Voluntary Administration is a less known alternative to liquidation.

How does it work?

1. The board of directors resolves to put the company into administration.
2. Administrators take control of the company.
3. Creditors rights to pursue the pre-administration debt freezes for a five-week period (potentially extended by the court).
4. An initial meeting of creditors is held, where the Administrator puts the plan for the Administration to creditors and they vote on whether to confirm his appointment or replace him/her.
5. A 4-week period is set down during which time the Administrator reviews the position of the company and reports to creditors on his recommendation for its future.
6. A “Watershed Meeting” is held where creditors vote on the future for the company. Creditors, by majority, can choose;
   1. Liquidation
   2. Return the company to its directors (pre-administration state)
   3. Enter into a Deed of Company Arrangement (“DOCA”)

What is a DOCA?

A DOCA is an arrangement put to creditors where they swap their existing rights against the company for the rights under the Deed. The Deed can offer any proposal the directors see fit, however, it is important to note that creditors (majority in number representing 75% in value) have to accept the proposal, otherwise liquidation is the likely outcome.

If a DOCA is accepted, the Administrator will become the Deed Administrator and tasked with ensuring the company’s obligations under the deed are met.

For an Administrator to recommend a DOCA, the outcome for creditors should be better than the likely outcome in liquidation.

What can be proposed to creditors in a DOCA?

Depending on the circumstances the following types of proposals have, historically, been accepted:

• Where an otherwise profitable business has too much debt, creditors can be offered a percentage of the trading profits over a set period; and/or
• Directors/shareholders can personally advance additional funds to enable creditors to receive a portion of their debt now with the rest written off or a combination of this and 1.
• Directors/shareholders can agree to waive rights to secured/unsecured loans due to them from the company to increase the funds available for creditors.

Technically the proposal can be anything, however, the proposal must be accepted by the creditors, and in our experience, creditors are likely to be unwilling to accept a proposal unless it’s a better outcome for them.

Does a DOCA have to be proposed?

No.  If, during the administration, it becomes clear that a DOCA won’t be successful, then a DOCA need not be presented to creditors.  That typically means the creditors place the company into liquidation at the Watershed meeting.

That’s not necessarily a bad thing.  We have experience, in a couple of situations, where an offer was received to buy a business during the course of the administration.  The offer, being far more than the creditors would otherwise receive, represented the best option available.  In those circumstances, the Administrators can sell the business and ask the creditors at the Watershed meeting to place the company in liquidation to allow the proceeds of sale to be distributed.

Summary

Ever situation is different. Voluntary Administration is a tool which may help save some businesses, but it’s not a magic bullet. If you think Voluntary Administration may be of help to you or your client please feel free to call us on 0800 343 343 for a free consultation.

BEN FRANCIS
Senior Manager
021 042 6991
bfrancis@gerryrea.co.nz

The Government on the 3^rd of April proposed some legislative changes to the Companies Act in order to support business that are struggling due to the COVID-19 lockdown.

One of the more interesting changes was the proposal to allow business to place their debts into hibernation.

So, what is “Business Debt Hibernation”?

Exact details aren’t known at this stage, but the intention of the regime is to;

• Encourage directors to talk to their creditors with the view and intent to place the business into hibernation.
• Allow the directors to retain control of the company rather than passing control to an insolvency practitioner.
• Provide certainty to new creditors that they won’t have to repay any money they receive, so as to encourage businesses to continue trading with entities in Business Debt Hibernation.
• Be easy to implement so businesses can apply it to their own situation without the need for legal advice.

So, how do you place your business debt in hibernation?

Well, the regime appears to need to allow creditors to vote, one assumes in a similar way to, for example, a DOCA (Deed of Company Arrangement) in a Voluntary Administration.

However, a company only needs 50% of their creditors to approve a debt hibernation (by number and value) which makes it easier to obtain the relief.  All creditors will have one month to make up their mind.

So, how long does it last?

Once the creditors are notified of the intention to place the business debt in hibernation, none of the creditors can seek to enforce their debts for one month.

If the proposal is accepted, then the company gets a further 6 months where creditors cannot enforce their debts.

