Part C - Options for Addressing Problems Identified with Current New Zealand Law
Problems with the Current Law
69. The key problems identified in Part A with the current regime can be summarised as:
- Individual creditors' place their interests ahead of the collective interests of creditors; and
- There are high transaction costs involved in using the current regime.
Options for Addressing Problems Identified
70. This section discusses two options for addressing these issues:
- Amendments to strengthen the current law; and
- The adoption of a more comprehensive business rehabilitation regime, which would include a stay against actions of secured creditors.
Option One - Amendments to Strengthen the Current Law
71. This option involves retaining the status quo (i.e. no stay against secured creditors), but introducing an automatic stay against unsecured creditors.
72. Stakeholders have suggested that Part XIV of the Companies Act 1993 could be strengthened to reduce opportunities for a creditor minority to defeat the interests of the majority. At present the Part XIV moratorium is insufficient to prevent creditors from taking action against the debtor to the detriment of creditors overall. In many instances, it will be too costly to defend these actions. Part XIV could be amended to include an automatic rather than a court-ordered stay on actions by unsecured creditors.
Option Two - Adoption of Business Rehabilitation (Including an Automatic Stay against Actions of Secured Creditors)
73. As noted above, a regime with a mandatory stay preventing secured creditors from taking recovery action during the development of a rehabilitation plan may maximise returns to all creditors. A stay of this type is likely to result in greater use of the business rehabilitation procedure and possibly a higher percentage of successful rehabilitations of economically viable companies.
74. While the continued use of secured assets is likely to be key to the successful rehabilitation of a business, secured creditors could retain the right to reject a proposal through voting at the completion of the stay. Secured creditors would also retain the right to enforce their securities post-proposal.
Analysis of Options
75. Both options would reduce transaction costs by reducing the need for court involvement before a stay against actions against the company can be implemented.
76. The underpinning assumption of the current law is that where rehabilitation is most viable and will provide the greatest returns to creditors, that secured creditors have both the commercial judgement and incentives to support the rehabilitation. There is in many cases an obvious financial incentive for secured creditors to pursue rehabilitation where an asset realisation is worth less than the value of the asset as part of a going concern. In informal workouts the "buy-in" of secured creditors is critical to the success or otherwise of any arrangement, as the realisation of the security may effectively prevent any possibility of rehabilitation. The key issue is whether a legislative stay on secured creditors will result in a greater number of successful rehabilitations of economically viable companies and therefore provide increased returns to creditors.
77. The potential advantage of a stay against actions by secured creditors is that it could, if implemented properly, reduce the cost of credit by increasing returns to all creditors. However, the increased contractual uncertainty faced by secured creditors may have the opposite effect on the cost of credit. Rehabilitation of businesses may, however, be encouraged as debtors and administrators will be able to focus on the preparation of a rehabilitation proposal for creditors knowing that all individual recovery actions are stayed.
Questions for Submissions
- Do you have any evidence or view that affirms or rejects the assumption that under current New Zealand law creditors will have both the commercial judgement and incentives to support rehabilitation where it is most viable?
- Do you believe that the interests of the business and creditors as a whole would be enhanced by introducing a more comprehensive business rehabilitation regime that includes a stay on secured creditors?