What is a General Security Agreement?

A General Security Agreement (GSA) is a document recording a security provided by a debtor company to its creditor over a specific group of assets or over all assets of the business. The GSA records the terms which include a right of the creditor to register their interest on the Personal Property Securities Register (PPSR) so that there is a public record of that financial interest in the assets of the debtor company.

We always recommend to directors/shareholders investing moneys into their business on start-up that they attend to completing the appropriate loan documentation (between company and individual) and a General Security Agreement recording the terms. It is important that this GSA is registered on the PPSR. It is also important that the registration is maintained and updated every five years to preserve the position as secured creditor.

Priority of Securities

The registration on the PPSR is an important step and “perfects” the security interest. Perfection of the security interest and the timing of that perfection establishes the order of priority of secured parties who have an interest in the company assets.

The main exception to the priority rule is the Personal Money Security Interest (PMSI) which is where a supplier of goods or equipment takes a security over the goods supplied (but not yet paid). For example, a hire purchase agreement over a refrigerator or a loan by a Finance Company secured over a motor vehicle (a serial numbered good). A PMSI creditor has “super” priority for the recovery of their unpaid goods and/or equipment.

The first to register on the PPSR will usually have priority in the event of insolvency – unless there has been a Deed of subordination between secured parties changing the priority or if the security is not valid.

Under a GSA, a debtor has obligations to the secured creditor to pay amounts owing to the secured party when due, to perform obligations under any agreement, not to allow another party to take security in the same assets without consent, or not to change control of the company without consent.

An important right under a GSA, is for a secured creditor following a default by the debtor, to appoint a Receiver, who then takes control and takes steps to pay the secured creditor.

It is common for banks when they advance moneys to a company that they do this by way of a GSA.

Where GSA’s go wrong

To maintain priority, the GSA needs to be registered immediately on execution of the GSA.

A financing statement has a life of 5 years and then falls off the register. It must be renewed before it lapses, or priority is lost;

The collateral description and accuracy with the registration of the security on the PPSR is important. If there are material discrepancies the security can be invalid.

It is important to register on the PPSR. It is the difference between having some right of recovery and running the risk of losing it all if the debtor company fails leaving a shortfall to creditors.

If your business supplies goods to customers on credit, your terms of trade should include clauses relating to the PPSR.  If your terms have PPSR provisions but you have not been registering those interests on the PPSR, you should start. 

Once you are granted a security interest, you can (and should) register that interest on the PPSR as soon as possible.  Registering your security interests on the PPSR is easy.  It only takes a few minutes and the registration process can be completed online.  The fee for registering your financing statement on the PPSR is $20.00.  Your financing statement lasts five years but it can be renewed, if you still need it when it comes up for renewal.

The main benefit of having your financing statement registered on the PPSR is that, if your customer goes into liquidation or has receivers appointed, your goods will not be available to the general body of unsecured creditors.  As a secured creditor, you can take back your goods (provided they have not yet been paid for) or, if your goods have been sold, you can trace into the proceeds of sale of your goods (when your goods are paid for by a third party).

If you don’t register your security interest on the PPSR and another creditor has been given and registered a General Security Agreement (“GSA”), the GSA holder will have priority over your goods.  We often deal with creditors who have registered their security interests on the PPSR too late, if at all, and have lost their priority in goods to other parties’ security interests. 

It’s a good idea to review your internal PPSR procedures on a regular basis.  If you think it’s time for a review or you want to discuss how you can use the PPSR to your best advantage, get in touch with the team at McDonald Vague.

Background

McDonald Vague partners have been appointed receivers on a number of major appointments, including the recent receivership of Tawera Land Company Limited "TLC". This is an entity owning millions of dollars of farmland associated with bankrupt businessman Ken Thurston.

Mr Thurston (formerly a director of 14 other companies) had a rocky financial period which reached its climax in October 2010 when he was adjudicated bankrupt. Since then a number of his companies have failed.

TLC owned and operated significant land holdings in the Manawatu and Taumarunui regions comprising 15,000 acres. Over the past six months, our Agri-Business team has managed the farming operations which include a dairy farm as well as sheep and beef farms.

