A liquidation is the means by which a company’s assets are collected and distributed to its creditors in a set scheme of priorities. Both the shareholders and creditors of a company can put it into liquidation through different methods.
When a company is liquidated, a vast amount of discretion is conferred upon the liquidator or liquidators. Their primary duty is to realise the assets for the highest price possible to pay out creditors. However, liquidators are not under any strict duty to litigate potential breaches of director duties.
Accordingly, sometimes there is a big difference in steps taken by a shareholder appointed liquidator (being a liquidator appointed by the shareholders of a company) and a creditor appointed liquidator (being a liquidator appointment by the creditors of a company).
The below case study is an example of creditors replacing a shareholder appointed liquidator with a liquidator of their choice in the hopes of receiving a better outcome.
The following is a case study on steps we have taken for clients. If we can be of assistance to you, take advantage of our FREE 30-minute Legal Consultation.
Case Study
Originally, Norling Law was engaged to act for multiple creditors (“the Creditors”) of Vijay Holdings Limited (“the Company”) and was instructed to resolve a dispute regarding the payment of a debt from the Company to those creditors. Norling Law had previously made demands and taken steps to realise the debts for the Creditors.
Unknown to the Creditors and after demands were made, on 6 November 2020 at 11:00am, the shareholders placed the Company into liquidation. Daran Nair and Heiko Draht of Greenlane Chartered Accountants (“the Original Liquidators”) were appointed, jointly and severally, as liquidators of the Company.
Norling Law advised the Creditors that in general, shareholder appointed liquidators can be seen as “friendly” to the Company as they have been appointed by the owners of the Company (being the shareholders) and were also unlikely to pursue and litigate claims due to not being under any statutory obligation to do so.
Norling Law advised the Creditors that a creditor appointed liquidator would likely be more aggressive in examining the conduct of the Company and its directors, potentially resulting in more recoveries for the creditors of the Company.
Ordinarily, liquidators of a company must call a meeting of the creditors of the company in liquidation for the purpose of resolving whether to confirm the appointment of the liquidator or to appoint another liquidator (s 243(1)(a) Companies Act 1993 (“the Act”)).
The Original Liquidators did not call a meeting of the creditors but rather, pursuant to s 245 of the Act, provided notice to creditors to dispense with the meeting of creditors.
Subsequently, pursuant to s 314(2) of the Act, Norling Law made a request to the Original Liquidators to call a meeting of creditors for the purpose of voting on the replacement of the Original Liquidators, for a creditor appointed liquidator.
In response, Norling Law wrote to the Original Liquidators stating that the Creditors intended to exercise their right to request that the Original Liquidators call a creditors’ meeting as per the Creditors’ s245(1)(b)(iii) of the Act right for the purpose of reviewing the Original Liquidators’ appointment and to vote on whether they shall be replaced with another liquidator.
On 7 December 2020, the Original Liquidators provided notice to all creditors of the Company that the meeting would be convened on 17 December 2020 at 2:00 pm via postal ballot only, with a postal voting form that had to be submitted by 15 December 2020 at 2:00 pm. This meant that there would be no in-person meeting and all votes had to be sent to a third party who chaired the meeting by this date.
Norling Law had 8 days to persuade the creditors of the Company to vote out the Original Liquidators.
Norling Law achieved this by individually contacting and talking to credit managers, directors, and accounts teams throughout the country, explaining the differences between a shareholder appointed liquidator and a creditor appointed liquidator.
On 17 December 2020, Norling Law received confirmation that its preferred liquidator, Gregory John Sherriff of Waterstone Insolvency was voted in, replacing the Original Liquidators. 93.33% of the number of creditors and 98.58% of the value of creditors voted to replace the Original Liquidators.
Norling Law trusts that Mr. Sherriff and Waterstone will fully investigate the Company’s affairs and the directors’ conduct with scrutiny.
Norling Law considers that this will produce the best possible results for the Creditors.
