Most commonly, receiverships commence when a secured creditor appoints a receiver to a company in cases where the company owes funds but fails to pay on time, or the company is in another kind of default to the secured creditor. The Court can also appoint a receiver in certain circumstances but this does not occur as often in practice.
Once appointed, a receiver may take possession of, manage, and sell some or all of the company’s assets.
Appointment of a Receiver
A secured creditor’s right to appoint a receiver is purely contractual; it will depend on the wording of the security agreement. It should be noted, however, that in practice most security agreements include the power to appoint a receiver. Likewise, the receiver’s powers are not only set out within legislation but also under an underlying contract allowing the receiver to be appointed in the first place.
Most of these security agreements require that a formal demand of any outstanding debt is made before an event of default that triggers the right to appoint a receiver occurs.
It is important to review these documents once a company shows signs of financial distress and enforcement options are considered. At Norling Law, our experts are experienced in dealing with receiverships and offer aFREE 30-minute Legal Consultation where they can discuss the issues and add strategic value.
Status of Receivership
The appointment of a receiver does not change the legal status of the company; the company is still the same legal entity as it was prior to the receivership. Generally, the legal rights of the company in receivership are not limited by a receivership. The company can still commence or continue legal proceedings and its contractual and property rights are generally unaffected.
Some contracts with third parties, however, expressly provide for termination of the contract if one of the contracting parties is placed into receivership. Subsequently, it is important to review all contracts to see if they are potentially affected by a receivership of either of the contracting parties.
Powers of a Receiver
The security agreement itself is usually the fundamental source of the receiver’s powers. However, these powers are also supplemented by the provisions of s 14(2) of the Receiverships Act 1993 (“the Act”). These statutory powers are subject to the deed or agreement or the order of the court by or under which the appointment was made.
It is advised that all powers that are intended to be granted to a receiver are expressly included in the security agreement, as some powers, such as the power of sale, are not expressly included under the Act.
Likewise, it is advised that powers that are not intended to be granted to a receiver are expressly excluded in the security agreement if they have been statutorily included under s 14(2) of the Act.
Examples of powers usually granted to a receiver are:
Power to collect and sell the debtor company’s assets;
Power to operate the debtor company’s business;
Power to restructure the debtor company’s affairs;
Power to borrow for the purpose of the receivership;
Power to execute all necessary documents on behalf of the debtor company;
Power to commence and conduct legal proceedings in the name of the debtor company;
Power to apply to Court for directions in relation to any matter arising in connection with the performance of the functions of a receiver; and
Power to take remuneration and indemnity.
The basic function of a receiver is to take control of the assets in receivership and to generate cash through profitable trading, or more commonly, the sale of all or some of the assets and pay the proceeds to the appointing creditor.
Duties of a Receiver
The receiver must exercise his or her powers in a manner he or she believes, on reasonable grounds, to be in the best interests of the appointing creditor (s 18(2) of the Act). Although a receiver must exercise his or her powers in good faith and for a proper purpose (s 18(1) of the Act), a receiver may not always act in the best interests of the company or other creditors, to the extent that s 18(3) of the Act applies. Subsequently, this means that a receiver’s primary duty is to the appointing creditor, and a subservient secondary duty is to have reasonable regard to the interests of the debtor company and its other creditors.
Receivers also have reporting obligations that they must abide by. Not later than 2 months after the appointment, a receiver must prepare a report on the state of affairs with respect to the property in receivership including:
Particulars of the assets comprising the property in receivership; and
Particulars of the debts and liabilities to be satisfied from the property in receivership; and
The names and addresses of the creditors with an interest in the property in receivership; and
Particulars of any encumbrance over the property in receivership held by any creditor including the date on which it was created; and
Particulars of any default by the grantor in making relevant information available; and
Such other information may be prescribed.
The report must also include details of:
The events leading up to the appointment of the receiver so far as the receiver is aware of them; and
Property disposed of and any proposals for the disposal of property in receivership; and
Amounts owing, as at the date of appointment, to any person in whose interests the receiver was appointed; and
Amounts owing, as at the date of appointment, to creditors of the grantor having preferential claims; and
Amounts likely to be available for payment to creditors other than those referred to in paragraph (c) or paragraph (d).