One significant event was the successful sale of the Manawatu land blocks to Landcorp Farming Limited who intend to continue the sheep and beef farming operations. Since the start of the receivership McDonald Vague has realised approximately $27 million worth of property for the secured creditor.

Receivership issues

As is the case with many receiverships, we have managed our way through a thorny path of issues including:

• Livestock disputes as regards ownership and security interests therein
• A dispute over neighbouring claims to an airstrip
• Employee claims to pre-receivership wages and holiday pay
• Asset disputes, in particular the right of family members to funds they advanced towards the purchase of a company stocktruck and trailer. There was no loan document drawn up, no security document had been completed and no financing statement had been registered over the truck and trailer. The financial accounts of the company remained incomplete and so were not of any assistance in helping to determine the true owner
• Four subdivision projects partially completed at the date of appointment
• A contractual dispute with a neighbour in which the neighbour had purchased a small block of land from TLC and claimed that as a condition of sale, TLC were required to complete boundary fencing, which had not been done
• A contractual dispute with another neighbour who purchased a farm house. It was alleged that as a condition of the sale TLC were required to install a separate power supply to the property, which had not been done
• The rights of a metal contractor to enforce his three year contract with TLC for metal extraction
• The rights of contractors to barley crops they had planted

The most important point arising from many of these disputes was that the contracts were invariably made with TLC and not the Receivers. The obligation on the Receivers was to either adopt the contracts (if of ongoing value) or novate them. In the majority of the situations listed above, we (as receivers) made it clear that we would not adopt the contracts and therefore no liability attached to the Receivers.

PPSR and creditors

A key issue we continually encountered was the failure of other parties to safeguard their financial position by registering a security interest on the Personal Property Securities Register (PPSR) over financial advances they had made to TLC (for example: the stock truck and trailer, and the crops sown by contractors). Because no PPSR registration was made, all potential security interests given to these parties became subordinate to the interests of the registered secured creditor(s).

In this particular receivership it is highly unlikely that there will be any funds available to pay unsecured creditors. The above mentioned parties that advanced funds to TLC will now miss out altogether when some of them could have been in a position to receive something. This shows the importance of always ensuring that whenever funds are loaned to another entity, a proper loan agreement is drawn up, signed and a security interest registered on the PPSR. This may take more time at the beginning of an agreement, but in the event of a receivership, liquidation or other financial dispute it will have been time well spent.

Boris van Delden was the appointed Receiver on this appointment. For more information on McDonald Vague's Agri-Business expertise please visit the Agri-Business page.

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.

When commencing a receivership we often expect that it will involve a relatively straightforward sale, realisation and distribution process. However, it is increasingly common in these economic times for the receivers of an insolvent company to be considering and dealing with not only its creditors' interests but the positions and creditors of other, potentially competing, insolvent entities.

The factual scenario

Matakana was a winemaker. It had a related company, Goldridge, whose role was to market the wine. The Vintage companies ("Vintage") were set up to raise money from outside lenders and to hold that money to be paid when invoiced for the cost of the grape juice and for bottling the wine, and then supply the bottled wine to Goldridge. The use of the funds from Vintage's secured creditor was supposed to be monitored by an independent accountant. That accountant was supposed to be a cheque signatory and control the flow of funds according to the terms of the loan agreement.

There were agreements in place for each stage, except notably there was no agreement between Vintage and Matakana for the actual winemaking. Personal Property Securities Register ("PPSR") registrations were made pursuant to the written loan agreements.

In fact, what was happening was that Vintage drew down all of the loan funds. Matakana was then almost immediately paid all of the funds by Vintage contrary to the lending terms, purchasing the grapes, commencing winemaking and later billing Vintage for the cost of the juice. Later, when it finished and bottled the wine, Matakana would send another invoice to Vintage. Vintage would then sell the finished wine to Goldridge.

In late May 2009 Matakana had invoiced Vintage for 400,933 litres of juice. Matakana had maintained detailed wine records as required by law. This was ultimately very helpful in resolving the ownership issues.

It was intended that Goldridge would pay for the wine sold to it by Vintage in stages so that Vintage could meet its obligations to its lenders.

