5. Consultation Points: Business Rehabilitation
5.1 Summary of the Paper on Business Rehabilitation
In Part 3 of the report, the Commission considers whether New Zealand should introduce a business rehabilitation regime into its insolvency laws.
The Commission summarises relevant economic and legal considerations in making that decision and comes to the conclusion that New Zealand's insolvency laws could be improved by introducing a targeted business rehabilitation regime.
The Commission outlines the benefits to be gained from business rehabilitation and recommends the removal of tax disincentives for debtors entering into compromises with creditors. The report also notes INSOL International's guidelines for conducting informal workouts.
The Commission outlines a proposed rehabilitation regime, together with other suggested amendments to the present law. The Commission recommends that the regime be focussed on the activity of the business rather than the form of the entity, and have strict entry criteria. The Commission details the specific features of the proposed regime and then sets out the advantages of the regime.
5.2 Problem Definition
In considering whether there is any need to introduce a general rehabilitation regime into New Zealand containing stays against secured and unsecured creditors, the Commission has found no evidence of any problem that needs to be remedied (paragraphs 227 and 233). However the Commission also reaches the view that New Zealand's insolvency laws could be improved by the introduction of a targeted regime (paragraphs 234-8).
20. Do you agree with the Commission that no problem exists because of the lack of a rehabilitation regime in New Zealand?
21. Do you agree with the Commission that a rehabilitation regime be introduced? What are the risks (both fiscal and non-monetary) associated with introducing or not introducing a rehabilitation regime?
22. Do you believe the lack of an automatic stay or moratorium (mandatory suspension of actions and proceedings against the property of the entity) against all creditors in the current statutory procedures prevents companies from being rehabilitated?
23. Do you agree the factors taken into account by the Commission are appropriate in deciding whether to introduce a rehabilitation regime (paragraph 216)? Should other factors (e.g. the impact of any changes on the cost of credit) be taken into account?
5.3 Informal Workouts
The Commission sets out guidelines for conducting informal workouts whereby debtors and creditors can reach a compromise without using the regulatory regime and recommends consideration be given to removing the tax liability for written-off debt of debtors that enter into collective compromises (paragraph 239).
24. Should the Government encourage informal workouts and if so, how?
25. Do you think the provision of a tax incentive to debtors would encourage compromises with creditors? Is this likely to lead to an increase in collective compromises? What other benefits may flow from this recommendation?
5.4 Current Regulation
In outlining a proposed rehabilitation regime, the Commission also suggests amendments to the present law, in particular:
- that Part XIV Companies Act 1993 does not require significant alteration, but recommends its provisions be synthesised with Part XV of the Insolvency Act 1967; and
- that Part XV of the Companies Act 1993 be repealed.
26. What are your views on these proposals? In particular, can the procedural requirements of Part XIV be improved? Is the operation of Part XV of the Companies Act 1993 uncertain? Should the legislation ever allow compromises to be imposed on creditors where a significant number do not agree? Should Part XV be repealed?
5.5 Law Commission's Proposed Regime
The Commission proposes that a new rehabilitation regime be introduced, but with strict entry criteria. The main features suggested are:
- Entry into the regime would require a court order. The proponent would need to satisfy the court that the business' records will enable a prompt assessment of its future viability to be made, that there is a real prospect that creditors will accept the proposal, and that once the proposal is implemented, the business will be able to satisfy the solvency test;
- Once an order is made, a 14-day stay on all creditors' claims (secured and unsecured) will come into effect. There is provision for a further 14 day extension; and
- An impartial administrator would also be appointed to carry out an investigation, negotiate with creditors, protect the assets of the business, and oversee the existing management.
27. What do you think are the advantages and disadvantages of this regime? Do you agree with the Commission's entry criteria? Why?
28. How important is the issue of cost in the design of the regime? Would the cost of entry into the Commission's proposed regime be prohibitive? How can the costs of reporting requirements and court applications be balanced with accessibility issues?
29. Would greater accessibility to rehabilitation procedures encourage debtors to address financial difficulties as early as possible?
30. Who should be able to initiate the rehabilitation process? Should creditors, as well as the debtor, be able to initiate the process?
31. What are the risks attached to the introduction of a stay against creditors, as recommended by the Commission? Should secured creditors retain any powers during the rehabilitation process? In what circumstances might a secured creditor be able to veto a rehabilitation?
32. Do you agree with the Commission that a 14-day stay, which may be extended for a further 14 days, is adequate? Why?
33. Who should control the debtor entity during the stay? Should there be an impartial administrator, or should management of the company continue on? What checks and balances might be put in place?
34. How extensive should the powers of the impartial administrator be? What powers and duties should the management of the debtor have during the stay? Do you agree with the Commission that decisions by management should be subject to veto by the administrator? Do you think that management should be prohibited from using the debtor's existing capital?
35. What other statutory requirements would be necessary for the duration of the stay?
36. What other options may exist to deal with this problem? What would be the key features of an alternative regime?
5.6 Corporate vs. Business Rehabilitation
The Commission recommends the rehabilitation regime should focus on saving the activity of the business rather than the form of the entity. A general rehabilitation scheme, then, would apply to individuals and companies.
37. Do you agree with the Commission that less legislation will be required if it is the core business, and not the corporate shell, that is the subject of rehabilitation?
38. Do you agree with the Commission the risk of inconsistency in legislation will be reduced by their recommendation? Will this help ensure consistent policy?
39. What are the implications of the Commission's recommendation for individuals in business? What risks would be borne by sole traders and other individuals in business if a general business rehabilitation scheme was adopted? Are there any other risks?
40. Would these risks be outweighed by the benefits outlined by the Commission?
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