Though the New Zealand insolvency law regime has much in common with the Australian regime, there are also important points of difference to keep in mind.
Depending on which side of the Tasman you are on, these differences have the potential to change the outcome of a dispute or priority contest.
We set out below some (non-comprehensive) differences that companies, insolvency practitioners and creditors may want to keep in mind.
Safe harbours for directors of insolvent/near insolvent companies
Voidable transaction – clawback period
Voidable transactions – continuing business relationship
Liquidators’ powers of examination
Crown preference as creditor
Employee preferential status
Ipso facto rights in insolvency scenarios
SME-specific restructuring / insolvency processes
A security interest does not need to be registered on the New Zealand Personal Property Securities Register to be valid. However, failure to register an interest can greatly affect the priority of that interest against other interests in the same asset. Valid registration “perfects” the security interest, and can ensure that it retains priority against other creditors.
Although more forgiving for an individual creditor, this system can make priority disputes more complicated, and the overall security position can be less clear.
A security interest must be registered on the Australian Personal Property Securities Register. If a creditor fails to register a security interest, that security interest is void and unenforceable. As a consequence, the creditor is merely an unsecured creditor, and has no priority to the secured assets (s 21 of the Personal Property Securities Act 2009 (Cth)).
This regime is, on its face, less forgiving to the interests of creditors. However, it provides some certainty that the registered interests are the only interests to be accounted for.
New Zealand does not have safe harbour provisions. A temporary safe harbour had been in place between April and September 2020 to address the potential wave of insolvent companies due to the economic effects of COVID-19. Under those provisions, a director would not breach their ss 135-136 duties by trading on , if the company was facing significant liquidity problems as a result of COVID-19, the company was able to pay its debts prior to COVID-19, and the director believed in good faith that it is more likely than not that the company could pay its debts by September 2021.
An Australian director of an insolvent or near insolvent company can make use of “safe harbour” provisions, which provide a defence to an insolvent trading claim (s 588GA(1) Corporations Act 2001 (Cth)). The safe harbour provisions allow a director to develop, and embark on, a course of action reasonably likely to lead to a better outcome for the company. That must involve obtaining relevant professional advice. These provisions provide some comfort to company directors to trade on the company during times of uncertain insolvency. On the other hand, the alternative course of action pursued may result in a worsening of the company’s position, and worse outcomes for the company’s creditors.
New Zealand recently reduced the specified period from two years to six months (except for related party transactions). That change greatly reduces a creditor’s potential exposure if a debtor goes into liquidation.
Though this change brought the New Zealand period for unrelated party transactions in line with the Australian position, a liquidator’s ability to claw back related party transaction in New Zealand remains two years from the date of liquidation, less than the four year period across the Tasman.
In Australia, a liquidator may challenge a transaction with an unrelated party as an unfair preference if the transaction occurred within six months of the company entering liquidation.
Transactions with related parties (including director-related transactions), a liquidator may challenge a transaction within four years of liquidation.
The “peak indebtedness rule” has been emphatically rejected in New Zealand (Timberworld Ltd v Levin  NZCA 111). However, it remains uncertain in New Zealand at what point in time the continuing business relationship should be measured from. The start of the specified period? Or the point that the company became unable to pay its due debts, if that came after the specified period? The former could result in payments being set aside when there was no insolvency to form the basis for setting a transaction aside.
Until recently, the settled position in Australia was that the start of the continuing business relationship (or “running account”) could be taken as the point at which the company is at “peak indebtedness”, allowing a liquidator to maximise voidable transaction recoveries.
The Australian courts have recently moved away from the peak indebtedness rule (Badenoch Integrated Logging Pty Ltd v Bryant, re Gunns Limited (in liq)(in rec)  FCAFC 64 and  FCAFC 111). That decision is currently under appeal. However, in general, creditors in Australia should be mindful when dealing with a potentially insolvent debtor that a larger catchment of payments could be treated as voidable by a liquidator than in New Zealand.
The New Zealand Courts have generally taken a restrained approach to interpreting liquidators’ powers of examination. For example, liquidators of New Zealand companies cannot use their statutory powers of examination to ascertain the prospect of recovering funds from the company director (Finnigan v Ellis  NZCA 488). That decision was made in explicit rejection of the alternative Australian position.
However, in a recent judgment (finding that liquidators can use their examination powers even where they had previously brought proceedings against the company and its director: Stewart v Fatupaito  NZCA 21) the Court of Appeal noted that where possible, New Zealand insolvency legislation should be read in a way that is consistent with Australian law, given the close commercial ties between the two countries.
Australian liquidators’ powers of examination are broad, and have been used to require directors’ to disclose private financial information. That is based on Australian Courts taking a broad interpretation of the words “examinable affairs of the company.”
This position allows liquidators to more easily ascertain whether an action against a director is worthwhile. Conversely, it opens up directors of insolvent companies to arguably invasive scrutiny of their personal affairs, even where those affairs are distinct from the interests of the company.
