Part D - Design Issues
Adoption of the Australian Approach
78. The Australian approach to business rehabilitation, voluntary administration, is outlined in Appendix I of this paper. If New Zealand were to adopt a business rehabilitation regime which includes an automatic stay against secured creditors, there are strong reasons to consider adopting the Australian approach to business rehabilitation or parts of that approach.
79. There are a significant and increasing number of firms which conduct business on both sides of the Tasman. As capital markets become more integrated and as barriers to the supply of goods and services from New Zealand to Australia and vice versa are reduced, it has become more common for firms to have both assets and creditors in both countries.
80. Because of the increasing incidence of trans-Tasman and international companies and transactions, and in order to encourage greater trans-Tasman activity, it is important that New Zealand has insolvency laws that minimise the transaction costs for a company operating in both jurisdictions.8
81. Where a company does operate in both Australia and New Zealand, a rehabilitation regime that applies in one country and not the other is unlikely to fully achieve its objectives. For example:
- A creditor is likely to be able to circumvent the stay by taking action in the other country, thereby preventing the company from trading on as a going concern; and
- If the stay in one country begins at a different time from the stay in the other or ends earlier, the effective length of stay will be limited to the period where the stay is operative in both countries.
82. In recognition of the benefits of co-ordinating Australian and New Zealand law in this area, the discussion of design issues in this paper reflects a presumption in favour of following the Australian approach, unless there are good reasons to take an alternative approach.
Question for Submissions
- If New Zealand were to adopt a new business rehabilitation regime then should we co-ordinate with the Australian voluntary administration procedure? What further reasons for and against co-ordinating with the Australian approach can you think of?
Business Rehabilitation Design Issues
83. The previous section of this paper noted that if New Zealand were to reform its business rehabilitation regime along the lines of one of the two broad options previously stated, then there would be benefits in adopting the Australian approach. Assuming that New Zealand might want to reform its business rehabilitation regime and adopt the Australian approach, the next section of the paper identifies the other important issues that would need to be considered in the design of a business rehabilitation regime and for each issue:
- Describes the Australian approach;
- Assesses the viability of adopting the Australian approach; and
- Considers whether there are any reasons to adopt an alternative approach.
Safeguards for Creditors
84. A key risk of a stay against secured creditors is the potential for an abuse of the procedure by the owners and/or the directors of a business. For example, the stay might be used to delay an inevitable liquidation with funds and assets expended or transferred defeating the interests of creditors. However, the potential for this can be minimised by certain design features.
85. In Australia, major secured creditors have the ability to enforce their security within 10 days of the initiation of an administration.9 This prevents shareholders from using the procedure to defeat the interests of those creditors.
86. The Court also has the power to make such orders that it thinks fit in relation to a particular company. For example, if the Court is satisfied that the administration should end because provisions of Part 5.3A of the Act are being abused, it may order the administration is to end.10 An order may be made on the application of various interested people, including a creditor. The Court is also able, on the application of a creditor or ASIC (the Australian Securities and Investments Commission), to make any order it thinks necessary to protect the interests of a company's creditors while the company is under administration.11 In addition, creditors have the ability to apply to the Court for the removal of an administrator.12
87. The Australian safeguards provide a balance between the interests of an efficient administration and the interests of secured creditors. While there was some initial concern about the ability of major secured creditors to thwart administration and rescue attempts,13 to date, there appears to be little evidence that this has occurred. A recent study reported that 80% of the sample companies in administration were subject to substantial charges, but that the vast majority of chargees allowed the administration to proceed.14
88. There are no other features unique to New Zealand that would appear to rebut the presumption in favour of adopting Australian law in this area.
Question for Submissions
- Do you consider that the Australian safeguards of the interests of creditors are sufficient? Would you support the adoption of these safeguards in a New Zealand business rehabilitation procedure? Why or Why Not?
Initiation
89. A business rehabilitation regime will generally provide for the process to be initiated in one of two ways:
- By filing of notice by a permitted party (resulting in an automatic stay of proceedings by creditors); or
- By application, generally, to a court (which will decide on defined criteria whether a stay should be imposed).