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A statutory demand is a mechanism created by legislation, the Companies Act 1993 (“the Act”). It enables creditors to enforce overdue payment from indebted companies. The debtor company’s failure to comply with the issued statutory demand could result in the liquidation of the debtor company.
The Court of Appeal in Pioneer Insurance Company Ltd v White Heron Motor Lodge Ltd [2009] NZCCLR 14 stated that there are two main purposes of a statutory demand:
The main purpose is to obtain payment of the debt.
The secondary purpose is to prove that the debtor company cannot pay their debts for the purposes of liquidation proceedings.
A statutory demand is a common way pursuant to which liquidation proceedings are started and brought to the High Court; a failure to pay or set aside a validly issued statutory demand creates a presumption of the company’s insolvency (s 287(a) of the Act).
Due to severe consequences that it can cause, a statutory demand should not be used carelessly or vexatiously.
Requirements for issuance of statutory demand
For the creditor to be able to issue a statutory demand, the statutory demand must (s 289(2) of the Act):
Be in respect of a debt that is due and is not less than $1,000.00; and
Be in writing; and
Be served on the debtor company; and
Require the debtor company to pay the debt, or enter into a compromise under Part 14, or otherwise compound with the creditor, or give a charge over its property to secure payment of the debt, to the reasonable satisfaction of the creditor, within 15 working days of the date of service, or such longer period as the court may order.
The service of the statutory demand on the defendant company must also comply with the rules of service contained under the Act.
Abuse of Process
The Courts have made it clear that creditors should not be criticised for utilising a statutory demand as a method of debt collection, however, the process should not be abused. The Court of Appeal in Link Electrosystems v GPC Electronics (New Zealand) Ltd (2007) has explicitly stated that a statutory demand should not be used “oppressively as a debt collection device”. A statutory demand should not be used to threaten a company with liquidation if the requirements have not been met for issuing the statutory demand in the first place.
A statutory demand should not be used where there is a genuine and substantial dispute as to the debt. Doing so will likely be seen as an abuse process.
It is a good practice that a statutory demand is issued by the creditor’s lawyer, rather than the creditor personally or their debt collection agency. This is because it is generally expected of lawyers to ensure that the required pre-requisitions for the issuance of the statutory demand are satisfied.
Subsequently, it is recommended to consult a lawyer before considering your options and whether or not to issue a statutory demand is the right process for your company, as there can be risks associated with improperly using the process. For example, a Court may penalise a creditor by awarding increased costs in relation to setting aside the statutory demand if it deems that the statutory demand was improperly issued.
Setting aside a statutory demand
If your company has been served with a statutory demand, then you should consult a specialist lawyer immediately; time is of the essence in determining your options. The Act has strict timelines for companies that have been issued with a statutory demand.
If the debt is not disputed by the debtor company, most commonly recommended option is to either pay the debt or enter into a payment arrangement with the creditor.
If obligation to pay the debt is disputed by the debtor company, there is an option to make an application to Court to seek that the statutory demand is set aside. There are three primary grounds under s 290(4) of the Act that allow the court to set a statutory demand aside:
There is a substantial dispute whether or not the debt is owing or is due; or
The debtor company appears to have a counterclaim, set-off, or cross-demand, and the amount specified in the demand (less the amount of the counterclaim, set-off, or cross-demand) is less than $1,000.00; or
The demand ought to be set aside on other grounds.
The grounds for seeking the setting aside of the statutory demand in High Court will be addressed in more details below.
It should be noted that any application to set aside a statutory demand must be made within 10 working days of the date of service of the statutory demand, and also served on the creditor within 10 working days of the date of service of the statutory demand. This is a strict requirement, and no extension of time may be given. However, at the hearing of the application, a court may extend the time for compliance with the statutory demand (e.g. payment of amount owing).
Otherwise, if the statutory demand has procedural defects (these procedural requirements are located in s 289(2) of the Act and above), it could be considered invalid and/or can be set aside.