Its also binding on all creditors, even those that voted against it or didn’t vote at all. However, it isn’t binding on the businesses employees and is subject to any conditions the creditors insist on.

Can the company continue trading?

Yes, but subject to any restrictions placed on it by its creditors.

In fact, in order to encourage other companies to trade with it, it is proposed that any further payments made by the company to its creditors on new trading debts, be exempt from the voidable transaction regime.  While this exemption wouldn’t extend to related parties, it would give comfort to new creditors that a liquidation, if one is appointed later, wouldn’t be able to claw back the funds they’d received.

It should be noted that related party debts are not included in this exemption.

My business isn’t a limited liability company.  Is that a problem?

No, any entity can seek to place its debts into hibernation under this scheme unless you are a licenced insurer, a registered bank or a non-bank deposit taker, or a sole trader.

What about directors’ duties?

The whole concept about this is to provide businesses with, what the Government is calling, a safe harbour.  There is a specific exclusion to sections 135 and 136 of the Companies Act 1993 for any director who is allowed to take advantage of these benefits.

What’s the catch?

The business must have been solvent at 31^st December 2019 and the directors would be wise to ensure that’s the case.  The directors must also consider that, in good faith, that the business will be able to pay its debts as they fall due within 18 months and believe the issues being faced now, or in the next 6 months, are as a result of the impact of COVID-19.

If it is proved, at a later date, that the above criteria are not met, then the directors may still be liable for breach of directors’ duties.

Summary

This is an interesting regime that may provide benefit to some businesses.  Will many businesses be able to take advantage of it and will it provide a benefit when it only gives a 6-month breathing space?  Only time will tell.

There are a few unanswered questions though.  For example;

• Do different creditor classes have to vote separately and, if so, what happens if one class of creditor votes against the proposal? It would be unfortunate, for example, if secured creditors lose their rights via this process but also unfair if one class of creditor can dictate the process.
• What happens if directors fail to notify a creditor? Are they bound by the voting outcome?
• The concept appears to be that the debts are frozen at a point in time, but it is unclear exactly what that time is. One assumes it will be at the date the proposal is put forward.

There seems to be significant risk falling on the directors.  If they make a mistake during the process, for example, fail to notify a creditor or miss a creditor from the list entirely, they may find themselves in a difficult position.

While the process is intended to be manageable by the directors themselves, it may prove sensible for them to take appropriate independent advice from an accredited insolvency practitioner.

Any business considering this option should also look at the other statutory options available and weigh up the pros and cons of each.  Each option has its own unique advantages and disadvantages. Choosing the right option for your business is vital.

SIMON DALTON
Managing Partner
021 023 50682
sdalton@gerryrea.co.nz

Separate Property => Relationship Property

The Property (Relationships) Act 1976 (“PRA”) has been enacted to determine how the property of couples is to be divided once they separate.

The general principle is that property is to be divided equally between the couple.

Life is not that simple, however, so the Act foresees circumstances where one partner may have separate property, be it inherited or otherwise.

Section 1M adds that the Act is to provide a “just division” when their relationship ends.

As one can imagine, the ownership of separate property can be an area of dispute.

The Act envisages the situation where separate property has been sustained by the application of relationship property or by the actions of the non-owning partner, and the court may alter the entitlement of one party to relationship property or order compensation to the contributing party.

The sustenance of separate property and the actions of a party will always be a matter of argument and degrees.

The Act is clear that all forms of contribution to the relationship are to be treated as equal.

One can easily see that the contributions from the relationship income to pay a mortgage over separate property from a previous relationship should result in compensation to the non-owning partner. That could be a share in the gain resulting from the ownership of the property.

The situation where a non-owning spouse goes out to work so that the owning spouse can maintain and enhance the asset would appear also relatively easy to appreciate.

Less easy to determine would be the situation where the separate property was self-sustaining, but the bankers required a personal guarantee from the owner, who wanted it supported by a mortgage over relationship property. If the separate property remained in all other aspects self-sufficient would the relationship be deemed to have contributed?

If it is deemed to have done so, what would be a “just division” having regard to the advantages and disadvantages to the partners at the end of the relationship?

