Restructuring and Insolvency 2022/23: The year that was and what's to come
We take a look back at all the major developments in Restructuring and Insolvency law for 2022 and get a taste of what's yet to come in 2023 and beyond.
You can access the summary version of this update HERE (PDF).
Court exercises discretion to grant examination order
18 February 2022
In Fatupaito v Stewart  NZCA 21, the Court of Appeal affirmed a decision of the High Court which provided guidance on the ability of a liquidator to conduct investigations and demand information under ss 261 and 266 of the Companies Act 1993. The company in liquidation had significant liabilities to IRD and the liquidators sought to examine a director before the Court and produce records concerning the company's only significant asset – an "overseas investments" account recorded in the financial accounts of the company. The director had not provided any meaningful information on the overseas investments account and the liquidators had been unable to gain any further information following an examination of the director under s 261 (which is conducted outside of Court). Therefore, the liquidators sought to examine the director under s 266. The director opposed the application under s 266 on the basis that it was oppressive due to the fact he was already subject to recovery proceedings brought by the liquidators.
The Court found that an order cannot be made to obtain a director’s private information for the purposes of ascertaining whether they can meet any money judgment that may be obtained against them. The Court rejected the argument that ordering an examination would be unduly oppressive or burdensome. The examination under s 266 was plainly necessary for the liquidators to fulfil their duties given the director's lack of cooperation and importance to investigating the "overseas investments" account. The Court, therefore, ordered that the director be examined before the Court to adduce information relating to the company’s overseas investments. This is a useful reminder on the limits of a liquidators' powers to obtain information under their examination powers.
Ukraine invasion commences with tragic consequences
24 February 2022
The shocking Ukraine invasion commenced on 24 February 2022 when Russia sent troops into Ukraine from three fronts and fired missiles on several locations near Kyiv. Central amongst the costs of this invasion is the atrocious human suffering in Ukraine and by Ukrainians across the world. Given Russia and Ukraine's roles as major producers of energy, metals, wheat, maize and fertilisers, this conflict has disrupted the supply of these commodities across the world and the negative supply shock to these commodities has seen an increase in the costs of imports for New Zealand. The Reserve Bank of New Zealand (RBNZ) has expressed the view that although New Zealand's direct trade and payment exposures to Russia and Ukraine are small, high commodity prices are affecting households and businesses and high headline inflation in New Zealand is weighing on household confidence, real incomes, and consumer spending.
This is driving the cost of key business inputs even higher, including energy, freight and transportation which has boosted other input costs indirectly. Adrian Orr, Governor of the RBNZ, is asking people to think harder about spending after admitting to engineering a recession to slow spending.
Additionally, in response to the conflict, New Zealand enacted the Russia Sanctions Act 2022 on 11 March 2022. This Act enables New Zealand to impose and enforce economic sanctions targeting specific people, companies, assets, and services associated with Russia's invasion of Ukraine. Read more in our Watching Brief here.
Restatement of the requirements for administrators exercising an equitable lien
12 May 2022
The limits of a voluntary administrator's equitable lien over secured property were recently considered by the New South Wales Supreme Court. Administrators in New Zealand and Australia have a statutory priority for costs over secured creditors. The provisions of the Corporations Act 2001 (Cth) and the Companies Act 1993 differ slightly in relation to that priority. In New Zealand, the statutory priority is limited to accounts receivable and inventory (section 239ADM). However, there is also an equitable (or "salvage") lien, which potentially provides a further basis to be secured out of assets to which section 239ADM does not apply, for example where the administrator maintains, preserves, or realises property which is the subject of a prior security granted to a third party.
The decision in Volkswagen Financial Services Australia Pty Ltd v Atlas CTL Pty Ltd (Recs and Mngrs Apptd) (In liq)  NSWSC 573 has emphasised that an administrator's equitable right of indemnity has strict limits. The lien was held to be claimable only where (a) the work was done and costs incurred were reasonable for the purpose of maintaining, preserving or realising the relevant property; and (b) the work was done and the costs incurred exclusively for those purposes. In this case, the administrators had traded the business of a rental car company, in which the rental car fleet was secured in favour of financiers such as Volkswagen Financial Services.
The Court held that the trade on costs were not for the purpose of preserving vehicles, rather they were for the purpose of preserving and realising the goodwill in the business. The vehicles were later realised by receivers appointed by the secured creditor, not by the administrators. In those circumstances, the administrators could not demonstrate a connection between their costs incurred and the fund of realisations nor that the decision to trade on was reasonable in the circumstances. In that case, the secured creditors were entitled to wait and see what was the outcome of the administrators' trading process without losing their priority over the vehicles.
