Rescuing Struggling Companies in New Zealand: The Power of Creditors Compromise under Part XIV of the Companies Act 1993

Introduction

In the challenging business landscape, many companies in New Zealand find themselves facing financial distress and struggling to meet their obligations. Fortunately, the Companies Act 1993 offers several mechanisms to facilitate the recovery of such companies. One option available to financially troubled companies is to consider a creditors compromise under Part XIV of the Act. This article aims to shed light on the benefits of a creditors compromise and highlight its differences from the voluntary administration process.

Understanding the Creditors Compromise

A creditors compromise is a process that enables a financially distressed company to reach an agreement with its creditors regarding the payment of debts and the restructuring of its financial affairs. Part XIV of the Companies Act 1993 governs this mechanism in New Zealand. The objective is to provide an opportunity for struggling companies to regain their financial stability and continue operating, while also ensuring fair treatment for their creditors.

Benefits of a Creditors Compromise

1. Breathing Space: The creditors compromise offers struggling companies a much-needed breathing space to evaluate their financial situation and develop a comprehensive restructuring plan. During this period, the company is protected from legal action by its creditors, allowing it to focus on implementing the necessary changes.
2. Enhanced Flexibility: a creditors compromise provides significant flexibility. The company has the freedom to propose various alternatives to address its financial challenges, such as debt rescheduling, debt-to-equity conversions, or partial debt write-offs. This flexibility ensures that the proposed arrangement aligns with the company's specific needs and circumstances.
3. Stakeholder Involvement: A creditors compromise encourages active participation from both the company's management and its creditors. It requires the company to develop a restructuring plan, which must be approved by a majority in number and 75% of its creditors in value of those creditors voting on the matter.  Creditors voting  is completed by class (for example secured, unsecured, employees etc). This collaborative approach fosters transparency, promotes stakeholder engagement, and allows creditors to have a say in the future of the company.
4. Avoiding Liquidation: By opting for a creditors compromise, struggling companies can potentially avoid the drastic step of liquidation. Liquidation often leads to the closure of the business, loss of jobs, and minimal recovery for creditors. A creditors compromise, on the other hand, offers a chance for the company to restructure and continue operating, thus maximizing the potential returns for all parties involved.

Creditors Compromise vs. Voluntary Administration

While a creditors compromise and voluntary administration both aim to provide relief to financially distressed companies, they differ in significant ways.
1. Legal Framework: The creditors compromise is governed by Part XIV of the Companies Act 1993, while voluntary administration is regulated by Part 15A of the Act. Each mechanism has its own set of rules, procedures, and requirements. The VA regime requires two formal meetings, statutory advertising and is more costly as a result.
2. Timing and Control: In a voluntary administration, the directors voluntarily hand over control of the company to an independent administrator, who takes charge of the entire process. In contrast, a creditors compromise can allow the company's existing management to remain in control throughout the process, under the supervision of the compromise managers.
3. Stakeholder Involvement: In voluntary administration, creditors are generally not involved in the development of the restructuring plan, as the administrator prepares and presents the proposal. However, in a creditors compromise, the company works collaboratively with its creditors to develop a plan that meets the needs of both parties.

Conclusion

For struggling companies in New Zealand, a creditors compromise under Part XIV of the Companies Act 1993 offers a viable pathway to overcome financial distress and chart a course towards recovery. This mechanism provides struggling companies with the necessary tools to negotiate with creditors, restructure their debts, and create a sustainable future. By embracing the benefits of a creditors compromise, companies can benefit from breathing space, enhanced flexibility, stakeholder involvement, and the potential to avoid liquidation.

It is important for struggling companies to understand the distinctions between a creditors compromise and voluntary administration. While both mechanisms aim to address financial difficulties, they differ in terms of legal framework, timing and control and stakeholder involvement. These differences highlight the unique advantages of a creditors compromise, particularly in allowing companies to maintain control over their operations and actively engage with creditors to develop a mutually agreeable restructuring plan.

In conclusion, struggling companies in New Zealand should consider the option of a creditors compromise under Part XIV of the Companies Act 1993 as a means to navigate financial challenges and secure a brighter future. Seeking professional advice from legal and financial experts can help companies understand the intricacies of the process, assess its feasibility, and develop an effective restructuring plan. By leveraging the power of a creditors compromise, companies can regain financial stability, preserve jobs, and foster a successful path forward in the dynamic business landscape of New Zealand. For more information contact our team here

COVID-19’s impact on the business world is unprecedented, presenting a challenge to all companies and businesses. Some companies have evolved quickly and some have or are falling behind.

