Submission to the Commerce Select Committee on the Draft Insolvency Law Prepared by Grant Thornton 7 April 2006
2 Contents Introduction 3 Key issues Not Addressed by the Draft Bill 4 Recommended Changes to the Draft Bill 6 Minor Housekeeping Matters within the Draft Bill 11 Appendix: Grant Thornton 12
3 Introduction We are pleased to have an opportunity to present this submission on the Draft Insolvency Law ( the Bill ). We highlight key issues that we believe need to be addressed by the Commerce Select Committee ( the Committee ). We have confined our comments on the Bill to the proposed Voluntary Administration ( VA ) and changes to the Companies Act 1993 since these are areas in which we have significant experience and expertise. We would like the opportunity to make an oral submission to the Committee should this be available. Richard Simpson Chairman Grant Thornton New Zealand Recovery and Reorganization Task Force Grant Thornton P O Box 10-712 Wellington T 04 495 3772 E rsimpson@wn.gtnz.co.nz
4 Key issues Not Addressed by the Bill Equity & Fairness We consider that there are differences in the Bill to the stated public policy objectives of seeking to distribute the proceeds to creditors in accordance with their pre-insolvency entitlements and we question whether one group needs priority to one or other creditors. Inland Revenue in New Zealand continues to be given priority to the other creditors of an insolvent company. In our opinion this runs against the general principles of fairness and equity associated with insolvency. For example, neither Australia nor the United Kingdom has any statutory preference for Inland Revenue debts. Further, commentators in Australia have indicated that much of the success of VA in Australia has been because the Australian Tax Office has not been given any preference. Therefore, we consider that the continuing preference for Inland Revenue will do little to change the current level of distributions from an insolvent company. New Zealand VA to Mirror Australian VA & Registration of Administrators to be Concurrent with Enactment of Bill We consider that the New Zealand adoption of the Voluntary Administration ( VA ) should mirror the Australian model under which insolvency practitioners are required to be registered. To ensure that the acceptance of VA by the business community as a viable alternative to liquidation, we recommend that the registration of administrators be enacted at the same time. We believe registration is essential as the skills required to run a company for any period of time will require significant business skills and experience and ethical behaviour. The VA regime requires a detailed report to be prepared of the company s present financial position, its historical performance, the determination of any offences and what its future prospects are, as well as running the day-today operations of the company. This is not a job for the inexperienced, unqualified and unethical. We also consider that the New Zealand adoption of the VA should include the changes that were recommended by the Australian Corporations and Markets Advisory Committee (CAMAC) and be fully reflected in the New Zealand VA.
5 Tax Losses to be Available We note that Australian legislation allows for the transfer of tax losses if the business is sold, but this is not so in New Zealand. Allowing the purchaser of the business to gain the benefits of the tax losses would clearly enhance the value of the company and the returns to creditors. No Personal Liability for Company s Tax Debts We are concerned by the omission from the New Zealand legislation of any personal liability for Directors for the tax debts of the Company. This is we believe one of the features of the Australian VA that encourages Directors of companies to take early action if the company is encountering trading difficulties. The general view of insolvency practitioners is that the earlier a company responds to its financial difficulties, the better its prospects of a successful rehabilitation. We therefore consider that the incentive of a Director being personally liable for a company s tax debts may encourage the early appointment of an administrator.
6 Recommended Changes to the Draft Bill Can the Administrator Give Clear Title? Section 239U(c) of the draft Bill does not indicate whether the administrator can give clear title should any property be disposed of by the administrator. We consider that this needs to be clarified to enable any purchasers of property from an administrator to be certain of clear title in the property. We recommend that the draft Bill incorporate a provision similar to section 30A Extinguishment of Subordinate Security Interests of the Receiverships Act 1993. Administrator s Powers We consider that the word unable in section 239V(2)(c) of the draft Bill should be changed to empowered to allow the administrator to take such actions as he or she requires, rather than the more negative connotations of unable. Notice to Terminate Employees We do not consider that the section 239Y(3) of the draft Bill is necessary in a VA. The section states that an administrator is personally liable for the payment of wages to employees during the administration, unless the administrator has lawfully given notice of the termination of the contract within 14 days of appointment. We consider that the termination of the employee s contracts simply to avoid any personal liability to the administrator appears to defeat the purpose of the apparent stay on contracts and actions that the VA regime looks to promote. Director to Attend Watershed Meeting We think section 239AW of the draft Bill needs further work. This section requires a Director to attend the Watershed Meeting (unless they have valid reasons for not attending the meeting), but the Director is not required to answer any questions (presumably on the grounds that they may incriminate themselves for any future actions that a liquidator may take). We are unsure of the intent of this provision and recommend that it be removed.
7 The Director ought to know more about the company s affairs than anyone else. It seems reasonable to us that creditors who may consider proposals for a company s rehabilitation should be able to ask the Directors for any additional information needed to help creditors reach a decision. Reporting Timeframe Too Tight We are concerned that the 20 working days is insufficient time for the administrator to gather sufficient financial information, historical data, industry trends and prospective information to prepare a report for creditors. Our experience with many insolvent companies is that management simply have no idea what the company s current financial position is. Frequently the accounting records are incomplete. An administrator will be required to run the day-to-day operations of the company whilst being required to prepare the report on the company s affairs and future prospects. Usually, a lot of work will be required. We note that a liquidator appointed by the New Zealand High Court has 25 working days in which to provide a report to creditors, shareholders and the Registrar of Companies. We note also that a receiver under the Receiverships Act 1993 is required to report on the state of affairs of a company in receivership not later than 2 months after their appointment. We consider that the nature of a receivership appointment has far more in common with VA than liquidation and therefore consider that the reporting timeframes should reflect the complexity of the work required. We understand that Australian insolvency practitioners have questioned the adequacy of the time period available for the first creditors meeting and the subsequent Watershed Meeting. We understand for example, that the Australians are considering extending the period for the Watershed Meeting from 20 to 28 working days. We recommend the extension of the reporting date to 28 working days from the date of appointment of the administrator. A liquidators report is much more limited than will be required of administrators. Bar set too High at 75% Majority for Acceptance of Deed of Company Arrangement ( DOCA ) Our experience with Creditors Compromises under the present Companies Act 1993 is that the 75% threshold for acceptance by creditors of a company is very difficult to achieve. The stumbling block will often be Inland Revenue, which may have a significant debt and has no motivation to compromise because of its statutory preference. We do not see this situation changing under VA, where a simple majority in number but 75% by value is required to accept the DOCA. We consider that a simple majority by value will increase the likelihood that VA s will be approved.
