Statement of the Net Benefit of the Proposal
A business rehabilitation regime with an automatic stay that binds all creditors (option four) would have a number of benefits and costs for different stakeholder groups. These are outlined below.
Businesses
Benefits
- The regime could provide some failing, but viable, businesses with an opportunity to develop a plan so they can trade on. This would assist in preserving the economic value of that business (for the benefit of all stakeholders).
Costs
- There would be costs to businesses in using the new regime. However, these costs would be no greater than those currently faced by businesses in liquidation and receivership procedures. The costs to small to medium sized businesses in using the Voluntary Administration procedure in Australia are on average between A$20,000 to A$50,000. These costs result from paying Administrators and legal fees.
- The cost of allowing a company to trade on which, in some cases, may further erode its value. However, such inappropriate application of the regime could be avoided through certain design features, such as the ability of creditors to petition the Court to end the rehabilitation procedure.
Creditors
Benefits
- The regime could provide for a more measured distribution of the assets of a company if does eventually fail (as compared to liquidation and receivership procedures), thereby increasing overall returns to creditors.
- The regime could lead to increased returns for creditors. Australian studies suggest that Voluntary Administration produced an average return to creditors of between 21.5% to 10%, compared to an average return of 7.35% in company wind-ups.
- The regime could minimise the loss for creditors and others who deal with the insolvent company from having to re-establish business relationships with another entity.
Costs
- A possible increase in the cost of credit as a result of the inability of creditors to enforce contractual rights during a stay on proceedings against the company. However, this effect has not been observed in Australia due to the operation of Voluntary Administration.
Employees
Benefits
- The new regime could protect workers jobs and provide redundant workers with more time to find employment elsewhere.
Costs
- The operation of the regime could mean that employees would have to at least wait for the period of the stay to end before they receive their entitlements. However, this delay would unlikely be any longer than that experienced by employees in liquidation and receivership procedures. This cost to employees could also be avoided through certain design features, such as giving employee entitlements a special priority.
The Economy
Benefits
- Business rehabilitation provides a more managed and orderly wind-up of insolvent businesses and therefore can minimise the social and economic impacts and negative flow on effects of business failure. Business rehabilitation can assist in mitigating against any domino effects of business failure in the economy, where the failure of one business leads to the failure of other dependent or connected firms.
- Business rehabilitation could improve the overall operating environment for New Zealand businesses.
Costs
- An increase in the costs of credit (as described above) could have an inflationary effect, although this has not been observed to date in Australia.
After considering the potential benefits and costs of option four, it appears that the co-ordination of New Zealand's business rehabilitation regime with the Australian Voluntary Administration regime would have a net benefit.
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