Four Vintage companies were placed into receivership in December 2010. Boris van Delden (Partner at McDonald Vague) was appointed receiver. Vintage had borrowed money on specific terms from a third party secured creditor. Vintage had lent the borrowed funds to Matakana, contrary to the loan terms. Matakana had different secured creditors to Vintage.

At the time Vintage was placed into receivership, Matakana and Goldridge had been in liquidation for about three weeks. There were many vats of grape juice or wine on the site that all the entities operated from. Matakana's liquidators said the wine was Matakana's or was held by them as bailee, and Vintage said it was theirs.

As you would expect, correspondence ensued between the Vintage receivers and Matakana's liquidators, including a warning from the receivers to the liquidators not to deal with the assets without the receivers' prior consent. The issues were not resolved, and Matakana's liquidators went ahead and sold most of the wine in the vats.

The High Court legal action

The dispute was taken to the High Court by Vintage's secured creditor and the receivers ("the plaintiffs"). Vintage's secured creditor said that under the terms of its security agreements it was entitled to possession of the juice on default, and the liquidators had committed conversion by not giving possession of the wine and by selling it.

Alternatively, all of the plaintiffs said that the wine was Vintage's and that the liquidators had converted it.

The liquidators denied these claims and said that Vintage was at best an unsecured creditor in the liquidation, and that the lenders' security was subordinate to the General Security Agreement ("GSA") held by Matakana's bank. We note that Matakana's bank held no security interest over Vintage. Matakana argued that the sale to Vintage was not in the ordinary course of business, and that as the companies were related, all were on notice about each others' security interests.

The Court's findings

In a decision issued in late October 2011, the High Court agreed with Vintage's secured creditor that most of the wine was the secured creditor's, and that the liquidators had converted it.

This was because the security interests had attached to most of the wine in May 2009 when the property in the original and/or later commingled wine passed to Vintage. The sales were in the ordinary course of business. This was easily proven, as the arrangements had been in place since 2001.

While the invoices from Matakana had not been specifically paid by Vintage, the funds advanced by Vintage to Matakana were sufficient to show that Matakana had received value for the invoices. Therefore, Vintage had paid for the invoiced juice in the vats, and the invoices were not merely an installment for the finished product that was to be invoiced and supplied to Goldridge. In concluding this, the Court relied on the face value of what the invoices actually said and in the absence of any other agreements Matakana was not able to convince the Court to infer any other interpretation of the invoices.

But the juice in the vats was not all Vintage's. Some of it had been commingled with Matakana's own juice and the juice of others at different times. The Court had to consider:-

1. What juice had not been blended at all;
2. What juice had simply been blended with other Vintage-invoiced stock; and
3. What juice had been blended with Matakana stock.

in each case as at 19/20 May 2009 when Matakana had invoiced Vintage.

On each question the Court referred to the provisions of the Sale of Goods Act 1908.

The Court went back to May 2009 (being the invoice dates) because that was the clear starting point to ascertain if property in the juice had been acquired by Vintage. The Court decided that Vintage was not entitled to any juice that had been mixed with Matakana's juice prior to the 19/20 May 2009 invoicing, as the relevant goods being transferred could not be ascertained despite the May 2009 invoicing. Where Vintage owned the juice, as a result of the May 2009 invoicing, and it was later mixed with other juice ("commingled"), Vintage owned the juice as tenants in common with any other entities whose juice was commingled with Vintage's.

The Court held that the liquidators were responsible for conversion. This is only the second instance we have come across of insolvency practitioners being found guilty of conversion. The Court also awarded substantial costs to the plaintiffs.

Recovery of the losses arising from the conversion is still under way.

Footnote

An action is under way against the independent accountant who was supposed to oversee the control of the lenders' funds.

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.

Introduction

In August 2011, the High Court issued an important decision in Burns v Commissioner of Inland Revenue on the widely argued question of "what is an account receivable?". This followed an earlier decision (re Northshore Taverns, 2008) in which the High Court decided that "accounts receivable" amounted to "book debts" only. This may sound like an academic point, but it is very important in determining which creditors receive distributions from the various sources of funds realised in a receivership or liquidation. The decision has positive implications for employees and the IRD as preferential creditors, and negative implications for General Security Agreement ("GSA") holders and guarantors.