Ultimately, Section 9A(2) of the PRA says that any increase in the value of separate property, or any gains derived from separate property, where attributable (wholly or in part, and whether directly or indirectly) to the actions of the other spouse or partner then:

• the increase in value or the income or gains are relationship property
• the share to each spouse or partner in that relationship property is to be determined in accordance with the contribution of each spouse or partner to the increase in value or gain.

If one was looking at quantifiable financial contributions, the prescriptive basis of the Act could be applied.  This is not possible when one is considering indirect contributions such as the underwriting of a liability over separate property.

In farming and horticultural situations, the land may be separate property, but the business involving the land is the source of relationship income. The business may invest both money and effort into the improvement of the land. Those improvements cannot be separated from the land.

Rose v Rose SC 73/2007 [2009] NZSC 46

This case epitomises the complexity that can arise in the assessment of the apportionment resulting from a relatively simple indirect contribution to the complex effect that contribution had on the separate property owned by the husband.

Had Mrs. Rose not attended to the household and the care of the children and worked to earn an income for the household, the amount of separate property would have been less and Mr. Rose would not have been able to work the hours he did in the development of the vineyard, adding to the value of the separately owned land. That value was also only possible with increasing relationship debt.

The Court of Appeal assessed a 40/60 allocation (upheld by the Supreme Court) of the increase in the separate property to Mrs. Rose.

Whilst an accounting of contributions may be of assistance, not all can be assessed in terms of dollars. Ultimately, it will be the judgment of the court that settles the allocation.

Do you have a client in need of impartial advice? Please email John at

jleonard@gerryrea.co.nz to discuss your options.

There are many accountants out in the field, but a chartered accountant is able to do much more than crunch numbers. They are able to guide you during difficult financial times to turn a negative situation into positive.

But most importantly, a qualified chartered accountant is able to provide expert advice during important instances during your company’s lifespan. A chartered accountant is:

• A member of the Chartered Accountants Australia and New Zealand
• Required to undertake mandatory professional development training
• Bound by CAANZ’s code of ethics and is required to adhere to professional standards
• Subject to our disciplinary procedures
• Trained for a minimum of seven years to achieve this professional qualification
• Subject to three-yearly review of their professional practices where they offer services to the public
• Eligible to obtain a Certificate of Public Practice to offer services to the public.

In this article, we’ll discuss two crucial instances when having a chartered accountant on your team can pay dividends – when you begin your company and when you decide to sell it.

Establishing your business’ legal structure

Not all business’ have the same legal structure. Some might be limited companies, limited liability partnerships, incorporated societies or trading trusts – others could be sole traders.

You should carefully consider each type before deciding which one best suits you. For example, you may do business as a sole trader, working on a self-employed basis and invoicing under your own name.

This also means, however, that you could be held personally liable for any business-related obligations. If your business fails to pay a supplier, the creditor could legally come after your house or other possessions.

With a limited liability company structure, it’s different – the liability of the business is limited to the assets owned by the business, not you personally. But be careful -there may be exceptions in some circumstances.

Which circumstances?

Well, this is a prime opportunity when a chartered accountant can explain the business structures available and help you choose the one that best suits you.

What about when selling your company?

An accountant will put your company’s financial records in order and produce statements of accounts that you can show to prospective buyers.

A chartered accountant can also talk to any potential buyers’ accountants during the due diligence process, which is often a requirement when a business is being taken over.

And a chartered accountant can help you structure your financial affairs so that you get the most money from selling your business. Depending on how the sale is structured, the amount of money you receive after tax can vary considerably.

Every company sale is different and a good chartered accountant will help you get the best result when you sell up.

If, however, an unfortunate circumstance occurs prior to a sale – such as your company becoming insolvent – your chartered accountant will be able to provide options in how to move ahead for the best results possible.

A chartered accountant is an important team member of your company — they let you focus on running and leading your company while they focus on the financial side of business. Their strengths complement your company’s strength.

Interested in receiving advice from a qualified chartered accountant? Please email Matt at mkemp@gerryrea.co.nz