Understanding the options available for struggling companies is important for all company directors in businesses facing financial challenges. The choice between receivership, voluntary administration, a company compromise or liquidation depends on the specific circumstances and the desired outcome for the company's stakeholders. Legal and professional advice is recommended to navigate these processes effectively.

What are the options? Please refer to our other articles for more detailed explanation of each option.

1. Receivership:

• Definition: Receivership is initiated when a secured creditor appoints a receiver to manage the secured assets of a company. It's important to note that a company can simultaneously be in receivership and undergo liquidation or voluntary administration.

• Process: The appointed receiver takes control of and deals with the assets that serve as security for the debt owed to the secured creditor.

2. Voluntary Administration:

• Definition: Voluntary administration involves the appointment of an administrator with the aim of reviewing and restructuring the business to prevent it from going into liquidation.

• Objective: The primary goal of voluntary administration is to explore options that could lead to the business's survival and financial recovery.

3. Liquidation:

• Court Liquidation: Creditors have the option to apply to the High Court to appoint a liquidator. This process is initiated when the company is unable to meet its financial obligations, and usually following the expiry of a statutory demand. The process involves the service of a winding up application and a formal court hearing putting the company into liquidation.

• Voluntary Liquidation: Alternatively, shareholders can opt for voluntary liquidation by passing a special resolution. This route is taken when the company recognizes its insolvency or decides that liquidation is the most appropriate course of action.

• Role of Liquidator: A liquidator, a licensed insolvency expert, is appointed to thoroughly investigate and manage the company's assets during the liquidation process.

4. Company Compromise (Part XIV of the Companies Act 1993):

• Overview: Part XIV of the Companies Act 1993 provides a legal framework for a company compromise, allowing businesses facing financial distress to propose arrangements with creditors for the purpose of avoiding liquidation. This option offers a formal mechanism for companies to reach agreements with creditors regarding debt restructuring, repayment plans, or other compromises.

• Procedure: The process involves presenting a proposed compromise to the creditors, outlining the terms and conditions. Creditors vote in classes and if a majority of creditors in number and 75% in value of those voting accept the terms, the compromise can proceed binding those creditors. Compromises provide the company with a structured path to address its financial challenges.

• Benefits: Opting for a company compromise can be advantageous as it allows the company to continue its operations under a revised financial arrangement while providing a more orderly resolution than liquidation. This avenue promotes the preservation of the company's value and may offer a more favourable outcome for both the business and its creditors.

Seeking professional advice is advisable to navigate these options and in makng informed decisions which are in the best interests of the company and its stakeholders.

CASE STUDY
Consider this case study, where a company is technically insolvent (assets are less than liabilities and/or the company is unable to pay debts when they fall due). In this case the company owes trade/unsecured creditors $200,000, has a secured creditor who holds a General Security Agreement (GSA) with debt owing $80,000, owes $100,000 to the Inland Revenue Department (IRD) for core GST/PAYE (preferential debt), and has a viable business but has faced setbacks, several insolvency options can be considered. Each option has distinct implications for both the company and its creditors.

1. Receivership:

• Pros: The secured creditor with the GSA could potentially appoint a receiver to manage and realize the assets held as security, ensuring they receive payment.

• Cons: Other unsecured creditors may not benefit from this process, and it may not address the IRD's preferential debt.

2. Voluntary Administration:

• Pros: Voluntary administration allows the company to engage an administrator to review its operations and propose a restructuring plan, providing an opportunity to avoid liquidation.

• Cons: The administrator's proposal must gain creditor approval, and the IRD, as a preferential creditor, may have more influence. Unsecured creditors may have limited power in this process. The process is regimented and can be costly with meetings and reporting and advertising costs.

3. Liquidation:

• Creditor Liquidation: Creditors, including trade creditors, can apply to the High Court for liquidation. Assets would be realized to pay off debts with creditors paid in accordance with the priorities set out in the Companies Act 1993 seventh schedule and Personal Property Securities Act 1999.

• Voluntary Liquidation: Shareholders may opt for voluntary liquidation. While it offers some control to the shareholders, the outcome for unsecured creditors may be uncertain, and the IRD's preferential status remains.

4. Company Compromise under Part XIV:

• Pros: Part XIV provides a structured framework for proposing a compromise to creditors, allowing the company to address its financial challenges while avoiding liquidation.
• Cons: Agreement from a majority in number representing 75% of creditors voting on the matter (by class of creditor) is required, and the IRD's preferential status may influence the negotiation process. However, if successfully implemented, it can provide a more favourable outcome for all parties.

Considering the viable business and the potential for a turnaround, a company compromise under Part XIV may be a strategic option. This could involve engaging with all creditors, including the IRD, to propose a comprehensive arrangement that addresses the company's financial constraints while allowing it to continue operations. This may involve an instalment plan with IRD and continued support from the secured creditor and payment of unsecured creditors over an agreed extended time frame as setout in the compromise (which may be a % return rather than full repayment) – providing a recovery better than an immediate liquidation.

It is crucial for the company to seek professional advice to navigate these options effectively. The engagement and cooperation of both secured and unsecured creditors, along with compliance with legal processes, are essential in determining the best course of action for all stakeholders involved.

For advice contact our team to discuss your situation.

What is a Statutory Demand and When is it Used for Debt Collection?

A Statutory Demand serves as a formal court notice compelling a debtor company to settle an outstanding debt owed to a creditor, marking the initial step in the legal process of initiating the "winding up" of an insolvent company in accordance with Section 289 of the Companies Act 1993.

Essentially, a Statutory Demand functions as a litmus test for a Debtor Company, evaluating its financial viability by determining its ability to meet its obligations and settle debts promptly. It should however only be used as a debt collection tool if there is no dispute.

A disputed debt has a different process to follow.  A statutory demand should not be issued on a known disputed debt.  Pursuing legal proceedings in the District Court (claims less than $350,000) or the Disputes Tribunal (claims up to $30,000) is recommended as a more suitable course of action to resolve the dispute through standard legal channels. The High Court deals with higher debts and complex cases.

The issuing of a Statutory Demand often proves to be a successful strategy, compelling the Debtor Company to address the outstanding issue promptly and often leading to successful debt settlement.

Owed Money?  What to Consider before issuing a Statutory Demand

Certain restrictions should be carefully considered before issuing a Statutory Demand. It is imperative to evaluate whether the Debtor Company has previously contested the debt or disputed the owed amount. Also if the debt is $1000 or less it is deemed inappropriate to issue a statutory demand since it constitutes an abuse of the court process for winding up a company.

It is advisable to have a professional such as a lawyer, licensed Insolvency Practitioner or Debt Collector issue the Statutory Demand and for a process server to serve it.

Ultimately, the issuance of a Statutory Demand is a strategic move, often prompting swift action from the Debtor Company to fulfill the demand and avoid the potential consequence of being wound up.

Owe Money?  How should a Company that receives a Statutory Demand Respond?

Upon receipt of a Statutory Demand, the Debtor Company is granted a 15-working-day window to either settle the debt, fulfill the demand through alternative means, or formally dispute the matter in the High Court. Failure to pay the debt or initiate a dispute by way of a notice to set aside within this timeframe establishes an act of insolvency, empowering the creditor to file an application in the High Court for the winding up of the Debtor Company. This can lead to liquidation.

Where there is a valid dispute for reasons such as the debt is not owing or where there is a counter claim, setoff or cross demand, the window to act is small with the application to set aside required to be filed in the High Court and served within 10 working days of the service of the statutory demand. Prompt action to appoint a lawyer to act is important.

If there is no dispute but the debtor company has no ability to pay or offer a compromise (such as agreed security and/or instalment plan) then it is recommended to seek advice of a licensed insolvency practitioner to discuss the options of voluntary liquidation or company compromise or possibly a voluntary administration.

