New Zealand Tiny Homes (Tiny Homes) fell victim to liquidation on 15 November 2022. After its incorporation in 2020 this was a short, but most certainly not sweet, business affair for its director James Cameron of New Plymouth.
The liquidation of Tiny Homes was said to be linked to the liquidation of Tiny Town Projects Limited (Tiny Town) which was also liquidated on 15 November 2022, another of Mr Cameron’s companies incorporated in 2017.
Tiny Town and Tiny Homes were related companies. Tiny Homes held the intellectual property for the creation of building small properties in New Zealand, whereas Tiny Town was the company that actually attended to the building of these properties
The business of Tiny Homes and Tiny Town
Tiny Homes and Tiny Town were in the business of building small properties for consumers in New Zealand. The size of these properties allowed for a far more accessible fixed purchase price for home buyers.
At the time of liquidation of Tiny Homes and Tiny Town, there were a number of these homes that were virtually completed. The only hurdle being procedural matters of gaining compliance before title in the property could pass from Tiny Town to the purchaser.
It is important to note that each of these homes was customised and built on the purchaser’s instructions. A sale and purchase agreement was signed for each home and payment of the purchase price was paid to Tiny Town in instalments.
The first liquidator’s report of Tiny Town that the issues stemming from COVID-19, a spike in building costs and supply chain issues impacted the company’s ability to ‘fulfil fixed price contracts.’ This inability to fufil fixed price contracts led to both Tiny Town and Tiny Homes demise.
The liquidation
In November 2022, Tiny Town was placed into liquidation. At the point of liquidation there were 6 homes that were partially completed. Of the 6 purchasers of these homes, 3 had paid the full purchase price of their respective homes and were awaiting small changes to be made to be issued a code of compliance before the homes could be delivered. The remaining 3 purchasers had homes that were 40%-50% complete.
The first liquidators report for Tiny Town showed the company had very few assets, bar the 6 homes in question.
The liquidators filed proceedings in the High Court seeking directions on how to best deal with the 6 homes.
The proceedings
The case of Manginness v Tiny Town Projects Limited (In Liquidation) [2023] NZHC 494 (the Proceeding) was heard before Venning J on 20 February 2023 with the judgment being delivered on 14 March 2023.
One of the issues to be decided in the Proceeding was whether the 3 fully paid purchasers were entitled to take ownership of the homes, or whether they belonged to Tiny Town. There were also issues raised in relation to the Personal Property Securities Act 1993 (PPSA) as to whether an equitable lien was granted over all 6 homes.
When does property pass?
The first issue was whether property in the homes had passed to the 3 fully paid purchasers. Counsel for the purchasers argued that as the purchase price had been paid in full, the homes should pass to the purchasers. Counsel argued the compliance certificate should not be the decisive factor as in the liquidator’s evidence it was accepted delivery of the homes would occur when full payment was made, not when the compliance certificate was issued.
Venning J rejected this argument, stating that, property will only pass when the homes are ‘in a deliverable state.’ Venning J defined the deliverable state as when the compliance certificate was issued.
It was concluded on the first issue that property in the homes had not passed to the purchasers.
An equitable lien
Counsel for the purchasers argued that even though there was uncertainty on the property passing, that under section 53 of the PPSA the purchasers had an interest in the homes, whether by way of an equitable lien or a constructive trust.
An equitable lien is a form of equity which the Court can grant to give an indemnity or priority over other creditors. On the other hand, a constructive trust is a trust created whereby one person holds property for the benefit of another, it prevents someone holding property from unjustly benefitting from the holding of that property.
Venning J considered that section 53 of the PPSA did not apply here. However, His Honour’s view was different on the topic of an equitable lien. It was argued by counsel for the purchasers that an equitable lien should be granted to all purchasers over the homes based on the extent of money paid to Tiny Town by them.
A key argument is that these homes were identifiable to each purchaser, and had been built to their specifications. Counsel for the purchasers argued that “the purchasers’ equitable lien confirmed their in rem rights in the tiny homes that trumped any competing claim in the liquidation.”
Venning J submitted this was a difficult issue to ascertain based on the facts of this case. His Honour laid weight on the fact these homes were specified to each purchaser and could not reasonably have been sold by the liquidators to other parties. Venning J concluded there was an equitable lien over the 6 homes.