The legal issue

The Seventh Schedule to the Companies Act 1993 sets out the order in which receivers and liquidators must pay preferential claims. This relies on definitions in the Personal Property Securities Act 1999 ("the PPSA"). The current wording took effect from 2002 but the meaning of some of the definitions is still being debated in insolvency circles.

The Seventh Schedule provides that, where a creditor holds a GSA over a company's assets, they rank ahead of most other creditors in the distribution of funds from the insolvent estate, except where the assets comprise "accounts receivable" or "inventory", in which case the proceeds must first be used to pay preferential claims, ahead of the GSA holder.

These preferential claims mainly comprise employee debts for wages, holiday pay and redundancy pay, and amounts owing to IRD for GST and PAYE.

While inventory is relatively easy to assess, there are many assets that could potentially be considered accounts receivable. Whether these assets are categorised as accounts receivable or not can have a major impact on the returns to secured and preferential creditors. In many cases, these items are the only assets and therefore the interests of preferential and secured creditors are directly in competition, with one or other of these groups potentially standing to recover nothing.

The PPSA defines an account receivable as "a monetary obligation...whether or not that obligation has been earned by performance". In most cases it is easy to determine whether an asset is an "account receivable" within that definition.  There is no question that routine trade debtors, properly invoiced and appearing in the company's accounts as a trade debt, fit the definition. This had already been confirmed in the earlier High Court decision. Where problems arise is in situations where money is due to a company for some other reason.

The Burns v IRD decision considered this definition in the context of such items as:-

• Council bond refunds
• Amounts refundable following overpayments
• Amounts held for the company in a lawyer's trust account

These, and similar items, have in the past proved difficult to categorise for distribution purposes and therefore entitlement to the proceeds of these assets has been potentially contestable.

The decision in Burns v CIR

The Burns decision stated that a broad interpretation should be applied to the phrase "account receivable". It held that bond refunds, refunds of overpayments and amounts held for the company in a lawyer's trust account all fitted the definition of accounts receivable and were therefore available to preferential creditors. The decision thus clarifies the position regarding a range of assets which were previously seen by practitioners and their lawyers as a "grey area". The decision also resolved the question of at what point a debt is classed as an "account receivable". Is it at the date of liquidation, or could it also refer to amounts which only become due after liquidation or receivership? The Court confirmed that the wording only refers to amounts due at the date of liquidation, and therefore only these amounts will be payable to preferential creditors. This is unsurprising, as otherwise many anomalies would arise.

For instance, if a liquidator trades on for a short period and sells inventory purchased after liquidation on credit, or sells a company's plant and gives the buyer 30 days to pay, should the amounts due suddenly become payable to the preferential creditors? The High Court has said no; the asset type is tested and determined as it exists at the date of appointment.

Implications for preferential and secured creditors

This decision will clearly not be welcomed by banks, finance companies and other parties who have lent against GSA securities (for instance, private individuals including investors, directors, and their spouses, friends and family members). It will, however, be welcomed by employees and the IRD, who will see themselves pushed to the front of the queue in cases where they might otherwise have ranked behind a GSA holder. For our part, there remains the question of which other assets the definition could capture. We are concerned that the two decisions have not provided total clarity as to what assets may constitute an account receivable. Instead, there is the potential for the definition to capture even more assets.

We understand that the case may be subject to an appeal in mid 2012, but for now it is the precedent and we must follow it. There may well be other cases on this issue, as there unfortunately remain some unanswered questions.

This decision should be brought to the attention of GSA holders, and also to guarantors under those GSAs. It means that there are likely to be less proceeds available to secured creditors and consequently there is a greater likelihood that secured creditors will be pursuing other repayment rights and remedies. The decision, and consequent expectations of loan collectability, will also impact on the holding values of loans in the financial accounts of secured lenders.

Update - December 2012

The Burns v IRD case is the subject of an appeal to the Court of Appeal. We understand that this is likely to be heard in mid 2013.

Note: This article was written by Jonathan Barrett who has subsequently left the firm.

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.