90. The stay will vary accordingly, being either:
- Automatic (avoiding the need for a court application and the attached costs in time and expense); or
- Discretionary (which while more costly, will limit appointment of incompetent or "friendly" administrators who consciously act in favour of the debtor).
91. The Australian voluntary administration procedure is initiated by appointment of an administrator in one of three ways:15
- By a resolution of the board of a company;16
- By the holder of a charge over all or substantially all of the property where the charge is enforceable;17 or
- By a liquidator.18
92. The Australian regime has an automatic stay and does not require court proceedings to initiate the administration procedure.
93. The initiation of administration in Australia is usually by the company itself. The ability of the company to initiate the procedure has two benefits - it is less costly than a court-initiated procedure and it provides a mechanism for a company to address any financial issues itself, providing incentives for the company to disclose its financial distress at an earlier point. The key risk of this approach is a perception that the company is able to frustrate the interests of creditors by initiating the procedure. However, as outlined in paragraphs 86 to 88, other features such as the ability to enforce a major security or apply to the court for relief provide some balance between the respective rights of creditors and the company.
94. Another issue is whether the initial stay is automatic or discretionary. Having an automatic stay, as in Australia, would avoid the cost and time required for a court application to enter the rehabilitation process and appoint an administrator. An automatic stay does, however, increase the likelihood of abuse by the debtor as the initiation process is easier and the debtor has an increased opportunity to appoint a "friendly" administrator. These same issues are relevant in considering the ability to extend a stay (see below).
Questions for Submissions
- Do you favour appointment of an administrator by a business, creditor or both? What are your reasons?
- Do you consider that the reduced costs associated with an automatic stay outweigh the benefits of court involvement in the process?
Length of the Stay
95. The length of the stay against creditor action in Australia is 21 days. During this time the administrator must prepare a report for consideration at a meeting of creditors. However, this period is extended to 28 days if the administration begins on a day that is in December or is less than 28 days before Good Friday. The Court may also extend this period on application made within the 21 or 28 days (whichever is applicable).19
96. The New Zealand Law Commission has recommended a stay against secured and unsecured creditors of 14 days, with the ability to extend the stay for a further 14 days.20 Previously, some stakeholders have suggested that 14 days is too short a period of time in which to prepare a realistic proposal.
97. The length of a stay should allow, within reason, for any necessary investigation and assessment by an administrator or other party to put together a viable rehabilitation proposal. The period allowed for the length of a stay must provide a balance between safeguarding the interests of creditors and providing adequate time for the debtor business and its administrator to construct a viable proposal.
98. One issue is that the information available at the initiation of the rehabilitation procedure to construct a financial profile of a debtor will vary considerably from case to case. In many instances, the debtor's current difficulties may be attributed to a history of inadequate accounts and financial statements. For such reasons there may need to be some flexibility in the regime to ensure a genuine assessment can be made of the viability of rehabilitation. This is a feature of the Australian regime.
Question for Submissions
- Can you identify any reasons for departing from the Australian approach in terms of the length of the stay?
Procedure on Failure
99. A related matter to the length of the stay is to consider what should happen at the end of the stay period.
100. The Australian voluntary administration procedure provides flexibility for companies to swap between procedures. At the meeting of creditors to decide the company's future, creditors may resolve that:21
- The company execute a deed of company arrangement; or
- That the administration should end; or
- That the company be wound up.
101. One method to discourage abuse of the rehabilitation process would be to provide for the automatic liquidation of the debtor if, for any reason, the proposal were to fail. At present, under Part XIV of the Companies Act 1993, if creditors do not approve a proposal the company is presumed to be insolvent. If retained in any reform, however, this provision would discourage companies approaching insolvency to use the regime either at all or at least until the business was insolvent. The more incentives there are for debtors to face up to their debts early the greater the returns to creditors are likely to be. An alternative method might be to limit or disallow future use of the rehabilitation regime by a business entity or its principals, or to seek court approval for an alternative action should the proposal fail.