Managing a business is a delicate balance anyway. The deadlines, the finances, cashflow, controlling costs, the need to generate income and improve margins, the human emotions, staff needs, skill shortages and with Covid-19 in the mix, it is simply hard to navigate.  Many businesses will rise to the challenge and get through it. Some businesses are no longer viable. Many have closed the doors or considering it.

Struggling NZ Business in First Quarter 2022 – the Why

NZ business owners have struggled in the last while with lockdowns, inflation, increased oil prices, increased freight, global impacts on the NZ dollar, increased interest rates and now we are facing the rapid spread of Omicron, self isolation, more working from home, the impact of protests/mandates and more uncertainty offshore.

Many NZ businesses are suffering and the latest support payments in March 2022 will barely put a dent in the fixed overheads let alone any variable costs. Cashflow is tight for many and the outlook uncertain.  Much of the downturn in business profitability being faced now is out of a business owners control. The statisticians for example say in Wellington foot traffic is down 47% on prior years. Auckland is down 38% of this time last year and 56% compared to two years ago. The prediction is 58% of hospitality businesses will close in the next month – some not indefinitely. 

The impact of Covid on business has been sombre. The company strike offs are on the rise. Debt collection activity is on the rise. The media are saying the probability of recession is rising from the emergence of Covid and the negative impact of high interest rates and inflation.  

It is not however all doom. There is some upside and some have had strong balance sheets with NZers spending in NZ. The dairy industry is doing well. As the borders open, tourism will change dramatically. Travel agents are seeing strong interest in bookings offshore for holidays and to visit family/friends. Some businesses will see an upturn in the near future. There is light at the end of the tunnel.

Options for Struggling NZ businesses – the How

If your business is at the point of spiralling out of control, speak to your professional advisors who may be able to help your business. The pressures now on business are high and it is difficult. There are options for struggling businesses to consider whether that be to restructure or to bring the business to its end.

There are three rescue procedures in NZ, the compromise (Part 14), the Court approved scheme of arrangement (Part 15) – an option seldom used, and Voluntary Administration (Part 15A).

Liquidation is not a rescue procedure. It is usually a terminal procedure. Liquidators typically trade only for a short term for the purposes of the liquidation. The purpose of liquidation is to realise and distribute assets, not business survival.  Some companies however advance liquidation for the purpose of restructuring and to purchase back part of the business from the liquidator (at market value). Some companies advance liquidation with a known purchaser lined up to purchase the business in a clean structure. The consideration attributed is often pre approved by the secured creditors in these cases.

Receivership can be a rescue procedure. It can result in the rescue of viable parts/businesses but the primary duty of a Receiver is to get the best return for the secured creditor (usually the bank). Business survival may be an outcome. Banks may agree to a VA proceeding to avoid the negative publicity from appointing a Receiver or to protect the value of the business goodwill achieved from the stay in an Administration.

A company compromise under Part 14 of the Companies Act 1993 is a useful method without (in theory) having to go to Court. There is however no automatic moratorium (like with a VA) so sometimes you go to Court anyway. A compromise requires the identification of classes of creditors and 75% approval by class. There is often no outside independent manager involved. The compromise is the likely least expensive option but it requires approval to essentially be assured in advance. It works well for smaller companies with lesser creditors involved.

A Voluntary Administration is advanced where the company is cash flow insolvent or likely to become insolvent. No Court application is required. The Board of directors can appoint an Administrator. If there is a winding up application (by a creditor) on foot, the Court will likely adjourn the winding up application if the Court is satisfied that it is in the interests of the creditors (Section 239ABV, Companies Act 1993).  A business must be truly viable to be successfully rehabilitated. The appointment of an administrator for any other reason apart from rehabilitation is unlikely to gain the requisite support.

Liquidation versus Administration
A liquidator can only trade on for limited purpose of winding up. An administrator on the other hand has wide powers including the power to borrow. Some contracts will have termination clauses on liquidation but not on Administration. Both options have their advantages.
The best option is best discussed and well considered before advancing. Contact our team for advice on the options available if your business is in need of rescue, restructure or an orderly termination.

If any of these options may help you bring an end to a messy situation or to survive and thrive, contact one of our Licensed Insolvency Practitioners or email us at This email address is being protected from spambots. You need JavaScript enabled to view it. for some advice.