The grantor and any person whose interests the receivers were appointed are entitled to receive the report. Furthermore, any creditor, director, or surety of the grantor, or any person with an interest in any of the property in receivership may request a copy of the report.
Receivers must also, no later than 2 months after each period of 6 months after their appointment, or the date on which the receivership ends, prepare a report summarising the state of affairs with respect to the property in receivership, including all amounts received and paid during the period that the report relates to.
This report must include details of:
Property disposed of since the date of any previous report and any proposals for the disposal of property in receivership; and
Amounts owing, as at the date of the report, to any person in whose interests the receiver was appointed; and
Amounts owing, as at the date of the report, to creditors of the grantor having preferential claims; and
Amounts likely to be available as of the date of the report for payment to creditors.
Summary
Receiverships are notoriously contentious; in every receivership, there are emotional and frustrated parties. It can be an arduous process to navigate for all parties involved. Whether you are a creditor wanting to enforce a security agreement to appoint a receiver, a receiver managing the assets of a company, or a director of a debtor company, Norling Law can assist you to ensure that a commonly stressful, contentious process is made smoother.
Our expert receivership lawyers assist clients to navigate this process throughout New Zealand. There are many pitfalls if implemented incorrectly.
Please refer to our People for more information on who we are, our experience, and how we can help you.
Generally, bankruptcy lasts for a period of three years. During this time, a bankrupt is subject to onerous conditions imposed by the Insolvency Act 2006. These conditions include, but are not limited to:
The bankrupt’s property vesting in the Official Assignee;
The continued monitoring of the bankrupt’s financial affairs;
Prohibition from being involved in the management of a company or being self-employed without the consent of the Official Assignee; and
Prohibition from travelling overseas without the consent of the Official Assignee.
The Courts have frequently acknowledged that the three-year term allows the Official Assignee to properly administer the estate of the bankrupt and it also allows for the protection of the community from the bankrupt.
Parliament, however, has also recognised that a bankruptcy term of three years may in certain instances not be necessary and there is a provision in the Insolvency Act 2006 which allows a bankrupt to end their bankruptcy earlier.
There is also a provision under the Insolvency Act 2006 which allows the bankrupt to annul their bankruptcy in limited circumstances.
Early Discharge
Under s 294 of the Insolvency Act 2006, a bankrupt may apply for early discharge at any time. In making the application, a bankrupt should carefully consider the timing of the application. This is because if the bankrupt is unsuccessful, the Court will usually specify the earliest date the bankrupt may apply again, and the bankrupt may not be able to apply for a considerable period.
The Court, in making an order for early discharge, may immediately discharge the bankrupt or may discharge the bankrupt with conditions such as the order to pay a sum of money or report to a financial advisor.
Parliament has given the Court a broad discretion to discharge the bankrupt and the Courts have been careful to ensure that the discretion remains unfettered. Each application will be determined on the facts of each case.
Despite the broad discretion, a bankrupt will usually need to show some form of special circumstances which justify early discharge. This is because there is a public interest in a bankruptcy lasting three years.
For instance, in Re Kaye HC Auckland B2182/93, 9 May 1997, the court allowed an application for early discharge when the bankrupt was unable to find meaningful work without being discharged and there was no advantage to the bankrupt’s only creditor serving the full three-year term.
It is important that a bankrupt who wishes to apply for early discharge ensures that they are compliant with their obligations and prohibitions under the Insolvency Act 2006.
The Courts have been clear that punishment of a bankrupt is not a consideration for early discharge, rather, the Courts tend to look at whether the bankrupt poses a further risk to the commercial community.
Annulment
Section 309 of the Insolvency Act 2006 allows a bankrupt to apply for annulment of their bankruptcy under three grounds:
The court considers that the bankrupt should not have been adjudicated in the first place;
The court is satisfied that the bankrupt’s debts have been fully paid or settled;
The court considers that the bankrupt’s debts should be revived because of a change in financial circumstances; or
The court has approved a composition with creditors.
The court considers that the bankrupt should not have been adjudicated
An application under this ground usually relates to some form of defect in procedure, abuse of process or where a material fact was not drawn to the Court’s attention at the adjudication hearing due to human error. The essence of any application for discharge under this ground is that the bankrupt, because of a defect in procedure or abuse of process, should not have been adjudicated in the first instance.
The threshold for annulment under this provision is high and the Courts will not entertain an effective rehearing of a bankruptcy proceeding.