If the statutory demand is neither satisfied, nor an application to Court is made for the setting aside of the statutory demand within the prescribed timeframe, by operation of the Act, the debtor company would be presumed to be insolvent, and the creditor would be entitled to make an application to Court to seek liquidation of the debtor company.
Disputed Debt
In the event that the debt is genuinely disputed, a statutory demand should not be issued in the first place.
If a statutory demand has been issued on a disputed debt, the Court will have to decide whether there is a credible or fairly arguable basis that the debt is not owing. The assessment is conducted on the basis of the material presented to Court. Where there is a genuine dispute, the dispute should be addressed in an ordinary proceeding, and not in the liquidation Court.
It is worth noting that if the debt had been genuinely disputed prior to the issue of the statutory demand, and the statutory demand was made despite the dispute, there may be an increased award of costs in favour of the party setting aside the statutory demand.
Set off, counter claim, or cross demand
If the debtor company can show that there is a set-off or a counter claim that appears to exist against the creditor that would reduce the amount owing to be under $1,000.00, then a Court may set aside the demand. If the claim against the creditor is a liquidated or undisputed amount, then it is likely the demand will be set aside with minimal issues. If the claim against the issuer is for an unliquidated amount or disputed, the debtor company must demonstrate sufficient evidence showing that it has a real basis for the claimed set-off or counter claim.
Other grounds
If the Court is satisfied that the creditor’s prima facie entitlement to liquidate the company is outweighed by some factor making it plainly unjust for the liquidation to occur, then the Court has the discretion to set aside the statutory demand (Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA)). Generally, this would include grounds such as preventing the abuse of the statutory demand process and/or preventing substantial injustice. It is less common to see this section invoked.
Conclusion
If you have received a statutory demand, the time to act is now. Due to the strict timelines of the Act, it is imperative to consult a lawyer as soon as possible. Failure to serve an application to set aside the statutory demand when faced with a validly issued statutory demand can lead to a company’s liquidation extremely quickly.
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Declaring a person bankrupt is a serious action, not only for the person in question but also the Court. Therefore, it is understandable why there are so many considerations to get through before officially adjudicating a person bankrupt.
Typically, a creditor is entitled to an order for adjudication if they have satisfied the requirements under s 13 of the Insolvency Act 2006. Regardless of these requirements, the Court retains discretion whether an order for adjudication is to be made. Section 37 of the Insolvency Act 2006 sets out the instances in which the Court may refuse an application for bankruptcy at its discretion. These are if:
The creditor has not established the requirements of s 13 of the Insolvency Act 2006; or
The debtor is able to pay his or her debts; or
It is just and equitable that the Court does not make an order of adjudication; or
For any other reason an order of adjudication should not be made.
The onus is on the debtor to show the Court that it should not make an order of adjudication. In considering whether to exercise its discretion, the Court considers not just the interests of those involved, the debtor and the creditor, but also the wider public.
These circumstances where the Court can exercise its discretion to refuse application to bankrupt a person are the subject of this article.
Section 37(a) – Creditor has not established the minimum requirements
The following minimum requirements have to be satisfied under s 13 of the Insolvency Act 2006 before a creditor can apply for the debtor’s adjudication:
The debtor must owe the creditor a certain amount of money, and the amount owed must be $1,000 or more;
The debtor has committed an act of bankruptcy within the period of 3 months before the filing of the application; and
The debt is payable either immediately or at a certain future date.
Sections 17 – 28 of the Insolvency Act 2006 set out various acts of bankruptcy. The most common act of bankruptcy is a failure to comply with a bankruptcy notice issued following the creditor obtaining judgment and/or order against the debtor. Other examples of acts of bankruptcy include (but not limited to) departure by the creditor of New Zealand with intent to defeat creditors, avoidance of creditors, a notice to the creditor that the debtor is about to suspend (or has suspended) payment of the debtor’s debts, and admission of insolvency by the debtor.
