Despite the challenges of the COVID-19 pandemic (which has seen the shuttering of New Zealand's international tourism industry), formal insolvency and restructuring activity in New Zealand has been at notably low levels in 2020. Nonetheless, it has been a year of considerable change. We have seen novel cross-border insolvency proceedings; both temporary and permanent law reforms; the commencement of insolvency practitioner regulation; landmark Supreme Court judgments; and some notable distressed M&A transactions.
In "a classic case for cross-border cooperation between courts", the New Zealand High Court has conducted joint hearings with the Federal Court of Australia by AV link and Microsoft Teams in the liquidation of Halifax New Zealand Limited (in liquidation) and its Australian parent.
The Halifax liquidators have sought directions in both countries on the way in which funds of over NZD$200 million held in relation to the Halifax online financial services businesses should be distributed. The courts have utilised the cross-border aid and assistance provisions of the Model Law on Cross-Border Insolvency and the Australian Corporations Legislation to coordinate the separate proceedings and hear evidence and submissions together in the interests of efficiency and consistency. Separate decisions will be issued by each court. Matt Kersey, Kirsten Massey, Bridgette White and Sam Jones of Russell McVeagh are acting for the liquidators in the New Zealand proceedings.
Outside of the Halifax case, formal cross-border insolvency proceedings in New Zealand have been limited in 2020. We have seen an Australian bankruptcy be recognised as a foreign named proceeding under the New Zealand legislation in one notable case.
COVID-19 specific reforms – Business debt hibernation and 'safe harbour' provisions
The New Zealand Government, like its counterparts around the world, enacted legislative reform as part of its package of support measures for businesses dealing with the impacts of lockdowns. Some of these measures were temporary; others constitute permanent changes to New Zealand's insolvency laws.
One temporary measure, for now, is a new insolvency procedure, business debt hibernation. The hibernation process allows entities a six-month period of "breathing space" to manage repayment of their existing debts. Take-up of this scheme has been limited. As of 30 October 2020, only 41 entities have triggered the business debt hibernation regime in total, with only 15 of those entities still in business debt hibernation. However, this relatively low level of take-up may reflect the success of other support measures, including the government's wage subsidy.
'Safe harbour' provisions were temporarily introduced to the Companies Act 1993 to provide some relief for directors of companies struggling due to the pandemic. From 3 April 2020 to 30 September 2020, safe harbour provisions were in place which were designed to protect directors from liability where they were acting in good faith while responding to challenges to their business posed by COVID-19. The safe harbour applied to the Companies Act duties not to trade recklessly (section 135) and not to allow the company to incur obligations without a reasonable belief that they will be met when due (section 136).
The Government also fast-tracked a planned law change to New Zealand's law transactions regime. This change saw the voidable transactions standard "claw-back" period reduced to six months prior to liquidation.
Insolvency practitioner's regulation
On 1 September 2020, a compulsory licencing and registration regime for insolvency practitioners came into force. The New Zealand Institute of Chartered Accountants (NZICA), being the statutory body responsible for regulating New Zealand resident members of Chartered Accountants Australia and New Zealand (CAANZ) will oversee the licensing of insolvency practitioners with members of Restructuring Insolvency & Turnaround Association of New Zealand being eligible for licensing. The Companies Office will maintain a publicly searchable register of insolvency practitioners.
Formal insolvency activity
Formal insolvency appointments remain at modest levels, with liquidations notably falling from 2019. For instance:
- There were 416 applications for winding up and liquidations in the period to 31 October in 2020, in contrast to 614 applications for the same period in 2019.
- 1,228 liquidators were appointed in the period to 31 October in 2020 compared to 1,418 for the same period in 2019.
- The appointments of receivers and managers moderately increased year on year. 104 such appointments were made for the period to 31 October compared to 83 for the same period in 2019. (Source: RITANZ)
Landmark Supreme Court judgments
The Supreme Court issued its decision in Madsen-Ries v Cooper (Debut Homes) on the duties of directors when a company is trading in the "twilight zone" and solvency is doubtful. The Court held that, where a company is insolvent (or nearly insolvent), the interests of all creditors must be considered, and where directors allow a clearly insolvent company to continue trading without engaging in a formal insolvency process or a restructuring involving consultation with (or payment of) all creditors, this is likely to constitute a breach of duty. This has the potential to cause difficulties for directors seeking to trade out of a difficult situation.
The Supreme Court did make certan comments that suggest that its judgment should be limited to "unsalvageable" companies and not apply to companies with temporary liquidity issues only. However, while the Court appears to have been focussed on companies facing inevitable liquidation, there remains uncertainty as to how far the judgment will be applied beyond that not least given the Court's reference to companies "near insolvency". This uncertainty has given rise to further calls for reform of the relevant Companies Act duties to provide much needed clarity for directors, not least to give them confidence to pursue director led workouts which often lead to a better result for creditors than formal insolvency processes.
In another significant judgment, the Supreme Court unanimously endorsed class actions being brought on an opt-out basis, meaning that future potential class actions could have a much greater pool of plaintiffs than those currently before the New Zealand courts.
Schemes of arrangement
New Zealand has a highly flexible scheme of arrangement regime under its Companies Act. 2020 saw the scheme of arrangement remain relatively popular for corporate transactions, including the Tilt Renewables return of capital. In a relatively rare instance, a shareholder's scheme of arrangement faced opposition for a period in a case detailed in our update here.
Whilst creditors' schemes of arrangement remain rare in New Zealand, they remain a useful restructuring tool in the right circumstances, and we watch with interest as to whether they may be used in the coming years.
Creditors – compromises
The New Zealand Companies Act includes a procedure for a compromise between a company and its creditors, without the need for a court order. These compromises draw their legal effect from a procedure which sees the dissemination of certain required information to creditors and a creditor vote. Court oversight is possible, but not required. It has been a notable feature of 2020 that creditors' compromises have received new prominence in New Zealand, even though the reported numbers of such compromises are relatively low. It has been well publicised that a womenswear retail chain, Max Fashions, and the fast food chain, Burger King, both used creditors' compromises this year.
The opportunities of distressed M&A have been highlighted by two high-profile successful sales by receivers in 2020. The Burger King creditors' compromise was proposed to allow the business to continue trading while a purchaser was found. Burger King was sold by its parent shareholding companies, which were under the control of receivers. Similarly, the wood-processing company Claymark was also sold as a going concern by its receivers in September 2020.
Russell McVeagh in 2020
2020 has seen our Russell McVeagh team bolstered by the return of former Herbert Smith Freehills banking litigation partner, Kirsten Massey, from a decade at the peak of the litigation market in London.
Our Restructuring and Insolvency team has won a number of awards and been recognised with rankings this year, including: