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

What happens with assets in a locked safe?

During the course of a liquidation, assets and accounts must be evaluated to determine which assets belong to the company, making them available as a means to pay creditors. This, as you know, is standard practice.

We would like to talk about a liquidation, which has been covered by the media, where a locked safe was discovered. Curiously, no one at the company in question was able to unlock the safe, generating a great deal of speculation. What was in the safe? Of course, the mind is left to imagines all sorts of magnificent treasures … and, usually, reality doesn’t quite match up.

To the surprise of many, the safe held half a million dollars in gold bars ….

What happens next?

This discovery must be handled with the same level of care given to all company matters during liquidation. Of course, with actual gold involved, one question becomes most pressing: who gets the gold bars?

Is this discovery a company asset available to creditors … or something else?

Any liquidator appointed to manage company funds is required to investigate. He or she must determine whether or not the contents of the safe belong to the company before moving forward. If, for example, the gold bars are being held in trust, they cannot be used to pay company debts.

Assets held in trust must remain separate

As you know, customer or creditor funds held in a trust are separate from company assets. In a liquidation, these funds must be returned to trust beneficiaries.

For example, Ticketmaster holds funds obtained from ticket sales in a trust so customers get their money back if the company should go into liquidation. This is a responsible practice that protects consumers paying in advance for goods or services by purchasing vouchers or giftcards or paying deposits.

Further, trading foreign currency in volume is made possible by trust accounts. These accounts exist to hold client money so funds remain the property of clients should a company involved in this practice go into liquidation.

In the case of gaming companies where funds are held on behalf of betting clients, a trust must also be used to ensure client funds remain separate from company assets.

Until insolvency laws change, customers remain unsecured creditors and they would be wise to confirm that monies paid to a company by them in good faith is being correctly held on trust.

What happens when funds commingle or they are not declared as trust funds?

There are times when things become more complicated. If, for example a director’s personal funds or company funds are commingled with trust funds, it can be more challenging to determine which funds are available to creditors …

However, this sort of confusion may lead to penalties for the trustee who should have been aware of their responsibilities when creating the trust and managing it.

As liquidators, we do not have to prove any assets are held in trust; rather the company must do so. Funds held in trust should be:

• Separate
• Accountable
• Identifiable

If, for some reason, segregated accounts are not clearly identified as trust accounts but are still claimed as holding trust funds, these assets may become available to creditors based on the outcome of our investigation. The source of the funds is evaluated as well as the intention of the company.

If the source of the funds cannot be identified or it becomes clear the funds were not held on behalf of creditors in trust, those funds could, in fact, become available to other creditors in a liquidation. The only way to avoid grey areas is to label trust accounts appropriately and manage them in compliance with the law … in a recent case we sought directions from the Court to confirm we were able, as liquidators, to access and deal with commingled funds of a forex trader. In that case, I’m pleased to say, we were able to return 100 cents on the dollar to all of the company’s clients.

The takeaway

During liquidation, the burden of proof lies with a company if and when assets are claimed as being held in trust.

For this reason, every company should ensure that clear records are maintained of what assets are held in trust. If trust accounts were not set up properly at the start or were later commingled, assets held in trust may still be used to pay back the company’s creditors.

Further, trustees have a duty to ensure funds are handled appropriately and are potentially subject to legal consequences if this is not the case.

If you have a client in liquidation with concerns about assets held in trust and you would like advice, please feel to contact Simon at sdalton@gerryrea.co.nz.

Image courtesy of walknboston

If you’re trying recover debts, show strength

If you are a creditor of a non-paying debtor there are many steps you can take to improve the chances of receiving payment of that debt.

However, in our experience, creditors taking a more aggressive stance are more likely to receive payment.

Where a debt is due and payable, and not subject to any genuine dispute, a creditor may issue a statutory demand to force payment. If the debtor doesn’t comply with the statutory demand, a creditor may apply to the Court for an order that the debtor be placed into liquidation. It appears though that many trade creditors are unwilling to incur this cost and look to write the debt off at this point.

However, giving up on pursuing payment is not the best course of action. Company liquidation statistics we have gathered instead reveal another strategy.

Push forward with a liquidation application

Many liquidation applications do not get advertised as they settle prior to the advertisement date. It is apparent from looking at the numbers that, most times, when liquidation applications are issued, the matter settles (usually meaning payment in full or a compromised amount is received).

We recently conducted a liquidation where the Company had several debtors that wouldn’t pay. As liquidators, we served statutory demands, and subsequently liquidation proceedings against five of these debtors.

Four of these debtors paid in full, including legal costs, and one debtor settled the amount by repaying the principal debt. A substantially better recovery was achieved because of the threat of liquidation.

The case referred to above is not unique, we are regularly asked to consent to act on liquidation proceedings where the matter settles prior to being heard in Court.

Let’s quickly review the numbers

We have conducted an analysis of the liquidation applications advertised in the New Zealand Gazette since 2011 and have observed the following:

(Please note: we have excluded applications undertaken by the Inland Revenue Department, as the IRD may choose to proceed with a liquidation to protect the integrity of the tax system.)

Liquidation Applications between 2011 and 2016 (inclusive) totalled over 7,500 with more than 4,900 of those made by the IRD. This indicates that, during that period, other creditors filed just under 2,600 applications to liquidate. But how many of those were placed into liquidation?

Court appointed liquidations in the period totalled only 5,200 and the majority of those were where the applicant creditor was the IRD.

By our calculation, over 80% of advertised liquidation applications — where the applicant is not the IRD — do not lead to liquidation. Instead, a settlement is reached.

What if the liquidation goes forward?

In the event your matter doesn’t settle and a liquidator does get appointed, you may still recover the funds through the actions of the liquidator.

Yet, you must nominate the person(s) to be appointed liquidator, who must consent to act. We recommend obtaining the consent of the prospective liquidator at the start of the process.

The costs (as awarded by the Court) of applying to liquidate the Company are preferential in a liquidation.

If you or your client is applying to liquidate a debtor, please feel free to contact Matt at mkemp@gerryrea.co.nz or 021 839 556. We are happy to discuss how we may be of assistance.