102. As noted above, the purpose of a stay is to allow for required information to be gathered and assessed that is not readily available at the initiation of the procedure. This same information gap can apply to companies that enter the liquidation process. It is possible that during the course of a liquidation administration an assessment could be made that a company might be able to be rehabilitated.
103. As in the Australian regime, a reformed New Zealand regime could define the circumstances in which there could be a conversion from one process to the other and whether the stay would be available in such proceedings.
Question for Submissions
- Do you consider that there are any good reasons for departing from the Australian procedure on the failure of an administration, which allows flexibility for a company to swap between procedures at the end of the stay period?
Control of Management
104. Another issue is deciding who should manage the business during the rehabilitation process.
105. In Australia Division 3 of Part 5.3A of the Corporations Act 2001 provides that the administrator has control of the company's business, property and affairs. They may carry on the business and manage the property and affairs or may terminate or dispose of any part of the business or property. They are also able to perform any function or exercise any power an officer of the company could perform.
106. While a company is under administration within the Australian regime a person cannot perform or exercise, or purport to perform or exercise a function or power, as an officer of the company except with the administrator's written approval.22 Generally, only the administrator is able to deal with a company's property.23
107. An alternative approach is that the existing management could be completely replaced by a team of professional managers who are either representatives of the creditors or fully independent. While this would prevent any possible abuse of the rehabilitation procedure by the original directors there is a risk of a loss in efficiency as the new management take time and incur costs in becoming familiar with the business. On the other hand, if the business is insolvent this could be regarded as an indication that existing management are not up to the task. Proof of fraud by directors will also prevent their involvement in any rehabilitation process.
108. The benefits of the Australian regime include that the existing management will be able to run the day to day business in the short term in the most cost-effective manner. However, it also provides for supervision and decision-making by an external party to prevent the potential for further losses by the company as a result of non-performing management.
Question for Submissions
- Can you identify any reasons to depart from the Australian regime in respect of control of management? In particular, do you consider this regime creates the right balance between the continuing efficient operation of the business and the prevention of further losses to the company?
Post-Filing Finance
109. A related issue to the control of management is financing of the business during the period of the stay.
110. Under the Australian regime, Schedule 8A of the Corporations Regulations 1990 sets out provisions that must be included in a deed of company arrangement. These provisions include an express power for the administrator, for the purpose of administering the deed, to borrow or raise money, whether secured or unsecured, for any period on such terms as the administrator thinks fit. The effect of this provision is to allow the administrator to secure finance for the purpose of administering the provisions of the deed. As the administrator is able to obtain secured finance, the repayment of this debt would take priority over unsecured creditors.
111. In addition, an administrator is expressly able to perform any function and exercise any power that the company or any of its officers could perform or exercise if the company were not under administration.24 This allows an administrator access to the company's existing finances.
112. The New Zealand Law Commission has proposed that management be prohibited from using existing company finances during the stay.25 The Law Commission's proposed regime would therefore require new capital to be provided for the continuation of the business.
113. Prohibiting any use of existing finances may prevent any further losses to creditors but is likely limit the company's rehabilitation potential and therefore inhibit the use of the regime. This may be overcome by giving post-filing finance a special priority, although this is likely to have an effect on the cost of credit if the repayment of the new finance is given priority over existing secured creditors.
Question for Submissions
- Do you consider that there are any good reasons to depart from the Australian approach to post-filing finance and use of existing company funds?
Creditor Voting on the Proposal
114. The assumption in this paper is that a business rehabilitation regime provides a "breathing space" to allow a proposal to be formulated and then presented to creditors for their approval. Creditors would be required to approve the rehabilitation proposal before it becomes binding.
115. In the Australian voluntary administration regime, the voting procedure at creditors' meetings is set out in the Australian Corporations Regulations. The voting procedure used is the same as for company wind-ups under the Corporations Act 2001. Voting is generally decided on a majority of voices by declaration of the chairperson, unless a poll is required by the chairperson, by at least two creditors or by a creditor with more than 10% of the voting rights.26 If a poll has been demanded, a resolution will be carried if:27
- A majority of the creditors voting vote in favour; and
- The value of the debts owed by the corporation to those voting in favour of the resolution is more than half the total debts owed to all the creditors voting.