The voluntary administration regime has been underutilised in New Zealand. The reason for this may reflect the wider business community viewing VA as essentially as equivalent to, or a precursor to, liquidation. That perception of VA disincentives companies from considering VA in difficult times, as engagement with any insolvency process is seen as carrying significant reputational damage. The cost of VA for SMEs also frequently means it is not a viable option.
Voluntary administration is used considerably more frequently in Australia, in part due to various structural incentives for directors of distressed companies (including the avoidance of personal liability for certain company tax debts by prompt appointment of an administrator).
The New Zealand Inland Revenue Department (IRD) enjoys preferential status as a creditor. This provides some incentive for IRD to apply to liquidate insolvent companies (and as a result IRD brings a large proportion of the liquidation applications in New Zealand), but it also means that it need not act promptly to stop further tax debt being incurred. Where a company has considerable debt to the IRD (which is common), IRD’s preferential status can considerably reduce the recovery for other creditors, particularly unsecured creditors.
The Australian Taxation Office (ATO) has no preferential status as a creditor in liquidation. Accordingly, if a company does enter liquidation, other creditors (to whom the director may be personally liable) are likely to be paid pari passu along with ATO, so there is less incentive for a director to strain to avoid insolvency processes.
Though company employees enjoy preferential status in New Zealand (to a cap of $25,480), New Zealand lacks an enforcement mechanism or agency to ensure that employees are in fact paid their full entitlement and in a timely way. Employees are often unaware of their rights in situations of insolvency, so may not necessarily know what their full entitlement would be, and what action to take if they do not receive it.
In 2012 Australia implemented the Fair Entitlements Guarantee, a legislative safety net scheme which allows employees of insolvent companies to claim from the government:
- unpaid wages up to 13 weeks;
- unpaid annual leave;
- payment in lieu of notice up to five weeks; and
- redundancy pay (up to four weeks per year of service).
The scheme operates as an advance to the liquidator to cover the debts owed by the company to its employees. The Australian Government then seeks recovery of those funds from the company in liquidation.
This scheme takes much of the burden off employees in pursuing their entitlements from their previous employer. Instead, the liquidator deals with the government to ensure employee entitlements are accounted for as much as possible from the assets of the company.
In New Zealand, if a company is subject to a formal insolvency regime (voluntary administration, receivership, liquidation, etc.), that will often trigger “ipso facto” clauses commonly included in contracts with creditors.
An ipso facto clause allows creditors certain contractual rights, such as terminating a contract or lease, by the mere fact the company is subject to the formal insolvency process.
That gives major creditors significant sway in insolvency scenarios, and may hasten a company’s demise even where there may be potential for a compromise or work out. But, it gives individual creditors more options when dealing with an insolvent debtor, and may lead to opportunities for greater recovery for that individual creditor.
In 2018 Australia provided a legislative moratorium on relying on ipso facto clauses where a company becomes subject to certain insolvency processes, namely:
- creditors’ scheme of arrangement
- voluntary administration
- receivership (where the receiver is appointed over the whole or substantially the whole of the property of the company), and
- restructurings (a specific Australian regime for SMEs, discussed below).
It does not apply however for other insolvency processes, including deeds of company arrangements, and liquidations.
This moratorium gives a company breathing room to consider its options when nearing insolvency, without the risk of a particular creditor acting in a way that prevents trading out. But for individual creditors, the restriction confines their ability to pursue their rights against an insolvent debtor.
New Zealand has no SME-specific restructuring / insolvency processes. The processes currently available are often complex, rigid, lengthy and costly.
Though those processes are thorough and procedurally robust, the relatively low amounts at stake, and low amount of cash on hand, make these processes unattractive for directors of SMEs.
The introduction of business debt hibernation early on in the COVID-19 pandemic reflected concerns about the need for a process suitable to SMEs, though it ultimately had low uptake (likely due to the availability of the wage subsidy scheme and more minimal lockdown interruptions relative to the rest of the world in the April 2020-October 2021 period).
In December 2020, Australia introduced provisions simplifying rescue and liquidation processes for SMEs, defined as companies with debts of less than AU$1m. These processes focus on providing utility for small companies, where more formalised and procedural regimes are too rigid and value destructive to be of assistance.
The SME rescue process is debtor-led, allowing directors to appoint a restructuring professional to help develop a company restructuring plan. Doing so triggers a moratorium on the enforcement of debts and claims by company creditors. Directors remain in office throughout the process, by contrast to alternative processes such as voluntary administration.
The SME liquidation process removes much of the investigations and inspections liquidators are ordinarily required to carry out, with a simplified dividend and more informal proof of debt process.
OUR THANKS TO NATHAN WHITTLE FOR PREPARING THIS ARTICLE.
This article is part of our regular publication Restructuring & Insolvency: Rescue & Recovery. Read the other articles in this series below.