Statement of the Feasible Options
Option One - Preserving the Status Quo
Preserving the status quo would mean that New Zealand continues to have business rehabilitation regime that promotes liquidation. The benefits of a regime which favours liquidation are that it:
- Encourages individual creditors to monitor debtors and to act early when repayment issues arise;
- Encourages the movement of resources from poorly performing management and firms to more efficient firms (economic efficiency); and
- Is in the case of some businesses shorter, administratively cheaper and simpler than business rehabilitation.
The key cost (or disadvantage) of a regime that favours liquidation is that New Zealand will not reap the economic benefits of an effective business rehabilitation regime.
Option Two - Education Programme
A programme to educate stakeholders in the use of the current procedures was considered, but has been discarded. This option would be ineffective in addressing one of the fundamental problems with the current regime, which is the lack of an automatic stay binding all creditors.
Option Three - Amendments to Strengthen the Current Law
This option would involve retaining the status quo (i.e. no stay against secured creditors), but also proposes introducing an automatic stay against unsecured creditors. Part XIV of the Companies Act 1993 could be strengthened to reduce opportunities for a minority creditor to defeat the interests of the majority by including an automatic rather than a court-ordered stay on actions by unsecured creditors.
As option three does not include a stay against secured creditors it is considered that it will be a less effective than option four as form of business rehabilitation. Under option three the actions of secured creditors seeking to recover their debts would likely mean that the opportunity for rehabilitation of businesses is diminished. A New Zealand regime that is not co-ordinated with the Australian Voluntary Administration regime could also prove problematic in the instance of the rehabilitation of a business operating on both sides of the Tasman.
Option Four - Co-Ordinate with the Australian Voluntary Administration Regime
This option would involve co-ordinating the New Zealand regime with the Australian Voluntary Administration regime.
The Australian regime involves the appointment of an Administrator who has control of the failing company's business and property. When a company is under Administration there is a stay on actions against the company and its property. This stay applies to secured and unsecured creditors for a period of 21 or 28 days. The stay prevents the company from being wound up and from charges being enforced against the company by creditors seeking to recover their debts. Within the period of the stay the Administrator must convene a meeting of creditors to decide and vote on the company's future. The options are a deed of company arrangement is executed, the administration ends or the company is wound-up. If a deed of company arrangement is executed it is binding on all creditors and officers of the company.
Option four is the preferred option. A regime with a mandatory stay preventing secured creditors from taking recovery action during the development of a rehabilitation plan may result in earlier action, a more orderly wind-up of companies and higher returns to creditors. A stay of this type would likely result in greater use of the business rehabilitation procedure and possibly a higher percentage of successful rehabilitations of economically viable companies. Co-ordinating the New Zealand regime with that of Australia will also mean it would be easier and less costly to conduct rehabilitations for the growing number of businesses that operate on both sides of the Tasman.
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