OPTIONS FOR COMPANIES IN FINANCIAL DIFFICULTY

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1 OPTIONS FOR COMPANIES IN FINANCIAL DIFFICULTY

2 WHY CHOOSE McDONALD VAGUE? VAGUE McDonald Vague is New Zealand s leading business recovery and insolvency firm, and has been in existence for over 20 years. Our value proposition is simple - we achieve the best possible outcome for you. We are known for our track record of proven results and our commitment to:- Responsible fee management Maximising returns Direct access to Partners Trust and integrity form the basis of all our relationships We re down to earth and easy to work with. We believe in open communication, listening well, keeping you informed and always being available and responsive. We are a midsized firm with the resources to handle major projects, but very personal when it comes to our client relationships. We strictly follow professional rules and ethics, and offer independence, service and integrity. National resources and capabilities We have around 16 full-time people on our staff. This includes three Partners and two Directors. We also have a number of experienced consultants that we can call upon as and when required. Our offices are located in Auckland and Hamilton. We are a member of the New Zealand Institute of Chartered Accountants (NZICA), INSOL (international body of insolvency specialists) and NZCA (an association of independent Chartered Accountants). We are able to undertake assignments anywhere in New Zealand and can align with a local NZCA firm for assistance. McDonald Vague will still control the assignment and ensure the same high level of expertise and service is maintained. Our clients benefit from the associated firm s local experience, as well as more cost effective fees as our travel expenses are reduced. A wealth of experience We have experience in virtually every business sector. Some areas we have particular experience in are:- Property and construction Agribusiness Hospitality Financial services Retail

3 IF YOUR BUSINESS IS WE CAN STRUGGLING, WE CAN HELP We recognise that it is stressful when your business is in financial difficulty. As New Zealand s leading business recovery and insolvency practice we have a wealth of expertise advising clients in financial difficulties across a range of industries. Company owners are frequently unaware of the options available to them. When a business recovery firm is engaged early enough, there will often be options available to restructure a company and negotiate new terms with its bankers, other creditors and customers. The benefits of seeking advice sooner rather than later By not exercising these options early enough, companies may find that outcomes are forced upon them by external parties. If a company continues to trade whilst insolvent, its directors potentially face personal liability. They may also face prosecution from the Inland Revenue Department ( IRD ) for failure to pay over PAYE and GST. IRD is taking an increasingly tough stance on this issue and conducting numerous prosecutions. We also regularly deal with directors who, together with family members, have sunk further money into a clearly insolvent business that has passed the point of no return. By taking advice early, such losses may be avoided. We work with you and your accountant/solicitor to guide you through the many pitfalls and legal issues that you can face. If your company is potentially facing insolvency, we may be able to help you identify ways to restructure it and get it back on track. Or if insolvency is the only realistic option, we can guide you on the various options available. This guide aims to provide a basic understanding of the concepts involved in insolvency. However, every situation is unique, so please contact one of our Partners if you wish to discuss your own circumstances. Regardless of whether you wish to save or close your business it is vital that you get professional advice.

4 INSOLVENCY OPTIONS Do you make the decision or is it made for you? Option Creditors compromise Voluntary administration Receivership Voluntary liquidation Court appointed liquidation Who decides Usually the directors (subject to creditor approval) The directors, or a creditor with a charge over all, or substantially all, of the company s property A security holder under the terms of a General Security Agreement The shareholders by special resolution The High Court, following a creditor s application CREDITORS COMPROMISES The purpose of a compromise is to enable a company to avoid liquidation, by trading out of its difficulties. In this way the company can survive into the future. A compromise is an agreement between a company and the various classes of creditors. Most compromises have two basic features:- Creditors will be repaid in full or in part over a period If they are paid in part, creditors write off the balance of their debt During the term of the compromise, debts are frozen and no creditor may take action against the company. For a compromise to succeed it must be approved by a majority in number, representing 75% in value of each class of creditor voting for the proposal. The creditors will need to be convinced that they will get more money than they would if the company was placed into liquidation. They must also have confidence in the insolvency expert who prepares and manages the compromise. McDonald Vague can prepare your compromise in a professional manner, in which creditors will have confidence. This will give your company an opportunity to survive.