The next issue was whether the lien was subject to the PPSA, to which Venning J referred to it as being excluded under section 23(b) of the PPSA. His Honour’s full conclusion was “I conclude that the individual purchasers are entitled to equitable liens for the extent of the value of the purchase moneys paid by them and that their equitable liens sit outside and are not affected by the provisions of the PPSA.”
The result of the judgment was that the purchasers of the 6 homes were entitled to an equitable lien against the homes to the extent of the purchase moneys paid by them.
Summary
This judgment has been described as ‘ground-breaking’ and that certainly is the case. This judgment will change the way assets in liquidation are dealt with. The judgment gives rights to the purchasers in a situation where in the normal course of the liquidation it would be common for them to lose their assets.
This decision plays on the fairness of the justice system and emphasises the importance of natural justice in a situation where typically there really are no winners. Although it is arguable this ruling is to the disadvantage of other unsecured creditors in the liquidation, it is weighed on the balance of taking away homes from 6 individuals who in some cases may have been left homeless without this judgment.
The judgment will cast a positive light on the prospects of recovery in liquidations for some creditors, showing them the law of equity can assist in certain circumstances. However, it also results in some doubt for secured creditors whose position is ultimately worsened if equity prevails.
In this case it seems as If on the balance the correct decision was made, however this may not always be the case. If you require assistance on your position as a creditor in a liquidation or want some further information on your rights please do not hesitate to contact us for a free no obligation discussion.
Our lawyers at Norling Law can discuss the outcome of this case as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link
There is no doubt that bankruptcy is never a position you expect to find yourself in. However, declaring bankruptcy is more common than one may think. In the wake of COVID -19, rising living costs, inflation and the devastation from natural events the prevalence of bankruptcy is more visible in the community, even though rates of bankruptcy are not as high as they once were.
The number of individuals who declared bankruptcy for the period of July 2021 to June 2022 was 528 in comparison with the figures from July 2016 to June 2017 where 1873 individuals were declared bankrupt.
Besides the clear decrease in number of bankruptcies occurring, the main difference between declaring yourself bankrupt in is the prevalence of conversations about insolvency and bankruptcy in general. New Zealanders are having to declare bankruptcy at no fault of their own, but rather as a victim of the circumstances of our current economic climate.
This article aims to inform you on what bankruptcy is, and what you need to be aware of if you are faced with debts which you are not able to manage.
The basics
Bankruptcy can occur when an individual is unable to pay their debts as they become due. If you are unable to pay your debts as they fall due you are insolvent. The typical length of a bankruptcy is three years from the date upon which you file your statement of affairs with the Official Assignee (OA) but can be extended in certain circumstances.
A person who owes debts can make a voluntary application for bankruptcy. This process is relatively easy and does not require legal representation. An ordinary layperson can make themselves bankrupt or can wait until a creditor adjudicates them bankrupt via the prescribed process at the High Court.
However, bankruptcy should not be viewed as an easy way out of paying debts as it can have significant and potentially long lasting consequences for the bankrupt. It is also important to note that bankruptcy does not wipe all of your debts, court ordered fines, orders of compensation for creditors and child support fees will be still viewed as due and owing by you.
Bankruptcy removes the control over your assets. You will no longer be able to live your life as your normally would, and are bound by a number of duties and restrictions which we will discuss in this article.
Voluntary Application
To enter bankruptcy a debtor must have debts greater than $1,000.00.
An application can be made on the insolvency.govt.nz website, a response by the OA should be received within 10 working days of making the application. It is up to the OA to decide whether the proposed bankrupt is accepted to bankruptcy.
It is also important to consider whether bankruptcy is the best option for a voluntary insolvency procedure. If you have not been made bankrupt before, have no assets of value and have debts of under $50,000.00 no assets procedure may be a more favourable option.
Creditor application
A creditor may also make an application to the High Court seeking that the debtor be adjudicated bankrupt.
The debtor must have committed an act of bankruptcy within the last 3 months before the filing of the application and the debt must be a liquidated sum of more than $1,000.00.
An act of bankruptcy is central to the creditor’s application. It must show an act of personal default by the debtor. There are 12 separate acts of bankruptcy, but the most common act alleged by a creditor is failure to comply with a bankruptcy notice.
Once the creditor makes an application there will be a hearing. the debtor does not have to attend the hearing. If they do not attend it is very likely the Judge will adjudicate the debtor bankrupt.