Introduction

It is now almost ten years since the Personal Property Securities Act 1999 ("PPSA") was enacted. Despite this, in our insolvency work we still regularly come across suppliers who have not performed the necessary registrations, and as a result lose priority to other creditors. This is highly unfortunate, given that a PPSR registration is simple to do and costs only $3.07. A PPSR registration is a little like income protection insurance - not terribly exciting to think about now, but it can make all the difference if the unexpected happens. We encourage all our clients to check that they, and their own clients, are fully conversant with this vital area. In this short article we attempt to explain the main points of the PPSA and its implications for suppliers.

The PPSA - a brief summary

The PPSA came into force on 1 May 2002. It constituted a major reform of the law relating to security interests in "personal property". The new law was closely modelled on a similar act in the Canadian province of Saskatchewan.

Prior to the PPSA, such interests were registered at a variety of locations including the Companies Office. The previous law was regarded as inadequate and cumbersome. The PPSA set out to provide a single online location where suppliers could find out at minimal cost what existing security interests there were against their customers' assets.

The PPSA affects lending, leasing and other types of credit-providing activities. Personal property is given a wide definition. With few exceptions it covers any property someone can own, notable exceptions being land (interests over which are still registered at the Land Registry), and ships over 24 metres in length.

The Personal Property Securities Register ("PPSR")

The PPSA introduced a registration system for what are termed "security interests" in personal property. This is run through an online registry called the PPSR, which anyone can search for just $1.02. Registration is not compulsory. However, failure to register means a creditor may lose priority to another creditor who does register, and is therefore inadvisable. A supplier generally only has to register once in respect of each customer (not every time goods are supplied), and then renew the registration every five years. There are strict time limits for registration - generally on or before delivery in the case of inventory, and within 10 working days for other assets.

"Security interest" is a broad term. Some of the most important examples of a security interest are:-

• A General Security Agreement - previously known as a debenture
• A retention of title clause
• A lease of goods/equipment of more than one year
• A lease of goods/equipment for an indefinite term
• An agreement to provide goods on consignment

Where things tend to go wrong

Where problems arise for many suppliers is when a bank or other lender has been granted a General Security Agreement ("GSA"). This is because most GSAs refer to "all present and after acquired personal property" and therefore potentially cover all company assets.

Because a supplier of stock or equipment has provided new value for its security, it normally ranks ahead of the GSA holder's general security in respect of those goods (this is known as 'super-priority'). However, this is only true if the supplier registers its interest on the PPSR. If not, it is likely to lose priority in those goods to the GSA holder (and also potentially the preferential creditors) in the event of its customer's insolvency. In most cases this means a supplier with a retention of title clause or a lessor of goods who has not registered walks away with nothing.

This is despite the fact that the retention of title clause may be perfectly valid in itself. This is because the PPSA only concerns itself with priority between security interests, not legal ownership. This subtle distinction is not often understood and tends to result in some understandably very disgruntled creditors.

Even where there is no GSA, a supplier of stock with no PPSR registration is still at risk of losing priority to the preferential creditors.

What are the key areas of risk for suppliers and lessors?

For most normal trading businesses, the main risk areas tend to be:-

Retention of title/"Romalpa" clauses

These should be agreed in writing rather than just stated on the back of invoices. However, even with a full set of signed terms and conditions, a retention of title ("ROT") clause is likely to be worthless in an insolvency if a PPSR registration has not been made. We have been involved in numerous cases where we have had to tell suppliers that their unregistered ROT clauses had no practical use and they could not recover any stock.

Consignment stock

The same principle applies to stock supplied on a consignment or "sale or return" basis. Even though legal title may not have passed to the customer, the consignment is a security interest and therefore has to be registered to rank ahead of a GSA holder or preferential creditors. Again, an unregistered supplier is likely to be unable to recover stock supplied in the event of its customer's insolvency.

Leased goods

Where a lease is for a term greater than one year (or for an indefinite term), the lessor must register its interest in the goods on the PPSR. If it fails to do so, the lessor may lose priority over those goods to a GSA holder. A lease agreement may be held to be of an indefinite term if it does not contain a clearly stated term, or end date. This is where many lessors run into problems.

General Security Agreements

GSA holders need to be aware that the old priority rules no longer apply. Previously, the first GSA to be executed ranked first, unless specific accommodation had been given to a subsequent GSA holder. The date of a GSA's execution is now irrelevant when assessing priorities. What matters now is the date of registration on the PPSR. The first GSA to be registered ranks first.

