Nature and Magnitude of the Problem and the Need for Government Action
New Zealand's presently limited business rehabilitation regime contained in Part XIV of the Companies Act 1993 allows company directors, among others, to seek a moratorium or stay on debt proceedings against the company while a proposal to enable rehabilitation of the company is being developed. This stay is not automatic, but is granted at the discretion of the High Court on a case by case basis. The stay does not apply to secured creditors.
The Part XIV procedure has not been greatly used and anecdotal evidence suggests it is not well understood. There are only on average 20 compromises with creditors each year under the Part XIV procedure, compared with the approximately 600 to 800 liquidations and 200 to 400 receiverships registered with the Companies Office each year.
There are two key problems with the current Part XIV procedure:
Individual v Collective Creditors Interests
The lack of an easily initiated general moratorium or stay, prohibiting all debt recovery attempts by individual creditors, means that the current regime prevents rehabilitation from occurring except in those cases where all parties agree. This means there are situations where a minority of creditors, in seeking to recover their debts, can put their interests ahead of the majority.
Inhibitive Transaction Costs
The expense of seeking to have statutory demands set aside will often be enough to deter an individual creditor from acting for the collective benefit of all creditors and seeking rehabilitation.
In addition to the problems identified above, there are a number of other reasons why the Part XIV procedure needs to be reformed.
New Zealand's current business rehabilitation regime differs from that of Australia and the absence of a workable reorganisation procedure in New Zealand means that our regime does not conform with international best practice. This represents an impediment to economic activity. Overseas investors may be deterred from investing in New Zealand if they perceive differences between New Zealand's insolvency regime and that of other countries.
A lack of co-ordination with the Australian approach to business rehabilitation, Voluntary Administration, also means that it is technically difficult and costly to conduct rehabilitations for the growing number of businesses that operate on both sides of the Tasman. This is significant as Australia is New Zealand's largest trading partner.
The lack of an automatic stay on all debt recovery measures within the current regime effectively inhibits business rehabilitation except in those few cases where all parties agree. Therefore, in effect, the current regime promotes liquidation. This means that New Zealand presently does not accrue the economic benefits of having an effective business rehabilitation regime consistent with international best practice.
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