The case demonstrates the benefits of administrators endeavouring to put in place an arrangement for costs and expenses, including trading expenses, with secured creditors if they wish to trade on in administration and be protected for their costs, and the risks if they do not do so.
Receivers are entitled to retain a fund to defend allegations of breach of duty
16 June 2022
The High Court in Fistonich v Gibson  NZHC 1422 has clarified that receivers are entitled to retain a fund out of secured property to protect themselves for both their remuneration and legal costs incurred in defending themselves against allegations of breach of duty. Receivers will generally have an indemnity out of, and lien securing the indemnity in respect of, secured property at least until the issue of liability has been determined. The quantum held will be likely to need to be reasonable but the fund can be used to meet costs as they arise. This case arose in the context of a claim by the shareholder and former director of Villa Maria against the receivers, alleging that the receivers had breached the duty to obtain the best price reasonably obtainable and seeking orders setting aside a retention of $5.16 million, of which $3.16 million was held for legal costs.
Deposit Takers Bill introduced into Parliament
27 September 2022
The Deposit Takers Bill forms the third of the trilogy of Bills that have occurred as a result of the Government's review of the Reserve Bank of New Zealand Act 1989 that commenced in 2017. The Bill had its first reading on 27 September 2022 and proposes to replace the existing regulatory regimes for banks and Non-Bank Deposit Takers (NBDT) under the Reserve Bank of New Zealand Act 1989 and the Non-Bank Deposit Takers Act 2013, which will have an impact on all currently registered banks and licensed NBDT.
The two key programmes the Act will enable is firstly the creation of a Depositor Compensation Scheme to protect deposits held in banks and non-banks. This will increase the deposit protection threshold from $50,000 to $100,000, which will bring the coverage limit more in line with similar schemes in OECD jurisdictions. Secondly, it seeks to strengthen the supervisory and enforcement powers of the Reserve Bank to allow it to act before deposit takers are in trouble.
Other key changes include:
the ability for the Reserve Bank of New Zealand (RBNZ) to set standards as the main tool for imposing prudential requirements;
a new due diligence duty for directors of banks and NBDT which covers "prudential obligations", including Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act) obligations;
increased supervision and enforcement tools for the RBNZ, including a range of civil liability provisions which will provide the RBNZ with a potentially more usable set of enforcement tools versus those in the current RBNZ Act where the focus in on criminal liability; and
a revised crisis management framework.
More information on the exposure draft of the Bill can be found here and from the RBNZ here. The Bill is expected to come into law after receiving Royal Assent in mid-to-late 2023.
Australia commences corporate insolvency law review
28 September 2022
The Australian Federal Government, through the Parliamentary Joint Committee on Corporations and Financial Services (Committee), announces an inquiry into the effectiveness of Australia's corporate insolvency laws on 28 September 2022. Matters that the Committee will be particularly focussed on include:
Recent and emerging trends in the use of corporate insolvency and related practices in Australia in regard to temporary COVID-19 pandemic insolvency measures and recent changes in domestic and international economic conditions.
The operation of recently enacted legislative reforms including regarding small business, simplified liquidation, unlawful phoenixing and the PPSA.
Other potential areas for reform including unfair preference claims, trusts with corporate trustees and insolvent trading laws.
The role of corporate insolvency practitioners and various government agencies.
The Australian Restructuring Insolvency & Turnaround Association (ARITA) has welcomed the announcement of this review and has supported streamlining Australia's insolvency laws to make them "simple, effective and efficient". The Committee accepted submissions up until 30 November 2022 and aims to table a report in both Houses of Parliament by 30 May 2023. The outcomes of this review will be of interest to New Zealand regulators and practitioners alike given the similarities of the laws across both jurisdictions, the similarities in current economic conditions facing each country, and the spotlight in New Zealand on directors' duties.
Confirmation of the Sequana sliding scale creditors' duty in the UK
5 October 2023
The United Kingdom Supreme Court confirms that directors of an insolvent or a near-insolvent company must consider the interests of creditors and adopt a sliding scale approach such that:
once a company becomes financially insolvent (or is approaching insolvency), the directors are required to consider creditors' interests and balance those interests against shareholders' interests where the two conflict. The greater a company's financial distress, the greater the attention that must be paid to the position of creditors; and
at the point where an insolvent liquidation or administration is inevitable, the interests of creditors become paramount and must be prioritised by the company's directors.
