tax department. Once that notice is received, company directors become personally liable for the tax unless a VA process is initiated within 14 days.

The Government here decided not to follow this process, and the IRD has "undertaken to work flexibly with administrators", a position many will view with scepticism.

Ms Dalziel said the IRD would take a long-term view.

"What a lot of outsiders don't realise is the extent of arrangements made by IRD behind the scenes to enable companies to get back on their feet," she said.

Many who have had experience of IRD first-hand would say "Yeah, right," to that.

PriceWaterhouseCoopers partner Anthony Boswell says the law change may mean the New Zealand version won't work as well.

In Australia, administrators might get in earlier, because the directors are spurred by their personal liability.

He said the earlier administrators are appointed when trouble brews, the more chance of saving a company.

"Whether that happens in New Zealand, the jury's out. There is not the same incentive here for directors to put their hands up as quickly as perhaps they do in Australia."

The big advantage of the new law is it's easy for companies to act -- directors simply need to pass a resolution -- and the process is transparent.

"It brings a rehabilitation mindset to forefront in the corporate scene," said Boswell.

In the 14 years it has operated in Australia, it is now the most frequently used process.

On the downside, it's very prescriptive and court-driven and can be time-consuming and expensive.

The average mum and dad business, which covers most in New Zealand, might find it too expensive, he said.

Once directors pass a resolution to appoint an administrator -- mostly from an accounting firm -- a meeting of interested parties must be called within eight working days. Then, within another 20 working days the administrator must work with stakeholders to assess the company's viability.

At that point, the administrator must call a watershed meeting where a plan is put to creditors who then vote on it. A `no' vote usually means the company is put into liquidation. Both a majority of creditors by number and value of debt must support the plan, with the former provision giving workers a say.

Whereas unsecured creditors and shareholders rarely get any return from receivership, the VA system at least gives them a chance.

John Vague, of McDonald Vague, a 25 veteran of insolvency work, is a critic of the new law, saying it simply adds another layer of cost to inevitable insolvency and that will reduce returns for creditors.

He said it might work for big businesses, such as Feltex Carpets, but the bulk of New Zealand businesses are small and the process is a waste of time and money.

But statistics showing the majority of Australian firms opting for VA later going into liquidation are misleading, according to Michael Bos, an insolvency specialist at law firm Philips Fox. Often parts of the business are sold or the company is restructured before liquidation.

Bos believes the new law is generally positive but he is disappointed about the removal of the Government's priority for tax and the related personal liability for the tax of the company.

"If the Government is truly serious about enhancing the rehabilitation of companies, then its position on these two issues should be reconsidered."

One commentator, who did not wish to be named, said the New Zealand law was "a very capitalist view for a Labour Government to take".

Chapman Tripp's Harper doubts New Zealand will replicate the perceived Australian success.

Unlike in Australia, the new law does not allow a business to be sold with its tax losses. These "assets" play an important role in rehabilitating companies.

Harper said the forgiving of debt under the new law created a tax liability, because IRD views forgiven debt as income and a tax obligation. That becomes another hindrence to recovery.

An important aspect of the new law is that it will be a criminal offence for directors to intentionally defraud creditors by using so-called phoenix companies -- where debts are left with the old company and a new one re-emerges with most of the assets and trading under a similar name.

This is one of the main concerns of the Council of Trade Unions. Recently retired president Ross Wilson notes while creditors are casualties, employees' entire income invariable comes from their job.

Wilson said that while VA may prolong uncertainty for workers, at face value it would seem to increase the chances of a viable business surviving.

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