What's the difference between bankruptcy and liquidation? This is one of the most common questions that we field from directors and individuals we don’t fully understand how the different types of insolvency may apply to their current situation and how it will affect them.

Given the current climate we are in with company insolvencies on the rise it pays to understand the difference.

While there are a number of detailed differences in simple terms bankruptcy is personal, and liquidation is for commercial entities (companies, trusts, incorporated societies etc.) The confusion often arises because of the use of the bankruptcy term in relation to companies in the USA which we often see in the media and on TV shows -XYZ company has entered Chapter 11 (or another number) Bankruptcy under the Bankruptcy Code.

Bankruptcy:

For an individual bankruptcy is not the end of the road, it just draws a line in the sand for their financial position at a certain date, their adjudication date. From this date their affairs are handed over to the Official Assignee (a government entity) to sell assets and pay creditors. A bankrupt is able to retain limited personal assets such as a vehicle up to a certain amount and some tools of trade.
During the term of their bankruptcy it are also a number of rules and restrictions in place that the bankrupt individual will have to abide by or apply for permission from the Official Assignee if they wish to work outside these rules (travel restrictions, self employment etc.). The bankruptcy term is around 3 years, provided the bankrupt completes their statement off affairs and does not breach restrictions that are placed upon them. The individual is then discharged at the end of the term to hopefully have a fresh start and continue contributing to the economy.

https://www.insolvency.govt.nz/personal-debt/personal-insolvency-options/bankruptcy

The above link is from the Insolvency and Trustee Service who administer all bankruptcies in NZ and details the basics on bankruptcy, for additional reading and more detailed informaiton.

Liquidation:

While a liquidation on the other hand will bring an end to a company. A liquidator will be appointed to deal with the affairs of the company and wind it up. Liquidators are generally Licensed Insolvency Practitioners who work for commercial entities, though the Official Assignee does take appointments if no one else is appointed by the court or the shareholders are bankrupt.

The liquidator is able to trade the business as a going concern to realise the assets, if a sale occurs it is to a new entity, otherwise the liquidator will close down the business and realise its assets, through auction or otherwise, and distribute the proceeds to creditors. The liquidators will also investigate the affairs of the company and review its books and records. Once the assets are realised and the investigation complete the company is then struck off the Companies Register.

For directors the rules and regulations placed on bankrupts do not apply during a liquidation, this is where people often get confused. While directors have duties to assist the liquidator they are still able to go out and start new companies, incur debt, travel and their personal assets are not on the line to satisfy creditor claims (unless there are personal guarantees, breaches of directors' duties or a debt to the company etc.)

https://www.mvp.co.nz/mcdonald-vague/liquidations

The above link is from our website and goes into further detail on liquidations, you are also able to request the guide to liquidation from it for further reading.

Essentially in NZ bankruptcy is for individuals and liquidation for commercial entities.

Be sure to contact our excellent team if you have further questions, we are here to help 0800 30 30 34.

In our 42^nd Insolvency by the Numbers, we look at our data set for May 2024. We review how the month has tracked compared to prior months and years.

In the last month the Reserve Bank has continued with no change to the OCR and indicated not to expect any reductions until 2025.

We are now beginning to see a further tightening being covered in certain sectors particularly construction where new work has become scarce and those that are not busy finishing off existing projects are beginning to look to the renovation space.

 The government has released their latest budget showing cuts to a number of ministry’s and projects that are not deemed essential, there has also been some tax relief in the moving of the personal income tax brackets. How these budget changes will affect our stubborn non-tradable inflation is yet to be seen.

 Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

 May 2024 appears to have fallen back into the traditional corporate insolvency patterns we have seen in prior years just at slightly elevated levels over past years. On this basis we would normally see a drop in June but the appointment levels remain consistently higher than the last 6+ years.

Overall total insolvencies for the year remain high, almost double the appointments seen as recently as 2022. Month on month May had 238 total appointments 83 above the long term average of 150 and well above past Mays (2023: 158, 2022: 138, 2021: 151, 2020: 158). We expect that these higher insolvency appointment levels will continue into 2025 given the back log of debts currently sitting with the IRD and other creditors.