This decision is likely to be relevant to the duty of good faith and to act in the best interests of the company in section 131 of the NZ Companies Act 1993 and may be apparent shortly, after the Supreme Court of New Zealand heard submissions on the case as part of the Mainzeal proceedings, in the context of appeals regarding section 135 (reckless trading) and section 136 (duty in relation to obligations). Our observations on the BTI 2014 LLC v Sequana and others decision can be found here.
Australia rejects set off of voidable preference liability against separate debt to creditor
12 October 2022
In the first of two insolvency related appeals heard by the High Court of Australia, the jurisdiction's highest court, the Court in Metal Manufactures Pty Ltd v Morton  HCA 1 holds that under the Australian equivalent to s 310 of the Companies Act 1993, a creditor cannot set off a liability to repay an unfair (voidable) preference against a separate debt owed to it by the company in liquidation. The Court's reasons were, in summary:
A liability to repay an unfair preference does not arise until after the liquidation commences. Accordingly, there is no liability of the creditor to the company in existence at the time of liquidation that could be taken into account when the automatic set-off of mutual debts, credits and dealings is taken to have occurred (on the appointment of liquidators);
There is also no mutuality between the two amounts because:
The debts were not owed between the same two persons. The debt owed to the creditor was owed by the company; while the liability of the creditor to repay the preference is still owed to the company, it arises on the application of the liquidator who does not do so as agent for the company but rather in his or her own right as an officer of the court.
The liquidator would not recover the payment for his own benefit or for the benefit of the company; instead the payment would need to be applied in accordance with the statutory scheme of liquidation, including for distribution to creditors as a whole in accordance with statutory priorities. This could not be said to be the same as the interest the creditor had in recovering payment of its debt from the company.
Australia moves towards NZ position in abolishing "peak indebtedness" approach to voidables
18 October 2022
In the second of the High Court of Australia's two insolvency decisions carried over from last year, the Court in Bryant v Badenoch Integrated Logging Pty Ltd  HCA 2 unanimously confirmed that the "peak indebtedness rule" does not apply in Australia in respect of voidable transaction proceedings. An Australian liquidator can no longer choose the point of "peak indebtedness" when considering a series of transactions that make up a "running account" (in which a series of transaction is treated as a single transaction for the purposes of determining whether the creditor has received a preference) so as to maximise the value of the potential recovery in a voidable transaction application. Instead, if there is a series of transactions that fit the "continuing business relationship" test, the starting point is either:
This brings the Australian position broadly into line with the New Zealand position established by the Court of Appeal in Timberworld Ltd v Levin  3 NZLR 365.
This takes away a tool previously available to Australian liquidators to maximise creditor recoveries, but equally lessens the risk to counterparties dealing with Australian companies that may later become insolvent. As explained by the Court, the purpose of the "running account" principle is to recognise that a creditor who continues to supply a company on a running account when potentially near insolvency likely benefits creditors as a whole; the purpose is not to maximise the potential for claw-back by a liquidator.
Are we in the midst of a Crytpo-winter
11 November 2022
2022 saw significant disruption to technology industries, particularly crypto based exchanges, platforms and related funders. In the US, tech stocks fell more than 30% in 2022 (more than the overall market decline of 20%), significant lay-offs have been announced and regulators have turned their attention to these sectors. Notable examples from international headlines include the collapse of FTX, a major cryptocurrency exchange platform which filed for chapter 11 bankruptcy on 11 November 2022. Related companies such as Celsius and Genesis (crypto focussed lenders) subsequently filed for bankruptcy. 'Buy now pay later' companies have also faced significant headwinds – in early 2023 receivers were appointed to Openpay, an Australasian buy now pay later platform. New Zealand has also experienced its own wave of technology industry disruptions. For example, in February 2023, receivers were appointed to Protempo Limited (a logistics and electronics technology company). All this disruption has prompted regulators to seek to tighten the regulatory environment in which technology companies operate. There has been a large volume of regulatory engagement with digital assets across the Commonwealth in 2022 and early 2023, including:
Following the recommendations by the Bragg Report in 2021, the Australian Treasury has consulted on (a) the establishment of a market licensing regime for Digital Currency Exchanges, including capital adequacy, auditing and responsible person tests under the Treasury portfolio and (b) establishing a custody or depository regime for digital assets. Future consultation has been foreshadowed on the appropriate regulatory structure for innovative corporate structures like Decentralised Autonomous Organisations.
