Insolvency Law at New Zealand
In New Zealand, insolvency law is well-established and provides structured procedures for both corporate and personal insolvency. It is designed to help businesses and individuals deal with financial distress while balancing the interests of creditors and providing a framework for rehabilitation where possible. The primary legislation governing insolvency in New Zealand includes the Companies Act 1993, the Insolvency Act 2006, and the Personal Insolvency (Bankruptcy) Act 2006.
Here’s an overview of insolvency law in New Zealand:
1. Key Legislation
Companies Act 1993: This is the main legislation governing corporate insolvency and the liquidation process in New Zealand.
Insolvency Act 2006: Provides the legal framework for personal insolvency, including bankruptcy and voluntary debt arrangements.
Personal Insolvency (Bankruptcy) Act 2006: This Act governs the processes for individuals who are bankrupt or facing financial hardship.
Receivership Act 1993: Governs receivership, a process used when secured creditors take control of a debtor's assets to recover their debts.
2. Types of Insolvency Procedures
a. Corporate Insolvency
In New Zealand, corporate insolvency involves various procedures, including liquidation, receivership, and voluntary administration.
i. Liquidation
Purpose: Liquidation is the process of winding up a company when it is insolvent and unable to pay its debts.
Initiation: Liquidation can be voluntary (initiated by the company or shareholders) or compulsory (initiated by creditors or the court).
Voluntary Liquidation: When the directors or shareholders determine the company cannot continue, they may appoint a liquidator to sell off the company’s assets and distribute the proceeds to creditors.
Compulsory Liquidation: Creditors can petition the court to force the company into liquidation, usually if the company is unable to pay its debts and is in financial distress.
Process: A liquidator is appointed to collect and sell the company’s assets and distribute the proceeds to creditors in a priority order.
Outcome: Once liquidation is complete, the company is dissolved.
ii. Receivership
Purpose: Receivership is used when a secured creditor (often a bank) appoints a receiver to take control of a company’s assets to recover its debt.
Initiation: Typically initiated by a secured creditor with a charge over the company's assets.
Process: The receiver takes control of the assets and sells them to satisfy the debt owed to the secured creditor. The receiver’s primary responsibility is to the secured creditor, though other creditors may receive some payment if there are funds left after the secured debt is satisfied.
Outcome: Once the receiver has collected and sold the assets, the company is either returned to the directors or liquidated if it remains insolvent.
iii. Voluntary Administration
Purpose: Voluntary administration is a process designed to help a company in financial difficulty to avoid liquidation by entering into negotiations with creditors for a possible restructuring or debt arrangement.
Initiation: The company’s directors can appoint an administrator to manage the company’s affairs, conduct investigations, and attempt to restructure or reach an agreement with creditors.
Process: During the administration period, the company is protected from legal action by creditors (known as a "moratorium"). The administrator will attempt to reach an agreement with creditors, which might involve debt forgiveness or a restructuring plan.
Outcome: If the creditors agree to the proposed plan, the company may continue to operate under a new structure. If no plan is agreed upon, the company may be placed into liquidation.
b. Personal Insolvency (Individual Bankruptcy)
In New Zealand, personal insolvency is primarily managed through bankruptcy and voluntary debt arrangements.
i. Bankruptcy
Purpose: Bankruptcy is a process for individuals who are unable to meet their financial obligations. It offers a fresh start by allowing for the discharge of debts after a period of time, typically 3 years.
Initiation: An individual can file for bankruptcy themselves (voluntary bankruptcy) or creditors can initiate the process by applying to the court for a bankruptcy order (involuntary bankruptcy).
Process: When an individual is declared bankrupt, an official receiver is appointed to manage the individual’s assets. The bankrupt individual must disclose all assets and liabilities, and the receiver will sell non-exempt assets to pay creditors.
Outcome: After 3 years, the individual is usually discharged from bankruptcy, meaning they no longer have to pay off the remaining debts, except for some specific obligations (e.g., child support, student loans).
ii. No Asset Procedure (NAP)
Purpose: The No Asset Procedure is a simplified debt relief process for individuals with minimal assets and few or no income.
Eligibility: To qualify, the individual must have assets of less than NZD 1,000 and must meet other financial criteria. It is an alternative to bankruptcy and offers a way for individuals to get a fresh start.
Process: Once accepted into the No Asset Procedure, creditors are barred from taking any further action to collect the debt. This procedure usually lasts for 12 months.
Outcome: At the end of the process, the individual is discharged from their debts.
iii. Voluntary Debt Agreements
Purpose: A debtor and creditors can enter into a formal agreement to settle debts over a period of time without going through bankruptcy. This is often seen as an alternative to bankruptcy.
Process: A debt agreement is negotiated and structured by a licensed insolvency practitioner, and it must be accepted by creditors.
Outcome: The individual makes regular payments to a trustee who distributes the money to creditors according to the terms of the agreement. The individual avoids bankruptcy and may have debts reduced or written off.
3. Priority of Claims
In both corporate and personal insolvency proceedings, New Zealand law prioritizes claims as follows:
Secured creditors (those with a charge over the debtor’s assets).
Insolvency costs (such as administrator or receiver fees).
Preferential creditors (e.g., employees for wages, holiday pay).
Unsecured creditors (e.g., trade creditors).
Shareholders (if anything remains after all debts are paid, which is unlikely in many insolvency cases).
4. Key Features of New Zealand’s Insolvency Law
Emphasis on Rehabilitation: New Zealand’s insolvency laws prioritize reorganization and rehabilitation, particularly in the case of companies. This is reflected in the voluntary administration and judicial management processes.
Clear Discharge for Individuals: Personal bankruptcy allows individuals to obtain a fresh start after a relatively short period (usually 3 years), giving them a clean slate and a chance to rebuild their financial position.
Insolvency Practitioners: Insolvency practitioners (liquidators, administrators, and receivers) are licensed professionals who manage insolvency processes. They are regulated by the Insolvency Practitioners Association of New Zealand (IPAN).
Access to Debt Relief: The No Asset Procedure (NAP) provides an alternative to bankruptcy for individuals who have minimal assets and few debts, allowing them to escape financial distress more quickly.
5. International and Cross-Border Insolvency
New Zealand is a signatory to international agreements and conventions that help manage cross-border insolvency, such as the UNCITRAL Model Law on Cross-Border Insolvency. This allows New Zealand to cooperate with foreign jurisdictions in the handling of international insolvency cases, particularly when businesses or assets span multiple countries.
6. Recent Developments
The Insolvency (Amendment) Bill: Proposed amendments to insolvency law are periodically reviewed in New Zealand to enhance the efficiency of the insolvency process, improve debt recovery, and provide better protections for both debtors and creditors.
Conclusion
Insolvency law in New Zealand is well-structured and provides clear pathways for both corporate and personal insolvency. The system offers a variety of tools for businesses to reorganize, such as voluntary administration and judicial recovery, as well as a fresh start for individuals through bankruptcy or the No Asset Procedure. The emphasis on rehabilitation, alongside well-defined procedures for liquidation and receivership, creates a balanced approach to managing financial distress.
RELATED Blog
0 comments