For May shareholder appointments increased and there was a decrease in court appointments as a comparative percentage. There was also a spike in Voluntary Administrations and Receiverships due to group appointments. As mentioned in prior months we have also seen a rise in personal receiverships by 3^rd and 4^th tier lenders in attempts to recover their debts (not recorded in the above corporate appointment figures)

We expect increases across all types of appointments to continue throughout 2024 and into 2025.

 Winding Up Applications

 We have now seen 3 months in a row of consistent applications just under the 100 marks being made driven largely by IRD and their recovery efforts. While the winding up applications are normally driven by those made in the Auckland High Court making up 2/3^rds of the total applications, May saw other courts around the country take up a larger share for the month making up around 50% of the applications, a sign that the regions outside of Auckland are also beginning to get their share of insolvency pressures.

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

 We can see a slight increase in April personal insolvency figures driven largely by bankruptcy applications but not a huge change over all. As outlined in the past I would expect that numbers will continue to increase slowly as job losses, increasing interest rates and cost of living continues to pressure people over 2024 and 2025.

 Where to from here?

Much like last month 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 when compared to prior years. The OCR is unlikely to be dropped in the next 6 months potentially 1 year and inflation continues to be above the target of 2% and may be for some years with non-tradable inflation refusing to come under control.

 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..

Economic recap

The OCR continues its march on an upwards trajectory, with the latest Reserve Bank rise of 75 basis points to 4.25 and a supporting narrative outlining future raises in 2023 of up to 125 basis points to bring the OCR to 5.0 and over.

From an economic perspective there continue to be a number of factors affecting businesses. The labour crunch remains with immigration not making up for the continued brain drain as people leave on OE’s or delayed travel plans. Shipping and product delays continue with China’s lockdowns as they struggle to grapple with a continued covid outbreak. On the construction front while councils continue to catch up on the backlog of buildings consents keeping the monthly consent numbers at elevated levels. The vibe from people on the ground however is that 2023 is looking like a slower year moving forward, no doubt a number of the issued consents may lapse incomplete.

ANZ business confidence can be detailed quite simply with their own blurb from their website “Business confidence fell 14 points in November to -57, while expected own activity fell 11 points to -14, only 8 points shy of 2009 lows. Activity indicators fell. Residential construction intentions tanked. Employment intentions were negative for the first time since Oct 2020. Inflation pressures remain intense, though pricing intentions eased.” So generally, the feeling is 2023 is looking rough for businesses.

Of note from our own purely unscientific observations we have seen an increase in the level of enquiries coming into the office over the last few months and an uplift in both solvent and insolvent jobs. What this has been driven by is difficult to say but likely the above factors affecting businesses along with a recent increase in IRD collections action and the cut back in government businesses subsidies seen over the last two years since the commencement of Covid lockdowns.

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

The elevated levels of appointments of the 3 prior months continued into October and November 2022.
Of interest November reached over 200 appointments for the first time in three years, Sept 2019 – 206 being the last time.

The breakdown of total appointments saw a constant levels of solvent appointments, court appointments and receiverships, the jump was seen in insolvent shareholder appointments jumping by almost 50% of earlier months from 67 in September, 83 in October to 115 in November.

The media has taken a recent interest in insolvency appointments in particular tiny home builders and Voluntary Administrations appear to be the flavour of the month. Where administrators have been appointed the recent trend of combining the appointment with a receivership to tie up creditors powers continues by a few practitioners.

From a yearly point of view total appointment figures for 2022 after 11 months are above the full 2021 calendar year. At this point it appears likely total appointments will exceed 2020 appointments before the year is out but are unlikely to reach 2019 levels as December is typically a slower month overall with the Christmas break and courts shutting.

Winding Up Applications

The gradual drop often seen over the 2nd half of each year changed in both October and continued on further in November 2022. This was a higher monthly total winding up applications than any other month in the last two years.

While corporate applications have risen, IRD applications continue to do the bulk of the heavy lifting in total applications. IRD will have a back log of derelict debtors from the last two years and are only now beginning to play catchup. How far this continues into 2023 as an election year will be a question yet to be determined.

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

While there has been a jump in corporate appointments this has not been reflected in personal insolvency appointments. The numbers continue to track down to lower levels than prior years.

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.