If the creditor’s application relies on the act of bankruptcy where the debtor failed to comply with a bankruptcy notice, and the debtor has appealed against the judgment or order forming the basis of the bankruptcy notice, the Court has powers under s 42 of the Insolvency Act 2006 to either refuse or stay application for adjudication.
Additionally, the Court can refuse to adjudicate a debtor with a special status, such as:
A minor is someone aged under 18. Contracts entered by minors are not enforceable unless there is approval from the Court. Where a minor is the subject of a bankruptcy application (or an adult, but the events in question occurred while the person was a minor) and they have entered into an unfair contract, the minor can dispute the creditor/debtor relationship and on this ground, defend the application. The Court can also enforce a contract on the grounds that it is fair and reasonable to do so, in which case, the minor could be subject to the bankruptcy regime.
Disabled persons. If a person is suffering from a disability and they are a debtor, they must have a litigation guardian to represent them. People with disabilities are not fully excluded from being classed as debtors, however the Court may refuse an application for bankruptcy if it seems like the person is unable to understand the nature and requirements of the bankruptcy process.
Foreigners or persons living outside of New Zealand. There is a provision in respect of bankruptcy notices in which said notices must be served in New Zealand unless the Court gives permission for it to be served elsewhere. With cases where the debtor is not residing in New Zealand the factors that the Court takes into consideration include the strength of connection and whether it will be appropriate to hear the application within New Zealand.
Members of Parliament and diplomats. If the debtor is a diplomatic official or a member of Parliament, they may have privileges of diplomatic immunity in civil suits.
This raises the question of whether the debtor has the actual ability to pay their debts, rather than if they are willing to pay their debts but have no funds to do so. The test is whether the debtor is able to pay his or her debts, as opposed to having a positive asset position. As such, showing a positive balance sheet would be insufficient.
In order to succeed under this limb, the debtor must provide sufficient evidence that they are both willing and able to pay off the debt. The Court might consider the debtor’s ability to make an immediate payment, or payment over a period of time. If the Court considers allowing payment over a period of time, the Court must take into consideration the interests of the creditors, how long they have been without the money they are owed and the reasonableness of the proposed payment period.
Debtors may argue that they have a claim against a third party, which after being considered, would bring sufficient funds to repay the creditors. Generally, the existence of the claim by itself, where there is no possibility of it being determined for a while, is not a good ground for the avoidance of adjudication. However, the Court has also commented that in circumstances where the claim seems to be straightforward and it could be resolved in the near term, the Court could exercise its discretion to refuse application for bankruptcy.
Where the Court is not prepared to refuse adjudication but is willing to provide the debtor with additional time to repay the creditors, the Court has jurisdiction under s 38 of the Insolvency Act 2006 to stay application for adjudication for any period the Court thinks appropriate.
Sections 37(c) and (d) – Just and equitable or other reason why order should not be made
The Court takes into account the economic climate, debtor’s age, employment, and prospects of recovery (e.g. through the presence of assets), as well as the overall public interest when an application for refusal of adjudication is considered.
In Re Taylor ex parte Greenwood (1992) 4 NZBLC 102,875, the Court stayed an application for adjudication in circumstances where the debtor had limited job prospects due to his age, had no assets which the Official Assignee could take, found himself in financial difficulty through no fault of his own, and there was no public interest in his adjudication.
However, the Court has since highlighted that each case where similar factors are raised should turn on its own facts. It has been found to be in the public interest to make an adjudication order in similar cases where the debts were greater, there were more creditors, or the debtor found himself in financial difficulty as a result of his own fault.
In Re Aitcheson, ex p BNZ, Salmon J, 9/7/99 HC Auckland B1235/98, the debtor argued that there was a public interest in refusing the application for adjudication as:
The debt resulted from a personal guarantee given as a director of a company which failed;
The debtor had no other creditors;
The debtor has made a reasonable offer to settle;
The failure of the company was not attributable to the debtor; and
The bankruptcy would damage the debtor’s reputation in the industry.
While the Court was sympathetic with the debtor, the Court considered there was a public interest in endorsing the commercial importance of holding those who give guarantees to the consequences of their promise. The Court considered that the factors put by the debtor did not outweigh the commercial considerations.
The same view has been upheld in various later decisions. However, in special cases, there could be other factors that could justify the Court exercising its discretion in the context of personal guarantees. For instance, in Re Timmins, ex p Motor Trade Finances Ltd 9/3/99, Master Thomson, HC Wanganui B56/97, adjudication was refused on just and equitable grounds, where the debt was as a result of personal guarantee given as part of requirements for finance for the debtor’s former partner, the former partner had left New Zealand for the USA, the petitioning creditor was the only creditor of the debtor, and the debtor wanted to avoid bankruptcy as she would not be able to continue receiving student loan to finalise her studies. The Court also found that there was no misconduct on the part of the debtor.
The Court could also consider refusing an application for adjudication if the debtor was in such a position of standing in the community that order of bankruptcy would result in excessive stigma and embarrassment. In Re Sellar, ex p Hesketh Henry Solicitors Nominee Co Ltd, Master Kennedy-Grant, 16/3/94 HC Auckland B1621/93, the Court refused to make an adjudication order in circumstances where there was no prospect of recovery in bankruptcy, the debtor was of old age, and due to the nature of his community (the debtor lived in the same community for more than 50 years, has made material contributions to his community and was well known), he would suffer excessive embarrassment.
Loss of employment and future business opportunities could also be relevant considerations. Application for adjudication has previously been refused where adjudication could affect the debtor’s ability to continue being a policewoman, and there was also no public interest in the debtor’s adjudication.
Conclusion
The circumstances which could provide grounds for defending an adjudication application are diverse. In some cases, where the creditor failed to satisfy all pre-requisites to apply for adjudication, it is easier to predict whether the Court would refuse an application for adjudication. In other, especially where defense is based on the ground of public interest, building the case and predicting an outcome can be harder. Our professionals will be able to assist with assessing your position and defending the adjudication application (if necessary).
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Importance of updating company address details on the Companies Register
It is important to keep the company’s address details on the Companies Register updated at all times. Yet, we often come across situations where this does not happen, and what seems like a small omission may lead to serious consequences. For example, important legal documents can be missed, and consequently, judgment can be entered into against the company without the company’s knowledge. Further, there can be personal consequences for company directors under the Companies Act 1993 (“the Act”) if the registered address is unmanaged.
Requirement under the Act
A company must always have:
A physical registered office in New Zealand. This is the address where the company’s records (described under s 189 of the Act) are stored.
A physical address for service in New Zealand, which can be the same as the registered office or another place. This is the address where legal documents are served.
The registered office and address for service of a company at any particular time are the places that are described as those on the Companies Register at that time. This information is publicly available on the Companies Register website.
Subject to the company’s constitution, the Board of the Company can change the registered office or addresses for service at any time. If the registered office or address for service change, then notice of that change (in the prescribed form) must be given to the Registrar of Companies. Otherwise, the registered office or address for service will remain in the previous place specified on the Companies Register.
Also, s 188 of the Act allows the Registrar of Companies to require a company to change its registered office by notice in writing. In such a case, a company will have two options: change its registered office by the date stated in the notice; or appeal to the Court. Failure to comply with s 188 is an offense and renders every director of the company liable on conviction to a fine not exceeding $5,000.
If the company’s records are moved to a location other than the registered office, a notice of this must be given to the Registrar of Companies within 10 working days. If the company fails to comply with this requirement, the company and every director personally commit an offense and are liable on conviction to a penalty not exceeding $10,000.
Risks of not updating address details
Section 387 of the Act prescribes how documents in legal proceedings are to be served on New Zealand registered companies. There are several options to serve, however, service by leaving the documents at the company’s registered office or address for service are the most commonly used options. If the office is closed, the documents in question can simply be affixed to the front door.