In Re Willis, ex parte Willis [2017] NZHC 2586, an interesting argument was raised regarding abuse of process. In that case, a wife was bankrupted by her husband for $12,000. At the time of the bankruptcy proceeding, the wife and husband were involved in an acrimonious relationship property dispute where the wife was due to receive $600,000 from her husband. The Court considered that the bankruptcy was couched in the context of the relationship property dispute. Associate Judge Sargisson held that the husband’s successful application to bankrupt his wife amounted to an abuse of bankruptcy proceedings and allowed the wife’s application for annulment.
A bankruptcy application that was not served validly will also render the proceedings a nullity.
In Fredrickson Centurion Finance Ltd HC, Auckland B 259-01, 11 February 2005, a debtor who arrived late at Court and was adjudicated bankrupt in his absence had the adjudication annulled.
A successful application under this ground has the effect of annulling a bankruptcy from the date of adjudication. This means that the bankrupt is never considered to have been bankrupt. In relation to the other grounds, the bankruptcy is annulled from the date of the court order.
The court is satisfied that the bankrupt’s debts have been fully paid or satisfied
In order for an application to be successful, the bankrupt will need to have paid or satisfied all of their debts. The ground does not necessarily require that all debts be paid in full, rather, that the debts are satisfied. This provision allows the bankrupt to negotiate settlement of their debt with individual creditors.
The Courts have taken a broad approach in relation to the definition of debts and the definition extends to all known debts of the bankrupt and not simply the debts of creditors who have lodged a claim in the bankrupt’s estate. It is important that the bankrupt is able to provide sufficient evidence to the Court which shows that all known debts have been paid in full or satisfied.
The bankrupt will also need to show that the Official Assignee’s fees in relation to the administration of their bankruptcy have been paid.
The court considers that the liability of the bankrupt should be revived
This ground is related to the one above, however, it does not require the payment of debts prior to the application for annulment. Rather, it simply requires a change in a bankrupt’s finances which allows the creditors to be paid (e.g. inheritance, gift and etc.).
It is important that, when an application is made under this ground, that the bankrupt can provide cogent evidence that the bankrupt has the ability to repay their debts.
Similarities and Differences
Applications for annulment and early discharge are similar proceedings in that they generally release an individual from obligations under the Insolvency Act 1993. However, the two different processes import fundamentally different consequences for an individual. These consequences can be summarised below.
Annulment:
If application is made under the first ground, the individual is considered never to have been adjudicated bankrupt.
All property that vested in the Official Assignee at the time of adjudication re-vests in the individual.
The individual is not released from their debts.
Early Discharge:
The individual is still considered to have been bankrupt. The procedure simply ended prior to the general three-year term.
All property that vested in the Official Assignee at the time of adjudication does not re-vest in the individual.
The individual is released from their debts prior to adjudication (subject to limited exceptions).
Conclusion
A bankrupt who wishes to end their bankruptcy should carefully consider the best way to terminate their bankruptcy. Our professionals will be able to assist with choosing the right option and also making an application to Court (if necessary).
On 18 February 2015, the Supreme Court determined three appeals which involved a short but important point about the operation of the voidable transaction regime under the Companies Act 1993 (“the Act”).
The three appeals involved creditors who provided supply of goods or services to debtor companies. The creditors invoiced the debtor companies, and the debtor companies then paid within few months of the invoices being issued. In each case, the debtor companies went into liquidation within two years. (It is noted that as of May 2020, the limitation for voidable transactions is six months from the date of making an application to the court to commence liquidation proceedings, or the resolution placing the company into liquidation, unless the parties are found to be “related parties”, in which case the limitation is still two years).
Upon liquidation, the liquidators sought to “claw back” the payments made by the debtor companies to the creditors pursuant to the voidable transaction provisions of the Act.
This case is a significant decision for creditors who receive funds from companies, insolvency practitioners and those who advise either of the above.
In our view, this case has significantly changed the recoverability of insolvent transactions.
The focus of the litigation
The focus of the defence was on the defence that is available to a recipient of funds.
It is a defence to a liquidator’s claim if a recipient can prove all three pillars of section 296(3). To succeed, the creditor must establish that when they received the payments:
they acted in good faith;
there were no reasonable grounds to suspect, and they did not suspect, that the debtor company was, or would become, insolvent; and
they either gave value for the payment or altered is position in the reasonably held belief that the payment was validly made and would not be set aside.