Economic recap

With the third quarter of 2022 inflation results coming in at 7.2 well above a number of economists and banks predictions of 6.5 we will likely be seeing jumps in the OCR at a steeper rate than expected with the next rate rise projected to be 75 – 100 basis points up from the prior estimation of 50 points. This will keep the pressure on homeowners with mortgages and businesses with lending as consumers role off fixed rates. With inflation well above the target levels of 1%-3% business continue to struggle on with constrained capacity and labour issues.

Leading into the Christmas period we will no doubt see the seasonal jump in retail sales followed by regional growth as holiday makers vacate the city centres for the traditional January break away. How this will affect insolvency figures will no doubt follow the usual course as businesses wind down as they head into Christmas and courts close for the break we will see the usual lower Dec and Jan figures. The question will be in the lead up months of Oct and Nov will the heightened levels seen in the last 3 months carry on, time will tell.

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

Corporate insolvency appointments in September saw the usual drop for this time of year but appointments for the month remain above the past two years, likely a result of elevated winding up applications from the past two months beginning to flow through with a chance to remain elevated to the end of the year.

What we did see during the month was the continued elevation in Receivership appointments at 9 however total appointments remain below the 2021 levels at this stage.

Winding Up Applications

September saw a continuation in the gradual drop-in total appointments, but the levels remain in the higher end of appointment in the 2022 year when compared with earlier months. From the above graph you can see the drop was directly attributable to the IRD drop in winding up applications. This is likely in part due to the end of year wind down as IRD collection slow in the lead up to Christmas and won’t kick off again till February.

The above figures are however difficult to compare to August/September 2021 due to the lock down that took place at that time.

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

Personal insolvencies have seen a lift on past months numbers largely related to Debt Repayment Orders and No Asset Procedures. While September 2022 is above the 2021 figures these are not an accurate comparison as we were in lockdown at this time last year.

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..

Video Link Here

July has mirrored the insolvency appointment figures over the last couple of months. The pressures affecting our economy have also remained fairly consistent over the last few months:
- Countries are continuing to fluctuate in and out of COVID-19 lockdowns
- Businesses and consumers are facing ongoing shipping delays and supply shortages
- Consumer demand for goods continues to exceed supply in many areas
- Labour shortages remain an issue
- Inflation remains higher than RBNZ’s targets and the affordability of goods remains an issue

To the end of July, the outlook for growth has continued to look positive:
- Unemployment rates have now fallen to pre-COVID-19 rates.
- The construction industry and the housing market continue to run hot
- Consumer spending remains strong
- The Reserve Bank has halted its Large Scale Asset Purchase programme

At the beginning of this week, most economists were predicting that the OCR would increase in the first time in 7 years. While the messaging continues to be that we should expect the OCR to increase before the end of the year, with a view to moving to an OCR of 2% by the end of 2023, subject to the impact of the latest COVID-19 lockdown. By the end of July, banks had already increased interest rates over the last couple of months, anticipating the August 2021 OCR increase that did not eventuate. We doubt that banks will decrease their mortgage rates before the next OCR update, given the indications that we should still be expecting the OCR to rise.

Data shows that 80% of residential borrowers currently have their mortgage interest rates locked in for 1 year or less, largely as a result of the historically low mortgage rates that have been on offer over the last few years. For new home owners with a 30 year mortgage, a 2% increase in mortgage rates will increase the monthly repayments on a $500,000 loan by around $550 per month. If wages do not increase in line with the cost of living, many could struggle to meet theses higher repayment obligations.

If you want to have a free chat about any issues your business is experiencing or about any other insolvency matter, contact us on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

The number of company insolvency appointments in July 2021 were:
- Consistent with May and June this year, both by number and type of appointment
- Comparable to July 2020 but there were significantly more court appointments in 2021 (up around 68%)
- Down 20% compared to July 2019

The spike in solvent appointments is likely attributable to companies waiting for their financial statements to be prepared following the end of the 31 March 2021 financial year and other companies having a 30 June or 31 July balance date.

The number of liquidators being appointed by the Court on insolvent liquidations increased from 37% in June 2021 to 44% in July 2021. This trend is not surprising, given the number of liquidation applications that have been advertised in 2021.