In July 2022, the Law Commission (UK) published a consultation paper for regulating digital assets following on from UK jurisdiction taskforce Legal Statement on status of cryptoassets and smart contracts, in which the UKJT found that cryptoassets have “all of the indicia of property” and the fact that cryptoassets are intangible, use cryptographic authentication and distributed transaction ledgers, are decentralised and operate on the basis of rules by consensus as opposed to legal rules, does not “disqualify them from being property”.
On 24 January 2023, the European parliament's economic affairs committee approved a draft law that would require banks holding cryptocurrencies to back them with prohibitive capital requirements. It remains to be seen how regulators in New Zealand will respond to this new disruption.
Are they documents of the company or of the liquidator?
16 November 2022
A liquidator obtains orders in Whitley v Meredith Connell  NZHC 2994 requiring a law firm instructed by his predecessor to carry out a privilege review of certain files it holds and to deliver up documents that relate to the business accounts or affairs of the companies in liquidation to the new liquidator. This was an application under sections 261 and 266 of the Companies Act 1993, which provide liquidators with rights to obtain documents belonging to and relating to a company in liquidation.
In reaching its decision, the Court considered whether documents held by lawyers instructed by a liquidator are documents of the liquidator or of the company in liquidation, and who has legal privilege in relation to those documents. Departing from previous High Court authority, the Court found that:
A liquidator is an agent of the company (although a special kind of agent) and agency principles apply.
The files that the liquidator ultimately sought to obtain came into existence in the course of the performance of the former liquidator's duties as liquidator and they belong to the companies. The company's lawyer cannot assert the company's legal privilege against its liquidator.
If the files also contained documents relating to the liquidator's personal affairs, it would be necessary for the firm to review its files and identify those documents before privilege could be claimed on behalf of the former liquidator.
A law firm cannot assert a lien for unpaid fees for work carried out for the former liquidator as a basis not to hand over company documents to a new liquidator.
The firm was not entitled to be paid its costs of conducting a review of its files, those costs being a cost of doing business in the practice of law and not uncommon for a law firm to need to incur.
This decision should be noted by insolvency practitioners and lawyers as it highlights the importance of correctly identifying the (often multiple) parties to the lawyer-client relationship in relation to insolvency instructions and the potential for advice provided to one practitioner to be available to their replacement. The Court's comments regarding lawyers being in a position to make arrangements to protect themselves for (non-)payment of their fees on insolvency engagements and reimbursement of costs for complying with a liquidator's demand for documents not being usual are also worth bearing in mind for insolvency lawyers, in particular.
UK Report on 2020 restructuring reforms
19 December 2022
On 19 December 2022, the UK Insolvency Service published the "Corporate Insolvency and Governance Act — Final Evaluation Report November 2022", which considers the impact of the Corporate Insolvency and Governance Act 2020 (CIGA) which was passed in the midst of the COVID-19 disruption in the UK. CIGA implemented three new R&I measures (in addition to temporary COVID-19-related relief): a moratorium process providing at least 20 business days breathing space from certain enforcement action, ipso facto clauses restricting termination of contracts upon insolvency, and restructuring plans. Our August 2022 presentation to RITANZ on the restructuring plan can be accessed via the RITANZ website or by contacting us.
In summary, the review concluded that the three permanent CIGA amendments have been largely successful. In particular:
The suspension of ipso facto clauses in supply contracts has been seen as a useful corporate rescue tool preventing insolvent companies from being held hostage by suppliers threatening to withdraw supply.
Restructuring plans appear to have been the most successful of the three measures and have largely succeeded in meeting their policy objectives. Whilst they are seen as costly, there is a growing trend of restructuring plans being used in the mid-market (which was not the case for schemes of arrangement), which will be of interest to New Zealand practitioners. The UK Insolvency Service have made several recommendations for improving restructuring plans including removing one of the two Court hearings, having a specific Insolvency and Companies court Judge (which we do not have in New Zealand) and increasing the disclosure and transparency requirements on the launch of the plan.
There are several issues with the moratorium procedure, including the eligibility criteria effectively excluding larger corporate borrowers due to the need to continue to service 'financial contracts' throughout the moratorium period, and the perceived disincentives for registered insolvency practitioners to act as "monitors"/supervisors of the moratorium.