116. The resolution is not carried if:28
- A majority of creditors voting vote against; and
- The value of the debts owed by the corporation is more than half the total debts owed to all creditors voting.
117. Where there is no clear outcome the chairperson has a casting vote.29
118. The New Zealand Law Commission has recommended the requisite majorities currently used in Part XIV of the Companies Act 1993 (75% of creditors attending a creditors meeting) be retained in a new rehabilitation regime. The Law Commission has also suggested the requirements in the current legislation for voting by different classes be removed.30 Of relevance will be which creditors are bound by the procedure and therefore which creditors, if any, are excluded from voting.
119. A clear and simple voting procedure could attract a debtor to use the rehabilitation regime and encourage creditors to participate in the regime. In setting voting requirements, a balance needs to be found between the need to protect the collective interests of creditors and protecting those interests to such an extent that the regime will be unworkable.
120. The Australian voting provisions apply to all insolvency proceedings. These provisions differ from current New Zealand insolvency voting provisions. However, the existence of differing voting requirements in New Zealand and Australia would cause practical problems in the event of a trans-Tasman administration and could preclude the operation of any mutual recognition regime.
Question for Submissions
- Do you consider that the advantages of adopting voting provisions similar to Australian provisions outweigh the potential costs, which could include inconsistency with other New Zealand insolvency provisions?
The Qualifying Criteria for Administrators
121. An issue that would need to be considered in the design of a new business rehabilitation regime is the possible introduction of criteria for the qualification of administrators.
122. The Australian regime requires the appointment of an independent administrator to undertake key duties following the initiation of the procedure. Under Division 14 of Part 5.3A of the Australian Corporations Act 2001 an administrator must:
- Consent to being appointed;
- Be a registered liquidator; and
- Not fall within a specified category of people that have a relationship with the company.
123. The individuals included under (iii) include:
- A person who is indebted to the company or related company by more than $5,000;
- A creditor of the company or related company in an amount exceeding $5,000;
- An officer of the company or a partner, employer or employee of an officer;
- An auditor of the company or partner or employee of an auditor; and
- An officer of a body corporate that is a mortgagee of property of the company.
124. Registration as a liquidator in Australia is governed by Part 9.2 of the Corporations Act 2001. Generally, the requirements include prescribed educational achievements and at least five years relevant experience. These requirements are set out more fully in Appendix II.
125. Currently New Zealand has no occupational regulation of liquidators. There may, however, be a greater case for adoption of occupational regulation for administrators, given that they would have a more active role in the management of a company. There are various options for addressing these concerns, such as legislative prohibitions on administrators who have relationship with the company and the ability for creditors to replace an administrator.
126. If New Zealand were to adopt qualifying criteria for administrators as part of a new business rehabilitation regime, then there may be benefits in adopting qualifying criteria similar to, or the same as, the Australian criteria outlined above. Under the Trans-Tasman Mutual Recognition Act 1997, adoption of these criteria would mean that New Zealand administrators would be eligible to undertake administrations in Australia and vice versa. This could increase the pool of available skilled and experienced administrators available in both countries. It should be noted, however, that New Zealand insolvency practitioners are currently entitled to gain an Australian registration, provided they meet the Australian criteria.
127. There are also potential costs with implementing an occupational regulation regime for administrators similar to that in Australia. These include the concern that it could present a barrier to entry into the profession which would limit competition and therefore increase administrator's fees. This would make the procedure more expensive and therefore less accessible for smaller businesses.
Questions for Submissions
- Do you think that criteria similar to that in Australia for regulation of administrators would be required in New Zealand for the effective functioning of a business rehabilitation regime ? In particular, can you identify any particular risks associated with having less regulated administrators involved in the management of a company under registration?
- Do you think that the benefits identified of co-ordination with Australia in this area would outweigh the additional costs for New Zealand administrators and businesses wanting to use the procedure?
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