As a result, if the company’s office or address for service is not updated, the company may risk missing essential legal documents, notices, and deadlines and be subjected to a judgment entered against them or, worse, liquidation proceedings. In our experience, unfortunately, this is common. While in certain circumstances it could be possible to reverse judgment or order that was entered into without the company knowing it, this process is expensive and procedurally complicated as an application to Court would be required.
If any of the addresses are in a building with other businesses, it is equally important to provide full details of the address, such as the level of the building, office number, and/or name. If no details are provided, the service of documents could be conducted anywhere in the building. This could again result in the essential documents being unnoticed by the company.
If the company suffers a detriment as a result of the addresses not being properly maintained on the Companies Register, the director could be personally liable for breach of his director duties.
It is also important to ensure that the address that is stated as the company’s office or the address for service is checked regularly. Some documents, such as statutory demands, when served, have a very strict and short timeframe for compliance, or making an application to set it aside. If that time lapses, the consequences could be serious as there is a risk that the company will be liquidated. If the address is not checked regularly (for example, staff usually work offsite), it is recommended that the registered office and/or address for service are at another location, such as the accountant’s or solicitor’s office.
Our expert receivership lawyers assist clients to navigate this process throughout New Zealand. There are many pitfalls if implemented incorrectly.
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Bankruptcy is an incredibly onerous process; upon adjudication, all property belonging to the bankrupt or vested in the bankrupt automatically vests in the Official Assignee (OA) (s 101 Insolvency Act 2006 (the Act)). The definition of property under the Act is wide and includes “property of every kind, whether tangible or intangible, real or personal, corporeal or incorporeal, and includes rights, interests, and claims of every kind in relation to property however they arise” (s 3(1)). As a result, shares in a company are included in this definition.
Context
We have recently been engaged to act for the spouse of a discharged bankrupt. Our client and their spouse both held 50% shareholding in a company that was essentially their retirement fund. Upon bankruptcy, 50% of the shareholding vested in the OA pursuant to s 101 of the Act. As there was no shareholders’ agreement for the company, there were very few restrictions on what could be done with the shares.
What happened
The OA wanted to realize the value of the shares that the bankrupt held in the company for the benefit of the creditors of the bankrupt. The OA offered to sell the shares to the remaining shareholder (our client) for circa $110,000.00 and warned that the OA would take steps to either liquidate the company or sell the shares on the open market, if this offer was not accepted. The basis of the OA’s valuation of the company’s shares was to simply ascertain the value of the net assets of the company. After calculating the value of the net assets, the OA then halved this to represent the 50% shareholding it held and then adjusted this figure for the shareholders’ current accounts.
The previous advisors of our client recommended accepting the value prescribed to the shares by the OA.
Upon being engaged by the client, we ascertained that:
The company had only been able to retain a level of value in the assets it owned due to the efforts, including unpaid work, of our client and the spouse.
They had not received any remuneration for work carried out for the company since its incorporation, over 20 years ago.
Taking a simple net asset position divorced from all other factors is not a reliable method of assessing the value of shares in a company in these circumstances.
As our client’s spouse had been adjudicated bankrupt and no longer eligible to be a director, this left our client as the sole director of the Company, and subsequently, our client had the power to set the director’s remuneration pursuant to s 161 of the Companies Act 1993. In such circumstances, any excess in the company could simply be remunerated to our client, making the shares worthless even with the net asset valuation method. The company was not simply profitable without our client’s unpaid services as a going concern.
We explained these concerns to the OA. After negotiations, our client was able to purchase the shares at a fraction of the amounts that the OA had been offering, which was also in full and final settlement of any claims that the OA may have had against our client and the company.
Key takeaways
This case demonstrates the importance of having a comprehensive shareholders’ agreement in the event a situation as this occurs, and also to obtain a valuation before purchasing items like shares, the value of which is not always obvious.
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.
