Executive Summary
9. The Ministry's consultation on business rehabilitation conducted in 2000/2001 was inconclusive. This discussion document seeks to obtain further and more precise information from stakeholders so that it can be used as a basis for providing policy advice to the Government on the issue of business rehabilitation.
10. This document is divided into four parts, with the discussion starting at a broad level and becoming more specific part by part. The issues discussed in Part C and Part D are predicated on certain answers being given to questions raised earlier in the paper. This approach is being used in an attempt to gain information about specific issues that we anticipate would need to be addressed if the Government agreed that New Zealand should adopt a new approach to business rehabilitation.
11. Part A and Part B of the paper describe:
- the nature of business rehabilitation;
- the main reasons for and against having rehabilitation processes;
- the problems with the existing New Zealand law; and
- business rehabilitation in other jurisdictions.
12. Part B concludes that New Zealand's business rehabilitation law is rarely used and seems to serve little real purpose either in terms of salvaging businesses that are essentially sound, but may have got into difficulties, or increasing returns to creditors.
13. Part C identifies and discusses two options for dealing with the substantive and procedural issues with the New Zealand law as identified in Part B.
14. Option One is a modified status quo, outlining changes that could be made to encourage the use of the existing regime. In particular, it canvasses the possibility of introducing an automatic stay on debt recovery measures that binds unsecured creditors.
15. Option Two canvasses the possibility of introducing a voluntary administration regime modelled on the Australian law. The key feature of this option is the inclusion of a stay that binds all creditors.
16. The main disadvantage associated with Option One is that it may not be that effective in addressing the objectives of business rehabilitation. In many instances of business insolvency there is often little, if anything, to be distributed among unsecured creditors. Hence, the automatic stay may simply have the effect of delaying formal insolvency rather than being a more accessible pathway towards business rehabilitation.
17. Option Two may provide a way of promoting business rehabilitation in a much wider range of circumstances. The main benefit of a rehabilitation regime with a stay that binds all creditors (including secured creditors) is that it could allow economically viable businesses to continue rather than liquidate, thereby increasing overall returns to creditors in those cases. The other benefits of business rehabilitation are that it could:
- Preserve value in the business as a going concern for all stakeholders including creditors, employees, suppliers and owners;
- Minimise the loss for those who deal with the insolvent business in having to re-establish business relationships with another entity, e.g. employees, creditors and suppliers;
- Reduce the number of formal insolvencies and associated costs e.g. voidable transactions and the disposal of assets; and
- Force reluctant debtors and creditors to communicate and explore whether rehabilitation of the business will maximise returns to creditors.
18. The risks associated with a rehabilitation procedure that binds all creditors are that it could be used:
- To impede the business failure element of the dynamic process of business creation;
- By debtors to defeat the legitimate interests of creditors;
- By unsecured creditors at the expense of secured creditors.
The paper identifies possible ways of mitigating these risks.
19. Part D of the paper is based on the assumption that if a new approach to business rehabilitation is warranted then the Australian voluntary administration regime is likely to be the preferred model. It identifies a number of design issues, describes how Australia deals with each of those issues and considers whether there are reasons for departing from the Australian approach.
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