Notable insolvency appointments in July:
- Receivers have been appointed over West Coast Brewery (New World Investment New Zealand (in receivership)). The business was listed for sale after one of its key people, a non-resident, could not get into New Zealand due to COVID-19 boarder restrictions. When the receivers were appointed, the business had not yet been sold.
- Many of the companies that were subject to insolvency processes this month operated in the following industries:
o Construction
o Dairy
o Forestry
o Hospitality

Personal Insolvencies - Bankruptcy

The number of personal insolvencies has been fairy consistent month on month since April 2021. Bankruptcies were around 24% higher in July 2021 than in in the previous few months, which correlates to fewer no asset procedures and debt repayment orders in July. This shift might indicate that the there has been more payment default on bigger debts.

As the cost of living continues to increase and more companies fail, we expect that there will be more payment defaults and demands made on guarantors. Personal insolvencies are likely to increase as a result.

Winding Up Applications

The IRD’s enforcement activity has continued but the numbers have eased off slightly since June 2021. It was the petitioning creditor in 66% July’s liquidation application and continues to lead the way by advertising 67% of all creditor applications in the year to date.

In the year to July 2021, 418 winding up proceedings have been advertised and 255 of the named debtors (61%) have ended up in liquidation. The IRD has advertised 161 (63%) court applications. The table below shows the number of companies that have gone into liquidation after their liquidation applications were advertised and how many of those were advertised by the IRD.

If you’re having trouble paying bills, suppliers and staff, bankruptcy is not the easy way out. Lets take a close look at your options and how you might be able to turn things around.

Financial difficulties can arise from bad luck as much as bad management. In the construction industry for example, the main creditor might be paid for a large building project, but the painter or decorator will only be paid at the end of the job which can cause flow-on effects and real financial hardship.

Yes, being declared bankrupt will clear most of your debts and get your creditors off your back, but you will still be responsible for Court ordered fines, as much repayment as is possible, child support and your own expenses.

The effects of bankruptcy can last for at least seven years,  - three years from filing your statement of assets and liabilities and a further four years credit agency records - during which time someone else will be in control of your estate, your credit rating will be reduced, and restrictions are placed on where you can travel and work.

So if you can't pay your debts, what are your options?

Be Up Front

Talk to your creditors in the first instance and let them know there is an issue. Odds are they would prefer you remain in business to repay them in full, instead of declaring bankruptcy which would force them to chase you for the rest. Sit down with them and try and work out a repayment plan.

Summary Instalment Order (SIO)

An SIO is a formal arrangement between you and your creditors to repay all, or an agreed part of your debts over time. To apply, you must have a surplus in your budget, be able to make some repayments and have unsecured debts under $47,000. You need to apply and nominate a Summary Instalment Order Supervisor who will check your application, keep in touch with all your creditors and ensure the terms of the Order are being followed. See the list of registered SIO supervisors on the Insolvency Services website.

Creditors Proposal

(Part 5, Subpart 2 Proposal, Insolvency Act 2006) 
This is another formal agreement that arranges a payment plan over a defined time period to settle your debts. It includes unsecured debts, some secured debts, and there is no limit on the amount of debt so long as you are able to make repayments and the requisite number and value of creditors voting on the proposal agree.

However, a Creditors Proposal must be approved by the courts, so you will need assistance from a lawyer or accountant when drafting the agreement. Once approved, it’s a binding agreement that prevents those named creditors from pursuing you further without the court’s permission - if the terms of the proposal are not being met.

No Asset Procedure

If you owe between $1000 and $47,000 in secured and unsecured debt and have no way of making repayments, a NAP is another alternative to bankruptcy. To be eligible you must never have previously been in a NAP or been declared bankrupt.

A No Asset Procedure is like a mini-bankruptcy. Some of the same restrictions apply, but for a shorter time period. Normally 1 year versus 3-7 years. A NAP will relieve you of your provable debt, but your creditors will remain unpaid.

Only after exhausting all these options should you consider bankruptcy. For more information on bankruptcy options, or any of these procedures or assistance with proposals and settlements please contact our team.

You can also download our FREE guide, Options for Companies in Financial Difficulty.

In the words of Fredrick Nael: “It takes both sides to build a bridge.”

An Alternative to Bankruptcy – Part 5 Subpart 2 Proposals

Insolvent individuals are often unaware that there are alternatives to bankruptcy and what the impact of those alternative options will be, so they are ill equipped to make informed decisions.

This article focuses on Part 5 Subpart 2 Proposals. There are other bankruptcy alternatives such as Debt repayment orders (DRO) formally known as the summary instalment orders (SIO) and no asset procedures (for debts less than $50,000) as well as informal settlements, none of which are discussed here.