8 Approval of the DOCA We are unclear of the intent within section 239ACP of the draft Bill. It appears from our reading of the section if a DOCA is not approved at the Watershed Meeting, the administrator can make changes to it, creditors can inspect and comment on the amended DOCA but no additional meeting is required to approve it. The deed administrator executes the DOCA as though it were approved at the Watershed Meeting. It appears from our analysis that this section contemplates that any changes to the DOCA were agreed on at the Watershed Meeting by the creditors and that these are only the drafting changes that need to be made. We consider that another meeting may be required to approve the changes to the DOCA unless the DOCA has been amended exactly as agreed at the Watershed Meeting. Administrator Liabilities We are concerned that section 239ADI (2)(c)(i) of the draft Bill does not end the administrators liability (for rent in this section) with his or her resignation, removal or death. The administrator s liability appears to cease at the end of the administration. That may be some time after the administrator ceases to act. We consider that an administrator s liability should cease when they cease to act as administrator. Other Duties of Liquidator We welcome the inclusion of section 467 of the draft Bill (new section 255(2)[c] of the CA) and support the requirement to provide a list of creditor names and addresses to all known creditors. Liquidator may assign Right to Sue under this act We welcome the inclusion in to the draft Bill of Section 468 (new section 260(A) of the Companies Act) that allows a liquidator to assign the right to sue to another party. Qualifications of Liquidators We have significant concerns with the drafting of section 471(1) of the draft Bill. We consider that there should be an exception in clause (ca) of section (1) that allows a liquidator to be appointed to a solvent company, where that person or firm has provided accounting services. We believe there needs to be a clear line between the differing situations of a solvent and insolvent company. If the company s directors have completed a solvency certificate we see no reason why a liquidator cannot be appointed to the company, even though the liquidator, or the liquidators firm, have provided accounting services to the company in the previous two years.
9 We believe the proposed disqualification is likely to add to the cost of solvent company liquidations. We do agree that the provisions of section 471(1) should apply to the liquidation of insolvent companies Section (cb) we believe also requires some clarification. We are unsure of the meaning of continuing business relationship recorded in this section and how it is to be defined. The clause appears to disqualify a liquidator from acting if the company had used the same banker as the liquidator, where the liquidator s bank is also a secured creditor of a company. Most liquidators take insolvency appointments in respect of other companies from some or all of the New Zealand banks. This may mean that the pool from which to choose administrators and liquidators is very small. Status Quo for Voidable Transactions We consider that the cost and burden of proof for challenging a voidable transaction will now fall upon the liquidator. Sections 474 to 479 of the draft Bill will amend and repeal sections 292 to 297 of the Companies Act 1993 ( CA ) and will require the liquidator to commence legal proceedings against any creditor who simply objects to the challenge by the liquidator to set aside the transaction. In our view, some creditors will therefore gain an advantage over other creditors, as the liquidator (who acts for all creditors) will need to carefully consider the costs and risk associated with challenging any particular transaction. We consider that the proposed changes to voidable transactions will clearly reduce the amount that can potentially be returned to creditors, as only substantial and strong claims will be challenged. We therefore consider that the current process whereby on service of a notice by a liquidator, the creditor has to bring proceedings that the transaction should not be set aside, strikes an appropriate balance between the interests of all creditors, and for whose benefit the voidable transactions exist. We note also that new section 292(3) of the CA will make a salvage payment made by a Receiver to salvage property or goods to be challenged by the liquidator. We consider that there are situations where a receiver is left with no recourse but to pay a particular creditor to continue the operations of a company in receivership and to allow that type of transaction to be challenged may complicate receivership practice. Phoenix Companies We welcome the introduction of the Phoenix Companies provisions as part of the measures to combat the abuse of insolvency procedures. We note the changes to combat the situation of a phoenix company trading before the failed company goes into liquidation have now been included in the draft Bill.
10 Administrators Cost Ranking behind Liquidator We consider that the proposed 7 th schedule of the Companies Act 1993 ( CA ) needs to be amended to give preference to the administrator costs. We consider it unfair that the administrator should rank behind the liquidator in terms of priority for fees and costs, given that they have been appointed to try and rehabilitate the company before a liquidator is appointed.
11 Other Housekeeping Matters within the Bill A Charge The draft Bill refers to a charge in a number of sections. With the introduction of the Personal Property Securities Act 1999 ( PPSA ), we consider that all references to a charge should be consistent with the PPSA description of a security interest. The Bill contains a significant number of clauses that refer to a charge as opposed to a security interest. Death of an Administrator We noted that a number of clauses do not consider the likelihood of an administrator dying in office. We consider that this occurrence should be included in clauses that relate to the appointment or removal or otherwise of an administrator. Minor Drafting Error We have noted a cross referencing error in Section 239ABK(a)(i). The cross reference in this section should apparently be to Section ADW(1)(c).
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