Responsibilities and restrictions under bankruptcy
When a debtor is made bankrupt they must first file a statement of the debtor’s affairs in the prescribed form. It is important this form is returned to the OA as the period of 3 years for bankruptcy does not begin until the statement of affairs is returned to the OA.
Once bankrupt, the property of the bankrupt vests in the OA. The definition of property is very wide in the Insolvency Act 2006. It might include any interests in trusts that can be defined as property. It may also include any interests in property (such as a 50% claim against the property of a spouse/de facto partner). Income earnt between the time of commencement of bankruptcy and discharge is also included as acquired property, so any income earnt by the bankrupt vests in the OA.
However, in most bankruptcies if the income is modest the OA will not take any steps as bankrupts have a right to retain earnings that are necessary to maintain themselves, their spouse and family to a reasonable standard. This includes necessary tools for trade, necessary household furniture and effects, motor vehicle worth up to $6,000.00 and in most cases, Kiwisaver funds.
The OA is entitled to look at transactions you have made in the years before your bankruptcy. These transactions can be deemed a voidable transaction, which is payment or transaction made whilst you were about to be made insolvent. The OA can reverse these transactions, therefore if you are considering going bankrupt disposing of assets is not recommended.
If a sole business owner is made bankrupt, there are serious consequences. The OA may shut down the business and any assets will be sold to pay creditors.
Other restrictions on the bankrupt include:
A bankrupt is unable to be a director of a limited liability company;
A bankrupt cannot incur credit of more than $1,000 without making the creditor aware that the bankrupt is bankrupt;
A bankrupt must not prevent, attempt to prevent or hamper the OA dealing with any property or assets;
A bankrupt must notify the OA whenever they change their name, address, employment or income/expenditure;
A bankrupt must not leave the country without consent of the OA;
A bankrupt cannot be employed by a relative or take part in the management or control of any business without consent of the OA; and
A bankrupt is prevented from employment in numerous professions such as auctioneers, officer of a charitable entity, motor vehicle trader and so on.
Bankruptcy considerations
In some communities, professions or circles, bankruptcy has a negative stigma attached to it. However, many individuals are adjudicated or volunteer themselves to bankruptcy and it does not necessarily have the same stigma attached as it once did. Life can continue beyond bankruptcy, and it does for many individuals in New Zealand
Being chased by creditors can be a substantial burden. Bankruptcy can be a good way to end that stress. However, the implications of bankruptcy can be long lasting in some cases and is not always a suitable solution. A debtor is considered bankrupt for a term of 3 years upon admission to this scheme and details of this are on the Insolvency Register for the entire term plus 4 years after discharge. In some cases, this term can be extended if the circumstances warrant an extension.
In many cases, there are alternatives to bankruptcy for debtors in financial turmoil. We have published a number of these articles on our website and encourage you to read these or book in for a consultation with us if you would like to discuss your options.
Sound, strategic advice is necessary to navigate the process or to navigate the alternatives to the process.
Before applying for bankruptcy, it is important to ensure you are fully informed of the process and the effect it will have on you and your day-to-day life.
If you would like a confidential no obligation discussion with one of our solicitors please book in here:
Original tax debt can quickly get out of control with the accruing interest and penalty fees. This may result in the debtor becoming insolvent and facing bankruptcy (for individual debtors) or liquidation (for companies) proceedings commenced by the Inland Revenue Department (IRD).
At Norling Law, we have extensive experience negotiating settlements with the IRD. Settlement with the IRD could be in the form of a provisional payment plan and/or partial principal debt/interest/penalties write-off. When faced with a settlement proposal, the IRD has a set of requirements that they must consider. At Norling Law, we take these requirements into account when formulating a settlement proposal.
In the event the debtor is not in a position to settle the debt, we can provide advice on other alternatives to bankruptcy and liquidations. The sooner the issue with the outstanding debt is addressed, the more options could be available.
Below we set out a recent example of a negotiation conducted by us on behalf of a client, which resulted in a significant write-off of the client’s debt to the IRD.
Our client was in significant arrears with the IRD, amounting to approximately $558,000. This amount related to a company and its two individual shareholders. This particular client, due to unforeseen circumstances, failed to meet its tax obligations over a period of approximately 3 years.
Our client came to Norling Law for assistance when the sole director of the company had a serious accident leaving them unable to earn an income. They came to Norling Law to obtain specialist insolvency advice.