Resolving personal insolvency issues using a Part 5 proposal requires the insolvent to put his/her best foot forward and the creditors agreeing to a concession and giving their support to the insolvent. The trustee brings it all together.

Background to Proposals

A Part 5 proposal is an option for an insolvent individual facing the prospect of bankruptcy to settle his/her debts. It is an opportunity for a person with significant personal debts to reach an agreement to pay his/her creditors in full or part by making a lump sum payment or advancing a deferred payment plan. A proposal must be approved by a majority in number that represents 75% in value of those creditors who vote on the proposal.

Some insolvents have the support of many creditors but face one aggrieved creditor who refuses to accept anything other than immediate payment in full, has a grudge, and is keen to advance bankruptcy proceedings for the sake of it. When you are facing bankruptcy because of one problematic creditor, you may be able to bind that one creditor with the support of the requisite majority of other creditors. It is not all doom!

Part 5 Case Study – Professional Advisor

I recently completed a Part 5 proposal for a financial advisor who was facing bankruptcy. His personal insolvency arose from serious ill health, which led to a loss of focus on his business and on maintaining his personal assets. His creditors, however, knew that he had been blessed with a full recovery to health and that, by supporting his proposal, he could continue to work as a financial advisor, earn a good income in future, and pay creditors a contribution towards their outstanding debts.

The creditors agreed the best outcome was to support the proposal and accept something instead of getting nothing. The alternative in bankruptcy would have been the end of a career and no return to creditors. The insolvent was able to borrow funds from his employer (borrowed against his future income) and contribute a lump sum to his creditors. The proposal was dealt with in less than three months and is now at an end. The result was that the creditors received more than they otherwise would have in bankruptcy. It was a “win/win” for everyone.

When Should Proposals be Considered

Proposals are not a good option for every insolvent person. Proposals require a financial outlay to cover the costs of the Court application for approval of the proposal and to cover the trustee’s costs in preparing them. They also require the support of the majority of an insolvent’s creditors. Avoiding bankruptcy is a significant incentive to some insolvent individuals, including where the insolvent’s career is at risk and when the individual clearly wants to repay what he/she can to his/her creditors in good faith.

Advancing Part 5 Subpart 2 Proposals

There must be advantages for both the insolvent and his/her creditors in a proposal arrangement or it will be a waste of time putting the proposal forward. A proposal must provide a better return to creditor than they would receive in bankruptcy.

The Advantages, in General Terms, of a Part 5 Proposal for the Insolvent are:

• avoiding the stigma of bankruptcy, the impact on your reputation, and the impact on family;
• avoiding the cost of defending bankruptcy proceedings;
• avoiding publicity of the insolvent’s insolvency (a proposal is between the insolvent and his/her creditors only);
• except in a few situations, property acquired after the filing of the proposal is not affected by the proposal;
• avoiding the restrictions faced by undischarged bankrupts, such as being required to provide information to the Official Assignee (“OA”) if changing address or job, not being able to leave New Zealand permanently without Court approval, or requiring a case managers’ approval to leave New Zealand for short time periods (personal or business);
• examinations of the insolvent are seldom conducted by the trustee; and
• the ability to be a company director and hold a management position in a family business.

The Advantages, in General Terms, of a Part 5 Proposal for Creditors are:

• avoiding the cost of Court proceedings;
• receiving a distribution from contributions made by third parties that would not be available to creditors in bankruptcy;
• receiving a greater recovery than what would be available in bankruptcy.

What Does the Insolvent Offer to his/her Creditors?

The proposed distribution to creditors usually comes from:

• funds advanced by family and friends;
• assets that would not be available to creditors in bankruptcy, for example, Kiwisaver entitlements (if approved), trust assets, assets subject to relationship property claims, funds borrowed specifically for distribution under the proposal
• contributions from future income to be paid over a period of up to five years rather than the normal three years;
• offering any windfall received for the duration of the proposal.

The insolvent’s family, friends, and related party creditors (who would be entitled to prove in the insolvent’s bankruptcy) can agree to subordinate their claims and not prove for their debts in the Part 5 proposal, which increases the return to the insolvent’s remaining creditors.