Conclusion

This is only a brief summary of this complex legal area. However, two very important points are clear. Suppliers/lessors of goods must ensure that their terms and conditions are properly worded to reflect the current law. They must also ensure that they have a valid PPSR registration to protect those legal rights. We recommend that all businesses selling goods on credit (or leasing goods) carefully review both their terms of trade and their PPSR registration procedures. We are happy to answer further questions, and can also recommend appropriate commercial lawyers with expertise in this field.

Note 1 -PPSR fees increased on 1 August 2012 to $3 for a search and $20 to register or renew a financing statement.

Note 2: This article was written by Jonathan Barrett who has subsequently left the firm.

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.

Business involves hard work and a bit of luck (or magic, given that only 29% of new businesses survive their tenth year). When things go wrong, a news release or a prosecution does not help creditors. Money in the hand does.

Remedying the situation monetarily is, however, interesting in a liquidation. Commonly, particularly in a High Court liquidation, any tangible assets of material value have been disposed of prior to liquidation, and the directors may be facing the prospect of bankruptcy. The unsecured creditor often throws their hands up in the air and writes off yet another debt.

In 2012, Peri Finnigan and Boris van Delden of McDonald Vague were appointed liquidators by the High Court of a small investment company, and subsequently by way of shareholders' resolution, of a wholly owned subsidiary that had operated as a retailer and wholesaler of 'fashion'. The companies' director, who was facing numerous personal guarantee claims and bankruptcy, advised McDonald Vague that neither company had any material value, all assets having already been disposed of essentially by fire sale. Money had been spent as if it was water.

However, within three months of the appointment, McDonald Vague had settled in full all third party unsecured claims against the companies (totalling 22 in number, or approximately half a million dollars by value) after entering into a settlement with the director.

The case is instructive, not only because it illustrates McDonald Vague's commitment to paying a distribution to creditors, but also because it confirms several practical points.

1. Not all company assets are disclosed in its financial accounts and you do not need a Court order to prove it

Too often we see grand statements based solely upon a company's set of financial accounts. Financial accounts, however, only provide a person's judgment on the company's financial position, and may not record, for example, unreconciled debtors, any contingent claims that the company or liquidators may have (such as over insolvent/voidable transactions), or how an unprofitable business can be turned around and made profitable.

In the case mentioned above, the distribution arose from an investigation that located payments that did not agree with the cashbook and financial accounts, and that confirmed the long term value of accrued tax losses to the director. Most importantly, the distribution arose from negotiation, persuasion and the receipt of funds from an insolvent person (through a third party). No claims were brought through the Courts.

2. Not all security interests registered on the Personal Property Securities Register ("PPSR") are valid or in relation to unpaid debts

Many creditors fail to remove their PPSR registration, even when they no longer do business with a company and have been repaid. Furthermore, creditors occasionally register an invalid and unenforceable security interest by, for example, registering their security against the wrong entity. This can mean that the position of an unsecured creditor is significantly better than that recorded on the PPSR. In the case mentioned above, General Security Agreements were registered against the companies on the PPSR at the date of the liquidators' appointment in relation to debts that had already been repaid.

3. The viability of all of your trading partners matters

When gaining a new customer, a business may perform a credit check and obtain security for goods and services supplied. However, it is relatively uncommon for a business to check the viability of its other trading partners, such as suppliers of materials, insurers and tax agents. In the case mentioned above, one of the companies had entered into and relied upon a licence agreement with an overseas sub-licensor covering a single brand. Expensive legal advice was obtained over the licence agreement, but the financial viability of the sub-licensor was never verified or checked. The sub-licensor subsequently went into administration, leading to the licence being lost, as well as the loss of stock that the company had paid for.

4. When things go wrong, get professional help

When a business is in financial difficulty, it gets difficult. A director is burdened with additional duties under the Companies Act 1993, gets chased by creditors and gets stressed. Sometimes it becomes too difficult for them, and they give up on their business and the creditors. In the case mentioned above, the companies unsuccessfully attempted to recover from the situation by changing the product offering sold in the retail premises, and then through a fire sale of assets. Notably, a key business engaged during the fire sale was unable to provide a financial account of the assets that they had dealt with. Had professional advice been obtained earlier, it is highly likely that the companies' debts would have been significantly less.

