Related Areas for Review and Impact
A review of corporate rescue impacts on other areas of insolvency law or related law, most of which have been proposed for review by the Ministry.
Cross-Border Insolvency
The UNCITRAL Model Law examined by the Law Commission gives scope for signatory jurisdictions to select all or part of the Model Law, and to recognise compatible aspects of another jurisdiction's legislative code. The Model Law encompasses reorganisation procedures such as voluntary administration, administration orders (UK) or Chapter 11. In addition to the Trans-Tasman situation, the Pacific Rim jurisdictions are enacting reorganisation or rescue procedures. While the Model Law eschews any attempt at harmonisation of the world's insolvency laws, a closer approximation of the laws of key trading partners would certainly make cross-border insolvencies more manageable and at lower cost to creditors.
Statutory Management
Any review of statutory management must work closely with the examination of corporate rescue generally. Comment has already been made above.
Group Companies
If any recommendations are made elsewhere in the Review in relation to treatment of corporate groups and insolvency, it may be necessary to ensure that the provisions are consistent with any recommended rescue procedure. In addition it will be necessary to consider how far the objectives of Corporations (Investigation and Management) Act 1989 in relation to complex group structures and financial failure can and should be met within existing or proposed schemes, and how far this gives rise to discrete insolvency, as opposed to regulatory, issues.
Netting
The recently enacted Companies (Amendment) Act 1999 (and related amendments to Reserve Bank Act and CIMA) provide for special provisions in relation to netting in financial markets on liquidation. It would be logical to extend these provisions to any recommended corporate rescue procedure, as happens in the United Kingdom and elsewhere.
Tax
Provisions of the Income Tax Act 1976 which provide for an "accruals" basis of assessment will have to be reconsidered in the context of a business survival objective, and group taxation issues will need to be similarly reconsidered in the light of any new proposals in relation to group insolvencies or group structures.
Secondly, one method of dealing with financing of business rescues may be to provide tax incentives for lenders to companies in distress.
Priority Debts
Since this is the subject of a separate Law Commission paper and separate paper from the Ministry is in process, little need be said. However, it is worth pointing out that in any discussion of whether businesses can be more effectively rescued, so that returns to creditors are maximised, the issue of which creditors benefit from any rescue is relevant. In the recent UK report on Business Rescue, an entire chapter was devoted to the position of the Crown as a preferential creditor. There were two strands to the discussion. First, abolition of some or all of the Crown's priority claims on insolvency would enhance the available unsecured assets for other creditors, thereby making them more inclined to support voluntary arrangements which need creditor approval. Secondly, the attitude of the UK IR and Customs and Excise to companies in distress, and Company Voluntary Arrangements, was described by consultees as "uncommercial", with the agencies adopting a blanket approach rather than looking at the merits of individual compromise proposals. Recommendations were made that the Crown agencies should improve their practice and attitude towards companies in difficulty, given that the size of preferential Crown claims in the UK was in the order of 60-90 million pounds sterling per annum. In response to the report the agencies simultaneously published proposals for adopting a more commercial attitude in the light of their power as preferential creditors, and other powers. In addition they agreed to publish criteria against which rescue proposals would be assessed, agreed to give reasons for rejecting proposals, and agreed to establish an ongoing forum for discussion with insolvency practitioners.33
Any reforms proposed in the Review for other reasons, which have the effect of reducing Crown priority on insolvency, and encouraging the IRD to embrace the concept of corporate rescue in a practical way, will be a welcome contribution to business rescue in New Zealand.
Priority Payment for Costs of Rescue?
The Law Commission in its recent report to the Minister entitled Priority Debts in the Distribution of Insolvent Estates refers to the current provisions, in section 234 of that Act, which ensure that some of the costs of an attempted compromise, at least the costs of convening creditors' meetings, will be paid in priority to unsecured creditors in any eventual liquidation.
Where a receiver or (in other jurisdictions) an administrator is engaged in performing his functions, remuneration and expenses are a priority payment in any subsequent liquidation; similarly where a liquidator is engaged in functions including compromising any of the company's debts and calling meetings of creditors, properly incurred costs will form part of the "liquidation expenses" which will have statutory priority under existing legislation. Indeed, in some jurisdictions such as the United Kingdom the court, when refusing a petition for administration, has discretion to order the costs of that petition to be costs of the winding-up, and where the petitioners presented the petition in good faith the court has allowed directors' costs of a failed attempt at rescue in this way. Where a rescue procedure is not court-initiated, the problem is how to ensure the good faith element, where costs are incurred for which directors or creditors know they will have priority on any liquidation.
Where a compromise is attempted under Part XIV ( or any other provision) which is ultimately unsuccessful, the issue is whether, in order to encourage such compromise attempts, the costs of attempting them should receive priority treatment in any subsequent liquidation. As the Law Commission points out at paragraph 199 of the Report, it is arguable that the present section 234 is limited to initial costs of holding meetings, not any further costs such as the fees of professional advisors.
The Law Commission recommends empirical research be undertaken into whether it would be desirable to provide for such a priority. The Commission refers to the need to ascertain the economic impact of any such new priority.