The Basic Rules when Seeking to Secure a Part 5 Proposal:

(i) Certainty of Return - creditors want certainty of a dividend. The creditor wants to know how much money they will receive as a dividend and when these dividends will be paid.
(ii) Certainty of Costs - the trustee’s costs need to be disclosed to creditors.
(iii) Disclosure - the insolvent must convince his/her creditors that he/she has disclosed all assets and interests.
(iv) Dollar Test - the insolvent must demonstrate that he or she has contributed the maximum that he or she can realistically contribute to the Proposal.

Is a Part 5 Proposal the Right Choice for You?

Bankruptcy can be the best option for an insolvent who has no ability to pay his/her debts and whose ability to provide for himself/herself and his/her family is not dependent on avoiding bankruptcy. For others, it is simply not feasible to offer a proposal.

Whether a Proposal is the right choice for you depends on:

• your ability to fund a proposal;
• whether you have the support of the requisite majority of your creditors;
• your ability to offer a sum to creditors that is more than they would receive in bankruptcy;
• your profession and your ability to secure future employment;
• the impact of bankruptcy on your employment; and
• the impact of the stigma of bankruptcy on you and your family.

In addition to any personal reasons, there are legal and practical reasons an insolvent may want to avoid bankruptcy:

• a bankrupt is obliged to attend any meeting that the OA requires him/her to attend;
• the OA can apply to have the bankrupt examined under oath;
• a bankrupt must immediately notify the OA of any change of name or address;
• a bankrupt must deliver to the OA all documents and papers in his/her possession that might relate to any of his/her assets, dealings, transactions, property, and/or affairs;
• bankrupts who practice in certain professions (for example: solicitors, financial advisors, real estate agents, and chartered accountants) cannot act as principals or hold the positon of director;
• bankrupts who have an income surplus after living expenses may be required to contribute that surplus towards payment of their debts;
• self-employment is not often an option (there are some exceptions);
• a bankrupt cannot act as a director of a company during his/her bankruptcy (there are some exceptions);
• the OA may investigate the financial affairs of an associated entity (company, partnership, person, or trust) of the bankrupt so far as they appear to be relevant to the bankrupt or to any of his/her conduct, dealings, transactions, property and affairs;
• the bankrupt’s bankruptcy must be disclosed to anyone to from whom the bankrupt applies for credit of $1,000 or more;
• transactions, gifts, or settlements that took place in the five years before the bankrupt’s bankruptcy will be examined;
• some employers require employees to disclose whether they are or have been bankrupt as do insurance companies; and
• the impact of the bankruptcy on the family home (this is a complex issue that will need to be considered by the insolvent before becoming a bankrupt).

I will end as I started. Dr Maya Angelou said: “You may not control all the events that happen to you, but you can decide not to be reduced by them.”

Part 2 of 2

Following on from our earlier article dealing with how liens over company records are treated in a liquidation, we will now cover how liens are dealt with in receiverships and bankruptcies, and how to handle a lien held over the assets of the entity.

Bankruptcy lien over records and documents

Upon the adjudication of a bankrupt all of their property is vested in the Official Assignee under Section 101 of the Insolvency Act 2006.  For those records that are not in the possession of the Official Assignee a written request is made for their surrender under Section 171 of the Insolvency Act 2006.  This request encompasses any document that relates to the bankrupt's property, conduct, or dealings that is in a third party's possession or under the control of a third party.

Failure to comply with a request made under Section 171 will likely result in a summons being issued for your attendance at an examination before the Official Assignee or a District Court Judge Court under Section 165.  There are no sections under the Insolvency Act that allow the holder of the records to charge for any expenses or disbursements incurred in providing the requested records.

What happens if you are owed funds by the bankrupt and hold a valid lien over records?

Section 172 of the Insolvency Act 2006 sets out that a person is not alowed, against the Official Assignee, to claim a lien over business records or a deed or instrument that belongs to the bankrupt.  However, a person may be a preferential creditor under Section 274(2)(f) provided they fall into the criteria set out under Section 172(2)(a)-(c).

Section 172(3) sets the total preferential claim as 10% of the total value of the debt, up to a maximum amount of $2,000.  The remainder of the claim will be recorded in the bankruptcy as an unsecured creditor's claim and will rank pari passu with the other unsecured creditors in the bankruptcy.