McDonald Vague is often instructed at the crisis point to provide a third party perspective, options, and assist a turnaround of a company wherever possible. We have consistently and successfully completed this across a wide range of industries in a confidential and successful manner for over twenty years.

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.

Our first article of the year reviews the significant issues and developments in insolvency from 2012 and looks at their impact on the industry into 2013 and beyond.

Insolvency practitioner licensing has not yet been adopted 

Legislation has been drafted however the approach and extent to a licensing regime seems to be difficult to agree and has generated much discussion within what is a relatively small industry. In late 2012 INSOL (the NZICA administered insolvency special interest group) proposed a voluntary registration regime, in an effort to provide all parties with more confidence when choosing and dealing with insolvency practitioners ("IPs").

IPs regularly hold significant funds for creditors, with minimal oversight.  The recent conviction of a liquidator for theft of funds from one of his liquidations highlights just one of the risks of having the wrong liquidator.  In that case the IP did not open bank accounts for each insolvency engagement and did not have access to or use a trust account.  Unfortunately, we note that neither of the proposed licensing regimes have any processes that would reduce the risk of theft by an IP, as they do not require audit of the trust or bank accounts.   We will cover the above points in detail in a future newsletter.

In our opinion, appropriate bank and independent practice verification arrangements are minimum engagement standards that need to be met, which anybody considering appointing a liquidator should raise with the prospective practitioner(s).

We recommend that creditors should maintain a lively interest in the progress of liquidations, and the results that liquidators are achieving in recovering assets and returning funds to creditors, so that they appoint liquidators who will achieve a good result for them if such a result is possible.

Creditors do have rights and remedies if they suspect wrongdoing by a liquidator, and these should be exercised.

Secured creditors versus preferential creditors - contest heads for rematch

We summarised the important Burns v IRD case on the definition of 'accounts receivable' in our February 2012 article.    Our latest information is that the case has been appealed and this is expected to be heard in late March 2013.  We await the outcome of the appeal, as we have experienced many instances in which it is uncertain whether preferential creditors or GSA holders are entitled to recoveries of assets, as those assets may arguably be classed as accounts receivable as a result of the Burns decision.

The PPSA - PMSI creditors still losing out due to non-registration

The Personal Property Securities Act 1999 ("PPSA") has been in force for a long time now and we expect most businesses will have been exposed to the power of the legislation at some point.  Despite this, businesses are still leaving themselves in a potentially worse position than they would have been had they registered a security interest on the PPSA.

Our April 2012 article summarised some of the key issues in this area.

Further, in our experience some suppliers have not understood the benefit of proper comprehensive terms of trade.  We have seen many instances where creditors have claimed rights and remedies and taken positions, which they were not able to maintain due to deficient terms of trade.

Ross Asset Management Liquidation - NZ's own version of the Madoff scandal?

You may have read of the recent liquidations of these Wellington based investment companies.  The liquidators' reports make grim reading.   Investors' funds supposedly totalled around $450m but the liquidators have only been able to identify assets worth around $10.5m.  Mr Ross and his entities seem to have operated a classic Ponzi type scheme, whereby money from new investors is used to pay high returns to previous investors based on non-existent profits.  Mr Ross evidently formed a number of companies with differing roles within the overall structure.  Each entity is likely to have its own creditors and will also possibly owe funds to investors on specific terms.

We note that the same liquidators were appointed over all entities.  This in our opinion could lead to a clash of interests as different groups of investors in different entities try to maximise their recoveries.  We were invited to attend one meeting of investors in Wellington in which the investors at that meeting were comfortable with that prospect. However we believe the potential for a conflict still exists and we remain available to discuss issues with investors or their advisers as they arise.