The focus of this litigation was on ‘gave value’.
The High Court and Court of Appeal
The High Court accepted that at the time of the payments, the creditors acted in good faith and did not suspect, nor were there any reasonable grounds to suspect, that the debtor company was or would become insolvent. This was not disputed by the liquidators. The primary issue in front of the High Court was whether the creditors could establish the third pillar of section 296(3) of the Act, being ‘gave value’.
The appeal hinged on whether “value” for the purposes of section 296(3)(c) means new value given at, or after the time the payment is received from the company, or whether it also includes value given prior to receipt of the payment when the antecedent debt was created.
In two of the High Court decisions, creditors successfully argued that the letter meaning was intended whilst in the third the former view was accepted.
The Court of Appeal held that the receipt of a payment in satisfaction of an antecedent debt was not “value” and a new value which was also “real and substantial” must be given at the time of the transaction.
In reaching its decision, the Court of Appeal considered that the use of the word “when” indicated that a temporal restriction was intended. The recipient had to give value at the time the payment was made – value given by the provisions of goods and service at an earlier point when the debt was created did not qualify.
This meant that the creditors could not rely on the defence because all payments received by them were in relation to the goods and services previously supplied.
The Supreme Court
At the Supreme Court, the Court considered the two competing policy aims:
If the respondents’ argument is accepted, primacy will be accorded to the interests of creditors as a whole, but that will be at the expense of fairness to individual creditors who have accepted payments in good faith and in circumstances where there was no reasonable basis to suspect that the debtor company was technically insolvent. In other words, what seemed at the time they were effected to be routine commercial transactions would be set aside. On this basis, there would be legal certainty in the sense that there would be a clear rule, routinely applied; but there would be commercial uncertainty in the sense that routine transactions would be vulnerable to challenge for up to two years after they occurred.
On the other hand, if the appellants’ argument is accepted, primacy will be accorded to fairness to individual creditors. Creditors who receive what appear to be routine payments in circumstances where they did not, and had no reason to, suspect insolvency will have certainty. This reflects the broader social interest in not causing any disruption to the routine flow of credit in commercial transactions. But that will be at the expense of the class of creditors as a whole and to the concept of collective realisation.
Ultimately, the Court favoured fairness and certainty for individual creditors as opposed to creditors as a whole.
While the Court agreed that “real and substantial value” had to be given by a creditor raising defence under section 296(3), it held that such value may be given prior to receiving payment.
The Supreme Court considered that while the use of the word “when” certainly indicates that there must be a linkage or connection between the impugned payment and the elements of section 296(3). However, the Court doubted that it could be taken further than that by holding that:
…”when” was simply referring to a state of affairs existing at the time of the payment. So it is not the use of the word “when” but rather the use of the words “gave value” that is significant in temporal terms.
The Court could see no reason why, as a matter of interpretation, “gave value” could not be taken to encompass the notion of giving value earlier.
The Supreme Court also analysed the legislative background of the voidable transaction regime under the Act and changes made to this regime by the Companies Amendment Act 2006 when the current provisions were enacted. The Court considered that the amendment was designed to temper the pursuit of collective justice for creditor as a whole with individual justice for a particular party in the circumstances of each case. There was a concern that, if the law failed to do this, it could impair the free flow of trade in New Zealand. The proposed changes were intended to give more certainty to creditors that the transactions they are entering into will not be made void.
The interpretation adopted by the Court of Appeal significantly prevented individual creditors from using the defence under section 296(3). The Supreme Court found this to be inconsistent with the 2006 reform.
Key take outs
In overturning the Court of Appeal decision, the Supreme Court has considerably widened the applicability of the defence.
It is now certain that “value” for the purpose of section 296(3) can include value given when the debt was initially incurred, in particular, the supply that gave rise to the payment would likely be real and substantial value.
Our view on voidable transactions regime as it is currently
Whether a transaction will be set aside will now hinge on whether the recipient knew or ought to have known of the company’s insolvency.
We expect to see significantly less voidable transactions being pursued as a result of the Supreme Court’s decision and the current uncertainty as to how to calculate voidable transactions
A copy of the Supreme Court decision can be found here.