It is noted that this proposal first arose in the context of Committee J of the International Bar Association suggestion that priority be given where debts were contracted within the context of "some kind of official management or supervision if the debt is contracted with the approval of the appointed management/supervision". (the Committee may or may not have had in mind such procedures as the old Australian or South African Official Management which are court-controlled). This context may provide an appropriate safeguard against unnecessarily incurred costs on hopeless reorganisation attempts. However, it is suggested that the Law Commission is right to be cautious before recommending such priority. While on the one hand it may provide directors with more incentive to take steps to avert failure at an earlier stage, it may also, especially in the absence of a regulated insolvency profession, be a license for practitioners to encourage fruitless rescue attempts at the expense of available funds for unsecured creditors.
Before recommending empirical research, the Law Commission should be asked what questions that research should address, and how such research is feasible. If the research is to be aimed at ascertaining whether current law on priorities provides a disincentive amongst creditors, the company and its directors, to take steps towards a compromise or rescue, it will be difficult to research. As the Commission suggests, there are a number of other factors which may affect directors' perception, such as the inadequacy of current rescue procedures, fear of investigation of their conduct. A more easily researched question (albeit one to which an intuitive answer is apparent) would be whether professionals are discouraged from "rescue" work by the fear of non-recovery of their fees, or whether they regard such work as potentially leading to long-term remunerative work if successful, or as part of a longer term relationship with banks and other clients.
As the Law Commission indicates, the need for a new priority for costs incurred by rescue proponents outside of receivership, liquidation or the company itself, can only really be addressed in the context of whether any new rescue procedure should be introduced, whether or not building upon Part XIV.
The related issue of whether such a priority would be more justified were the Crown to be given powers to recoup payments from directors along the lines of section 588FGA Corporations Law (Australia) is removed from the subject of this paper - those powers are in the context of voidable preference clawbacks by liquidators against the Revenue authorities. However, the defence provided to directors against the Crown under that provision extends to the court taking into consideration whether or not the director took steps to put the company into formal insolvency (voluntary administration). This ties in with "Directors' Duties" below, but if a new procedure such as voluntary administration or a revised Part XIV is forthcoming in New Zealand, any statutory defence to directors' liability for reckless or insolvent trading could also logically extend to covering the costs of directors taking steps to initiate rescue procedures.
Voidable Transactions
An issue may arise as to whether an administrator in any new procedure should have power to challenge voidable transactions. In the United States, for example, the "debtor in possession" has such power through the so-called "strong-arm" provisions, and administrators in the UK can also challenge voidable transactions.
Directors Duties
Two issues arise in relation to statutory provisions in Companies Act 1993, particularly sections 135 and 136. Should any administrator have standing to bring proceedings against directors on behalf of the company?
Secondly, should it be an ameliorating factor, as in Australia, that a director facing liability for wrongful or reckless trading, was party to placing the company in administration to avoid further losses to creditors? The two issues are related, since in the absence of powers for administrators to challenge directors' conduct, provision of such a "defence" may simply mean that a rescue procedure is popular with directors for the wrong reasons, that is, it may enable them to avoid liability or investigation.
The link between voluntary administration, and directors' liability for wrongful or reckless trading is an important one. It emphasises how a balance has to be struck between encouraging voluntary initiation of administration yet preventing directors from being "let off the hook" through administration.
Regulation of Insolvency Profession
When considering the introduction of a rescue procedure involving (if it is recommended) the possible continuation of an ailing company in business, under the guidance or control of a professional outsider, who not only attests to the viability of the initial rescue proposal but also may have wide powers of management going beyond directors' normal powers (for example to override secured creditors' rights), it should be recognised that in most of the major jurisdictions where such a professional is involved to such a degree in the affairs of a company, the professional is licensed by or through the State, and has to show that by reason of education and/or practical experience he or she is qualified for the specialist task of rescue. While liquidators and receivers in New Zealand are also part of an unregulated profession, liquidators do not generally manage or trade a business, but merely wind it up; receivers manage and sell businesses but are largely answerable to their appointor, not to a wider body of creditors. Having said that, administrators in the United Kingdom and Australia are answerable to creditors for their acts and omissions and can be challenged in court for their conduct of the company's affairs. If new procedures are introduced in New Zealand, it is essential that the insolvency profession and other stakeholders, particularly company directors, are given sufficient lead time and training to familiarise themselves with them. Arguably, there is a strong case that formal rescue procedures work best where the insolvency profession is subject to some form of licensing, self-regulation and training regimes.
Personal Insolvency - Proposals
Part XIV Companies Act 1993 was clearly intended to reflect the procedure in Part XIV Insolvency Act 1967 (Proposals). However, that did not happen. If the Insolvency Review has an objective of, where possible, achieving harmony between corporate and personal insolvency, harmonising rescue procedures between individual and corporate insolvency would seem desirable as far as possible. A relatively high degree of harmony and terminology has been achieved in England, and in the United States, Chapter 11 of the US Bankruptcy Code applies to corporate and individual debtors. The subject is also under examination in Australia.
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