Where does your preferential claim rank in accordance with Section 274 of the Insolvency Act 2006?

The Official Assignee must follow Section 274 when making a distribution from the assets of the bankrupt estate that are not subject to a charge, as it sets out the order in which preferential creditors rank.  Below is a list of preferential creditors that rank ahea dof valid lien holders:

1. Fees and expenses of the Official Assignee;

2. Costs of the applicant creditor;

3. Costs incurred and the claim of any funding creditors from the assets protected, preserved or recovered;

4. Wages/salary, PAYE, holiday pay, redundancy pay, any other deduction that would form part of an employee's weekly wage (child support and student loan payments) up to $20,340.  For wages/salary and PAYE this is limited to what is outstanding in the four months before adjudication.

Once the debts of the above preferential creditors have been satisfied in full the preferential claim of the lien holder will be paid.

Receivership lien over records and documents

With the appointment of receivers over the assets of the company by a secured creditor, the powers that are granted to the receiver will be dependent on those outlined in the appointment documents prepared by either the secured creditor or the High Court depending on the method of appointment.

Section 14 of the Receiverships Act 1993 outlines that the receiver may inspect at any reasonable time, books or documents that relate to the property in receivership and are in the possession or under the control of the grantor in addition to those that are in the possession or under the control of a person other than the grantor.

What happens if you are owed funds by the company in receivership and hold a valid lien?

While the lien will allow you to have a form of security interest in the books and documents of the company these rights are not directly dealt with under the Receiverships Act 1993 like the Companies and Insolvency Act.  The receivers will often find themselves in the same situation as the company would be if they required the records.  They will often only have the option to settle the debt or wait for liquidators to be appointed over the company.

A lien over the assets of the entity and how it is dealt with

Upon the commencement of an insolvency procedure there are a number of potential liens that may be held over the assets of the entity.  This includes contractual liens which are dealt with as a security interest in accordance with the PPSA, common law liens and statutory liens.

Common law liens and statutory liens

From a creditor's perspective if you have supplied services over an asset that has added value you may have priority to receive payment ahead of other creditors, however it is important to maintain possession of the asset that you are claiming their lien over, whether it is a tradesman's lien or other form of lien.  Once you have released possession you have effectively eroded any leverage that you may have had and detrimentally affected their standing which will result in increased difficulty in negotiating favourable settlement terms between the parties involved.

It should be noted however that each lien should be dealt with individually on a case by case basis as no two sets of facts are the same and will likely have an effect on the outcome.

If you wish to discuss liens further please contact McDonald Vague for free and confidential advice to find out how we can help.

Part 1 of 2 

Having a customer go into liquidation is never appreciated.  There is a potential loss of profit, and as such, creditors generally seek to secure and protect their situation through whatever means necessary.

In a perfect world, the creditor will be secured by way of a perfected security interest under the Personal Properties Security Act 1999 that leads to gaining a super priority to recovery of equipment or to unpaid stocks and potentially a recovery from proceeds relating to those unpaid stocks.  However, often there is no security and no assets on liquidation.

On occasion, however, the creditor will find themselves in possession of company assets and records over which they have no registered security, and the question then arises, can they retain possession until the debt that they are owed is discharged?  This is essentially a lien.

This article forms part one of a two part series on liens that will cover how liens over company records are treated in a liquidation.  Part two will look at liens in receiverships, bankruptcies and liens over assets. 

Who has ownership of the company records?

Under the common law, a company that is not in liquidation will retain ownership of their records even when they are not in their possession. What this effectively means is that if a company chooses to change their accountant or solicitor they are able to simply uplift their records after settling any outstanding liens that may be held over the records.

Upon liquidation, the right to ownership of the company's records granted under the common law is transferred to the liquidators of the company through the powers set out in Section 260 and the Sixth Schedule of the Companies Act 1993. What this allows the liquidators to do is effectively stand in the shoes of the company when making requests and uplifting records of the company.

The Courts have held that a request made by a liquidator for records of the company is not limited to those records owned by the company but extends to all documents related to the dealings of the company. 

What if you have received a request for documents under Section 261 of the Companies Act 1993?