GST law change reduces funds available in a liquidation - issues for directors

In November 2012, the GST Act was amended to prevent a liquidator or receiver from changing a company's GST basis from the Payments basis to the Invoice basis and thereby triggering a refund.  We have considered the funds recovered from this procedure to be an asset of the company, and one aspect of a recovery process to maximise recoveries for creditors.  Sometimes it was the only recoverable asset that existed.  The change in legislation however, only arises once a company is in receivership or liquidation, so we suggest that directors, accountants and advisers consider the GST accounting basis, and whether the company could be assisted by changing the GST accounting basis. This may lead to a reduction in exposure to the IRD.

There is an accounting process to go through as a result of a change of GST accounting basis and issues to consider that may be time consuming or take company staff away from their normal duties.  We have staff members who are experienced in dealing with such issues and we would be happy to assist or advise.  Contact Boris van Delden for further information or to arrange a meeting.

Directors jailed for non-payment of PAYE

During 2012 we saw a continuation of successful prosecutions following IRD complaints against directors for failure to pay over PAYE.   Legally, such monies are held in trust for the IRD.  If not remedied quickly, directors will face prosecution with home detention and jail time as possible penalties.

We regularly advise directors/shareholders that if the company isn't generating a return for their efforts and investment after paying company creditors then they should seriously consider liquidation.  Escalating indebtedness to IRD is a clear signal to shareholders, directors and advisers that the company should not continue as it is.

A decision to liquidate in such cases is most often the right decision.  It is only a matter of time before IRD will take steps to liquidate if the inability to meet commitments continues without proper attention.

We are happy to meet with people to discuss their financial position, and the options available.

Insolvent Transaction claims

Since our June 2012 article, we have continued to see some IPs issuing Insolvent Transaction claims. In some cases this is within only 48 hours of the liquidators' appointment, and for amounts less than $1,000.    As a result we are regularly asked to assist creditors facing a challenge to look for potential defences to the challenge.

We suspect that the approach taken by a few IPs has meant that creditors have delayed the appointment of liquidators to companies that owe them funds, preferring perhaps to let the matter rest and avoid litigation.

Two High Court decisions from late 2012 have assisted creditors with the range of defences available to them.  In both decisions the High Court judges decided that a creditor/supplier did not have to repay funds to the respective liquidations because the creditor had given value for the payment before the payment was made.  This is a significant change from how the defences available to creditors had been previously interpreted.

We need to note that the decisions are being appealed, and that the good faith and no reason to suspect insolvency defences still need to be satisfied.

In response to numerous queries on this topic, we have prepared a presentation for interested parties.   Please contact us if this is of interest to you.

We welcome questions on any of these matters.  We are always available to provide advice regarding companies or individuals facing financial difficulty.

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.

The content of this article may be out of date - please refer to our more recent articles for up-to-date information.

McDonald Vague strongly recommends that businesses register their security interests on the Personal Property Securities Register ("PPSR"), and increase their awareness of the consequences of non-registration.  Failure to utilise the PPSR can be a doubly expensive process in the event that their debtor company becomes insolvent.

Many companies are not aware that the legislation applies to suppliers of goods on retention of title terms, leases of more than one year (or indefinite terms), and consignment goods.

Jonathan Barrett, an Associate with McDonald Vague, says valid terms and conditions of trade, as well as registration of a Financing Statement on the PPSR, are absolutely essential if businesses want to recover goods or the proceeds of sale of those goods.

Jonathan regularly deals with businesses placed into liquidation or receivership.  When it comes to determining priorities for a distribution from asset realisations, there are almost always a number of competing securities, some valid and others improperly registered.

Generally speaking, businesses that fully utilise the PPSR gain priority over other creditors and can substantially increase their entitlement to return of goods or payment of proceeds.

For instance, a supplier with a valid retention of title ("ROT") clause who registers on the PPSR will usually rank ahead of a General Security Agreement ("GSA") holder, and preferential creditors.  Without this registration, the ROT clause is usually worthless, as the supplier ranks behind the GSA holder and preferential creditors.

Despite the Personal Property Securities Act coming into force around a decade ago, we still routinely encounter situations where creditors have failed to register (for instance in respect of leases or retention of title clauses) and as a result lose their priority and recover nothing.

Registration is a very cheap process compared to the potential costs of non-registration.  For instance, the cost of registering a Financing Statement is currently just $3.07.

We strongly recommend creditors visitwww.ppsr.govt.nz.  We are happy to provide further information and assistance on this subject.

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