First, we explained the legal consequences of this situation and provided our client with a detailed memorandum of advice which explained their options going forward. Included in this advice was a practical pathway to voluntarily liquidating the company and explaining the possible risks associated with liquidation. We also provided an outline of various steps and timelines that would take place in the liquidation proceeding, which provided the necessary support and guidance to our client in this particularly stressful time of their life.
We also interviewed our clients and explored:
The personal and financial circumstances they were experiencing at the time of the tax arrears;
Analysed their current financial position; and importantly
The effect of the serious accident and the consequences for them currently; together with all
Other matters relevant for an application for financial hardship.
We then conducted negotiations with the IRD on behalf of the client focussing on these four areas. We assisted our client to apply for financial relief under Section 177C(1) of the Tax Administration Act 1994. The outcome was an astounding $558,000 reduction in the tax payable for the company and both shareholders personally. Due to the unique set of circumstances, our client was able to resolve the matter entirely with no payment due to IRD at all. This provided our client with enormous relief at a particularly stressful time of their life.
Our client could draw a line in the sand and move on with life free of the stress of having outstanding arrears with the IRD. They could move forward with a clean slate with IRD.
Whether a reduction of debt owed to the IRD can be achieved depends on various circumstances associated with the non-payment of tax, position of the debtor and etc.
If you would like further information in relation to negotiating a settlement of your outstanding tax debt with IRD, contact the team at Norling Law at info@norlinglaw.co.nz or you can book a consultation here: https://calendly.com/wendy-506/30min
Negotiating with the Inland Revenue Department (IRD) in New Zealand can be a daunting task, especially if you are not familiar with the tax laws and regulations in the country. However, with the right approach and knowledge, you can effectively negotiate with the IRD and potentially reach a favourable outcome.
The first step in negotiating with the IRD is to understand your rights and obligations under New Zealand tax laws. It is important to know what you are entitled to and what you are required to do in order to comply with the tax laws. This will enable you to make informed decisions and to communicate effectively with the IRD.
The next step is to gather all relevant documents and information that will be needed to support your case. This includes financial statements, receipts, invoices, and any other documents that will help to demonstrate your financial situation and support your claims. It is also important to keep accurate records of all communication with the IRD, including dates, times, and the names of the people you have spoken to.
When communicating with the IRD, it is important to be upfront about your situation. We have found that when presenting a proposal to IRD for consideration, it is critical that it is accompanied with supporting financial information that demonstrates that the proposal can be sustained (by the company or individual) and is unlikely to place current tax compliance at risk.
The IRD is more likely to work with you if they believe that you are being open and are willing to cooperate. Accordingly, we recommend explaining in detail the reason(s) the company or individual fell into debt with IRD in the first instance, and the steps that have been taken since then to ensure they do not fall into debt in the future again. It is beneficial to attach supporting documents, where such documents are available. It is also important to remember that the IRD is a government agency, and their primary goal is to ensure that all taxpayers are paying their fair share of taxes. Therefore, negotiation should be approached in a professional and respectful manner.
It is also important to be prepared to compromise. The IRD may not agree to all of your requests, and you may need to make some concessions in order to reach a resolution. However, the IRD is also under pressure to collect taxes and may be willing to make concessions in order to reach a resolution in appropriate circumstances.
If you are unable to reach a resolution with the IRD, you do have the right to review its decision using the disputes process at IRD, which includes independent experts at its Disputes Review Unit (DRU) to undertake a review of your case and make a decision about your dispute. If the DRU decides in IRD’s favour, you may decide to take your case to the Taxation Review Authority or the High Court.
In conclusion, negotiating with the IRD in New Zealand requires knowledge of the tax laws, specialist negotiation skills and a professional attitude. With the right approach, you could potentially reach a favourable outcome and avoid any unnecessary penalties or fines. It is important to remember that where possible, the IRD will try to help you, so do not be afraid to ask for assistance or guidance if you need it.
Whether a reduction of debt owed to the IRD can be achieved depends on various circumstances associated with the non-payment of tax, position of the debtor and other factors.
Our experts at Norling Law have extensive experience negotiating with the IRD. If you would like further information in relation to negotiating a settlement of your outstanding tax debt with the IRD or require specialist assistance with it, contact the team at Norling Law at info@norlinglaw.co.nz or you can book a consultation here: https://calendly.com/wendy-506/30min.