Options For Companies Who Have Been Served With A Statutory Demand - Undisputed Debt

• Do nothing and ultimately face liquidation proceedings (being served with a notice for putting a company into liquidation);
• Pay the amount owing;
• Enter into an informal compromise reaching a full and final settlement for an agreed sum - over a term or upfront - and possibly from sources not available should the company face liquidation;
• Offer a formal company compromise under Part 14 of the Companies Act 1993 - offering all creditors a payment arrangement on "compromise debt" and trade terms for ongoing trading;
• Offer assets as a form of security;
• Enter into a shareholder resolution placing the company into a voluntary liquidation before the winding up proceeding is filed with the consent of the applicant creditor. The voluntary liquidation process is generally less stressful as the entire procedure is well planned and the directors can assist and guide the liquidator.

For advice on when to issue a statutory demand and the next steps leading to a winding up proceeding OR for advice as the recipient of a statutory demand and the options and risks contact our team at MVP. We are here to help.

In our 38th Insolvency by the Numbers, we look at our data set for the year end 2023 in review along with January 2024. We look at how the year has tracked compared to prior years and what to we can expect in 2024, followed by a look at how January 2024 has compared to the last few years.

The latest data release shows that inflation has fallen however the portion of it generated by non-tradeable inflation figures remains high. Economists are predicting that it is unlikely that we will see an official cash rate drop till the later part of the year with come commentators still expecting the first drop in 2025. The property market however has now stabilised in a lot of regions and in some regions begun a slow climb in prices.

Globally during January, we have seen both the S&P500 & Dow Jones hitting new highs, we have also seen the release of a number of Bitcoin ETF’s in January that have taken in large amounts of investor capital.

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

While December 2023 took a slight dive from the figures posted throughout the year January has started slightly above its historic levels back to 2019. As seen below however 2024’s January is still behind 2017 & 2018.

As expected with the courts closed there were no creditor appointments in Jan 2024. It did not however slow the number of winding up applications as detailed below. Of interest solvent liquidations were below the numbers seen in past January’s while receiverships were up on past years, the bulk of the appointments were insolvent shareholder appointments as shareholders began to ffel the increasing pressures and have decided to pull the pin.

Anecdotally we have seen an increase in enquiries into the new year. Interestingly this has been a combination of traditional formal appointments and informal insolvency advice and work outs.

As predicted in our November insolvency articles, 2023 beat out all years back to 2018 for total appointments. So for the first time following the Covid lockdowns and Government support payments insolvency figures have finally grown year on year.

Winding Up Applications

In January, there has been a noticeable variation in the total number of winding up applications compared to past Januarys. In January 2021, there were 28 creditor winding up applications and 22 being IRD winding up applications. January 2022 showed a decrease, with 18 total applications, including 13 company winding up applications and 5 IRD winding up applications. However, January 2023 experienced an increase, with 56 applications, consisting of 34 company winding up applications and 22 IRD winding up applications.

The big take away here being that for the first time in the last 4 years IRD has made more creditor winding up applications in January than all other creditors combined for the first time. A definite sign that they are continuing to keep the pressure on delinquent debtors.

When considering the total data for 2023 compared to previous years, the cumulative number of winding up applications has shown a continuous increase. This upward trend underscores the ongoing financial challenges faced by companies over time, leading to a rise in the number of winding up procedures initiated.

Personal Insolvencies – Bankruptcy, No Asset Procedure and Debt Repayment Orders.

In December 2023, there were 45 bankruptcy filings, 32 no asset procedures, and 17 debt repayment orders, totalling 94. This continues the low personal insolvency figures shown throughout 2023. Whether this will turn around in 2024 won’t show in the figures till February onwards. My expectation however is that the figures will continue to be low compared to past years.

Where to from here?

The signs continue to point to the NZ economy being in for continued pain for the foreseeable future with it likely to get worse before it gets better, we foresee continued rising appointments as the year progresses. The OCR is unlikely to be dropped in the next 6 months and inflation continues to be above the target of 2%.

If you want to have a chat about any points raised or an issue you may have you can call on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..