5 VOLUNTARY ADMINISTRATION Voluntary administration Voluntary administration is a relatively new business rehabilitation scheme that was introduced into New Zealand company law in Voluntary administration provides a company in financial distress with breathing space from creditors, to allow an insolvency practitioner to review and rearrange its affairs. The purpose of voluntary administration is for the company to either avoid liquidation, or to provide a better return to creditors than in a liquidation. After voluntary administration, the company may either be returned to its directors (this is very rare), placed into liquidation or a Deed of Company Arrangement may be entered into with creditors. Voluntary administration is fairly complex and expensive, and is therefore more appropriate for larger companies. When is administration appropriate? The critical determinants as to whether administration will be appropriate are:- Whether the company has the support of any General Security Agreement holders (who can appoint their own receiver or administrator) Whether the benefits to creditors of a continuation in trading or of a deferral of liquidation are likely to exceed the benefits for creditors achievable by any other means Other factors will include:- The extent, nature and spread of the company s liabilities The attitude of key suppliers The history of the company s dealings with creditors The availability of cashflow

6 RECEIVERSHIP A receivership appointment is made by a General Security Agreement ( GSA ) holder (previously known as a debenture holder). This may be a bank, or a private lender who has taken security for its debt. Receivership is governed by the Receiverships Act What is the difference between receivership and liquidation? A receiver s primary duty is to recover funds for the secured creditor. He or she reports to that creditor only, whereas a liquidator acts for and reports to the general body of creditors. Although a receiver has a duty to protect the rights of other creditors, his or her powers are limited. Once the GSA holder is repaid, the receiver ceases to act. If there are further assets to be realised or matters requiring investigation, a liquidator must also be appointed. A liquidator s powers are much wider than a receiver s. Liquidators have investigatory powers, and powers to set aside insolvent transactions and bring other actions not available to a receiver. LIQUIDATION The purpose of liquidation is to realise a company s assets and distribute the proceeds to creditors. Once the liquidation is complete, the company is struck off the register. The procedure for liquidations is set out in the Companies Act Voluntary liquidation For most insolvent companies with no realistic prospect of trading out of their difficulties, voluntary liquidation is the most appropriate course of action. The process is very simple and normally just involves the shareholders signing a written resolution to appoint liquidators. Ideally we will meet the directors at an early stage, identify the issues involved and take possession of the company s records. We can then start the liquidation immediately. This invariably produces a better outcome than a court appointed liquidation, where there is usually a lengthy delay before liquidation occurs. In most cases our fees are payable solely from the assets realised and there is therefore no cost to the shareholders in appointing liquidators. It is important to note that if a company has been served with a winding-up application by a creditor, this option is only available within 10 working days of the application being served. We therefore strongly recommend that directors or their advisors contact us immediately if they receive a winding-up application. Court appointed liquidation This occurs when a company is insolvent but the directors/ shareholders have not taken action to appoint a liquidator. In this situation it is the creditor, not the shareholders, that decides who is to be appointed liquidator. This, and the lengthy delays associated with the court process, are reasons why voluntary liquidation is usually preferable.

7 MORE INFORMATION For further information on any of the options outlined in this brochure, or to discuss your own company s situation, please contact one of our Partners. Our advice is provided confidentially and does not commit you to appointing us in any formal capacity. We also have team members who are fluent in Mandarin and Dutch.

8 Boris van Delden Partner DDI (09) Mobile Peri Finnigan Partner DDI (09) Mobile Tony Maginness Partner DDI (09) Mobile McDonald Vague The Insolvency & Business Recovery Specialists Level 10, 52 Swanson Street, Auckland Central Telephone (09) Facsimile (09)