If a creditor has served liquidation proceedings on your company, you may want to consider placing the company into liquidation before the matter is brought before the court and the court appoints a liquidator chosen by that creditor. In doing this, the company’s shareholders have the chance to appoint a liquidator (usually referred to as a voluntary liquidation) who could act more favourably towards them as opposed to the creditors throughout the course of the liquidation. Section 241AA of the Companies Act 1993 (“the CA”) forces companies to act quickly when considering this option. Creditors can bypass and replace the shareholder appointed liquidator with one who would act more favourably towards their interests. However, they too must act quickly.
Purpose of section 241AA
Under section 241AA of the CA, a company has 10 working days to appoint its own liquidator from the date when it was served with liquidation proceedings from a creditor. The 10 working-day provision in section 241AA(2)(a) pushes companies to take quick action to move into voluntary liquidation if appropriate. It also prevents a company from deferring voluntary liquidation until shortly before the court is due to consider the liquidation application, which can lead to excessive costs for the creditor.
In 2020, section 241AA(2) was amended and section 241AA(2)(b) was introduced to allow for the company shareholders to appoint a liquidator after the 10working day limit if the creditor that brought the liquidation proceedings consents to the appointment. This also assists in avoiding any unnecessary costs as the creditor may agree with the appointment of the liquidator suggested by the company shareholders.
The shareholder appointed liquidator
A company can place itself into liquidation by the passing of a special resolution of its shareholders (granted it is within 10 working days of being served liquidation proceedings from a creditor). Passing a special resolution requires 75% of all shareholders that are entitled to vote on the matter to then vote in favour of the resolution. A shareholder resolution is not required to be passed if the consent of the petitioning creditor to the appointment has been given.
If the shareholders appoint a liquidator, there is a perception that the liquidator is more likely to act in the interests of the shareholders as opposed to one appointed by the creditor. Although this is not true to every situation, it is still a strong trend in insolvency.
For example, a liquidator will have a contact network of lawyers and accountants. If a lawyer has a client that intends to place their company into liquidation, they will recommend a liquidator that would tend to act in the interests of shareholders. This would be a liquidator who is less likely to pursue areas such as an overdrawn current account or breach of director’s duties.
In many cases the shareholder appointed liquidator will typically remain appointed. Creditors do have an opportunity to replace them, however.
The creditor appointed liquidator
Creditors must act quickly to replace a liquidator if they are concerned by one appointed by the shareholders. In this circumstance, the most cost-effective way to achieve this is by passing a resolution to replace the liquidator at an initial creditors’ meeting.
The process to calling a creditors’ meeting is as follows:
The liquidator must give notice of the creditors’ meeting to every known creditor (see section 243 of the CA).
If the liquidator has decided not to call a meeting, they must give notice to the creditors advising that no meeting will be held and provide reasons for this (see section 245 of the CA).
If a creditor wishes for a creditors’ meeting to be held, the creditor must notify the liquidator in writing within 10 working days of the liquidators’ notice to dispense with a creditors’ meeting (also under section 245 of the CA).
The timeframes to call a creditors’ meeting are critical. If a creditor fails to notify within the statutory timeframes, the opportunity to attempt to replace the liquidator is lost.
A resolution to replace the liquidator may be put forward by a creditor at the creditors’ meeting and, if passed, the proposed liquidator will become the new liquidator of the company. The majority in number and value of the creditors voting must vote in favour of the resolution for it to succeed.
In many cases the creditors will be unsuccessful in replacing liquidators who have been appointed by the shareholders. The number of steps in the replacement process and the amount of lobbying of fellow creditors to vote in favour of the resolution to replace the liquidator can sometimes be too tall of a task.
Conclusion
If the perception of the favourable liquidator is legitimate, we suggest following our recommendations above to appoint a liquidator who will act more favourably toward your interests. As a word of caution, please note that although these perceptions exist, sometimes it can merely be a perception.
Whether it be creditors or shareholders that we act for, we encourage our clients to investigate a liquidator and their history to see if they are likely to act in the best interests of our clients. A liquidator’s reputation can be investigated either by publicly searching through judicial decisions or discussing with one of our insolvency experts.
If you require our legal assistance, please contact us for a no obligation discussion.
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.
Please refer to our People for more information on who we are, our experience, and how we can help you.
