A reader emails:
I read your blog from time to time and also tend to pick up pieces you run on insolvency type issues such as the one you ran recently titled “Bankruptcy is a Joke.”
I am in my 50s and have pretty well been part of the insolvency industry in NZ since the day I walked out of Uni all those years ago. I thought I would post a few pieces to you on insolvency to explain how it works and why we have so many issues in this area. I will also proffer some solutions, one of which would save the government money, direct public insolvency resources to better use and tidy the industry up a little
In the big picture insolvency procedures are critical to a capitalist economy. The business and consumer cycle in its simplest form has birth (of a business or a consumer) their life and their death (for the consumer not their literal death but their financial death). Insolvency is the ailment that leads to death. Insolvency procedures are in place to clean up the bodies and bury them. If you don’t clean up the bodies you end up with a stinking mess. At its heart it is the realisation of the assets that are left and a sharing of the proceeds of those assets amongst the creditors pro rata.
In this piece I will discuss liquidations. I will follow up later on bankruptcy and the use of trusts. There are 3 common ways a company can be placed into liquidation. By a shareholder resolution, by its board if the constitution allows (rare) and by an application to court usually by a creditor. With shareholder and board appointments the appointers choose the liquidator and if they consent before hand they are appointed. With a court application the petitioning creditor can seek consent from a liquidator to take the appointment. If no liquidator consents to the appointment then by default it goes to the Official Assignee. The Official Assignee also appoints themselves to liquidations of companies controlled by bankrupt shareholders.
As a general rule you can have confidence in private liquidators appointed by the court. Why? These liquidators have gone in at the request of a petitioning creditor and sometimes have an indemnity for fees. They are hardly going to bite the hand that feeds them. They are also less likely to favour the shareholders or directors over the creditors. At worst they might be professionally out of their depth and miss asset realisation opportunities. In some cases despite court appointment they just don’t do their job properly. But as I say this is rare in court appointments. If you scan public notices or the Gazette the bulk of court applications and appointments are on the petition of IRD. IRD has its owns liquidators in high profile firms and some others around the more provincial areas. These liquidators are as a general rule highly experienced and do a good job.
There has been a trend over the last few years for IRD appointments to go to the Official Assignee. This can only happen if IRD’s preferred liquidators do not consent to take the liquidations or IRD does not bother to ask them for a consent to be liquidator. I suspect the preferred liquidators are picking and choosing leaving the rest to go to the Official Assignee.
By far the bulk of liquidations in NZ are voluntary appointments by shareholders. 75% of shareholders can vote to put a company into liquidation and appoint a named liquidator. If the liquidator consents to appointment then they are appointed.
Why do companies go into voluntary liquidation? Some do so because they no longer have a purpose to exist. The business has been sold or ceased, creditors have been paid (or funds are there to pay them). These are usually solvent liquidations and a tidy up. They also allow a distribution of capital back to shareholders tax free. Other reasons are that the shareholders just come to the realisation that the company is insolvent and needs to go. There is not always huge creditor pressure it is just the right thing to do. Then there are voluntary liquidations that occur because a creditor is heading towards liquidating the company. If you look at the stats in the Gazette IRD is the petitioning creditor in the bulk of liquidation applications. However, there are some other organisations that apply a zero tolerance policy to debt collection -” if you don’t pay we will liquidate you.” That sends a good clear message. Unfortunately for most day to day creditors the cost benefit of liquidating debtors does not stack up and so they leave it to others usually IRD.
A stat demand is in effect a test of insolvency. When a creditor issues a stat demand if you don’t meet the debt or dispute the debt the company is deemed to be insolvent. The next step is to apply to liquidate on the basis that the company cannot meet its debts as they fall due.
Many companies at this point go into voluntary liquidation. Why? There are a number of reasons. Dealing with a failing company is stressful. Just biting the bullet and going voluntary is a sensible option. Having a liquidator of your choice appointed at your cost can avoid the harder scrutiny of a court appointed liquidator. And, in some cases the the voluntary liquidation regime provides an avenue to spirit assets away or allow transactions that have occurred in the 2 years prior to liquidation to go unchallenged. It can also shield directors from banning orders and other remedies for creditors under the Companies Act and other legislation. Read more »