Ordinarily, a liquidator will make a written or verbal request, however, a liquidator is able to, under Section 261 of the Companies Act 1993, make a written statutory request against a director, shareholder or other persons to deliver to the liquidator such books, records or documents of the company as the liquidator requires within a specified timeframe.  Section 261(6A) provides that a person who fails to comply with a notice given pursuant to the section commits an offence and is liable on conviction to a fine not exceeding $50,000 or to imprisonment for a term not exceeding two years.  Following receipt of a Section 261 letter you will be entitled to make a request for payment of reasonable travelling and other expenses in order to allow you to comply with the Act under Section 261(6).  This section does not apply however to a director, shareholder or other party involved in the formation of the company. 

What happens if you are owed funds by a company and hold a valid lien?

Section 263 of the Companies Act 1993 sets out that a person is not entitled as against a liquidator to claim a lien over books, records or documents of the company.  However, if the lien arises from a pre-liquidation debt and you have control over the records, which are held or have been produced for the company you will be able to claim a portion of the debt as a preferential claim in the liquidation.

Section 263(2) sets the total preferential claim as 10% of the total value of the debt up to a maximum amount of $2,000.  The remainder of the claim will be recorded in the liquidation as an unsecured creditor's claim and will rank pari passu (side by side) with the other unsecured creditors in the liquidation. 

On what occasions will you not have to comply with Section 263?

There are a number of situations in which Section 263 will not apply, the first of these being where the company has entered into a compromise with its creditors.  The Court has determined that it will only apply when a company is in liquidation.

The next situation is when the company has been placed into liquidation via a shareholder's resolution or by way of the company's board in accordance with its constitution, but they have passed a resolution as to its solvency and would be considered a valid solvent liquidation.

Where does your preferential claim rank in accordance with the 7th Schedule?

The liquidators must follow Schedule 7 when making a distribution from the assets of the company that are not subject to a charge as it sets out the order in which preferential creditors rank.  Below is a list of preferential creditors that rank ahead of valid lien holders: 

1. Fees and expenses of the liquidator;
2. Fees and expenses of the administrator;
3. Costs of the applicant creditor;
4. Expenses of the liquidation committee;
5. Costs incurred and the claim of any funding creditors;
6. Wages/salary, holiday pay and redundancy pay of employees up to a statutory maximum of gross $20,340.

Once the debts of the above preferential creditors have been satisfied in full the preferential claim of the lien holder will be paid.

What does an accountant's lien cover?

An accountant's lien is by default limited to the records on which work has been completed and the resulting records from this work.  It does not however cover records that have not yet had work completed on them.

An accountant may have recourse to a general lien provided that the terms of engagement between the company and the accountant explicitly establish a right to exercise a general lien.

What does a solicitor's lien cover?

A solicitor's lien on the other hand is by default a general lien under the common law.

It is important to note however that solicitors are unable to claim legal professional privilege in relation to the documents of the company.  As outlined earlier, the liquidator effectively stands in the shoes of the company under the common law when making a request for documents in accordance with the powers granted to them under the Companies Act 1993.

Part 2 in this series will look at how liens are dealt with in receiverships and bankruptcies and will also look at the situation where a lien is held over the assets of the entity.

If you wish to discuss liens further please contact This email address is being protected from spambots. You need JavaScript enabled to view it. for free and confidential advice to find out how we can help.

The Insolvency Act 2006 was implemented on 3 September 2006, and created a new alternative to bankruptcy called the No Asset Procedure ("NAP").  This involves a one year term, rather than the usual three year term in bankruptcy.

The NAP is simply a once-off reprieve for the consumer type small-time debtor who has got out of their financial depth.  To qualify, the debtor must have no assets (except excluded assets - see below), total debts between $1,000 and $40,000, no means to repay any amount, and a clean financial record (not previously bankrupt and not previously admitted to the NAP).

Once admitted to the NAP, the debtor enjoys a moratorium on their debts; with some exceptions these cannot be enforced while the debtor is in the NAP.  If the NAP runs for 12 months, the debtor is discharged and the debts are cancelled (excluding student loans, child support and fines).  If the NAP terminates at any time before 12 months is up, the debtor's debts become enforceable once more.

Assets which may be retained by a bankrupt or a person subject to the NAP are as follows:-

• Tools of trade - value at Official Assignee's discretion
• Household furniture - value at Official Assignee's discretion
• Motor vehicle - must not exceed $5,000 in value
• Money -  up to $1,000

DISCLAIMER

This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.