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.
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. The 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 negotiations 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 $260,000. This particular client, due to unforeseen circumstances, failed to meet its tax obligations over a period of approximately 4 years.
Our client came to Norling Law for assistance when the IRD had served it with liquidation proceeding and there was a hearing date scheduled in the High Court.
First, we explained the consequences of liquidation and provided our client with general insolvency advice. We also provided an outline of various steps and timelines that would take place in the liquidation proceeding, which helped to reduce the client’s stress levels.
We also interviewed our client and each director and explored:
the personal and financial circumstances they were experiencing at the time of non-payment;
the ability to settlement;
the steps they have taken to restructure the management of the company in order to prevent future non-payments; and
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. The outcome was an astounding $204,000 reduction in the tax payable. Our client was able to avoid liquidation and resolve the matter entirely by paying a lump sum of $20,000 and the balance of $36,000 in monthly installments over a period of 3 years.
Our client could draw a line in the sand and move on with business free of the stress of having outstanding arrears with the IRD and the threat of liquidation.
Whether a reduction of the debt owed to the IRD could be achieved would depend on various circumstances associated with the non-payment of tax, position of the debtor and etc.
During COVID-19 crisis, many businesses do not have access to their premises. For some businesses, there is no access only during Alert Level 4, but for others, it could also be during other Alert Levels.
At present time, we get asked daily by the businesses who lease premises, if they must continue paying rent for the time when there is no access. COVID-19 crisis has significantly impacted many businesses’ solvency, and for some, the ability to avoid paying rent until they are able to start trading again is something that could save the business from shutting its doors permanently.
In our earlier article, we analysed how to temporarily stop/reduce payments of rent where the lease is on a standard deed of lease from the Auckland District Law Society. That deed of lease contains express provisions addressing emergencies and the treatment of rent during emergencies. We concluded that it is highly probable that COVID-19 crisis is ‘an emergency’ that the Auckland District Law Society deed of lease would cover.
In cases where a different lease agreement is used and that agreement does not contain similar emergency provisions, there could be a possibility to run an argument that the lease should be terminated as a result of the doctrine of frustration. The doctrine of frustration and its application to lease agreements during COVID-19 crisis is the topic of this article.
We note that both solutions analysed in our earlier and this articles, would be relevant where there is no collaboration between the tenant and the landlord. We highly recommend that the tenants and landlords work together during this period to ensure both parties come out commercially viable. This could be in a way of the landlord providing a temporary discount to rent payments. The reality for most landlords is that they are likely to experience difficulty in finding replacement tenants for some time.
Doctrine of frustration
The doctrine of frustration of contract allows parties to be relieved from their legal obligations where contracts have become impossible to perform. Frustration occurs where neither party has been the ‘defaulting party’ regarding their contractual obligations, but it has become incapable of performing the contract due to circumstances that are outside of the parties’ control.
In National Carriers Ltd v Panalpina (Northern) Ltd,[1] Lord Simon explained the doctrine in the following manner:
Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.
The threshold to satisfy that the contract has been frustrated is high and the doctrine would not generally be applicable where the compliance with the contract is temporarily delayed, or the contract has become more expensive.
[1]National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675.
In Planet Kids v Auckland Council,[2] the Supreme Court of New Zealand has confirmed that the doctrine of frustration could apply to leases.
Examples of frustrating events could include an unavailability of a thing (e.g. if the premises which were leased have been burnt), unavailability of a person (e.g. if the person who was supposed to provide services have become unwell or passed away), or supervening illegality (e.g. performing the contract have become illegal through legislation or Government’s intervention, either permanently or for a prolonged period).
Application to COVID-19 crisis
Whether the doctrine would be available to specific businesses during COVID-19 crisis will depend on various factors.
In Planet Kids v Auckland Council, relying on an earlier English authority, the New Zealand Supreme Court set out the following factors that would need to be considered in deciding whether a contract is frustrated:
The terms of the contract;
Its matrix or context;
The parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at least to the extent that these can be ascribed mutually and objectively;
The nature of the supervening event; and
The parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.
In the context of COVID-19, the relevant factors to consider are the length of the lease (e.g. a 10 years lease or a 6 months lease), the stage of the lease at the time of COVID-19 (e.g. initial or final stages), the nature of the business and its ability to operate from the premises during various Alert Levels, and any express indications within the lease agreement as to the availability of frustration.
For instance, if the lease is of a short term, and the business is not able to operate during some or all Alert Levels, there is a higher chance that the doctrine of frustration would apply. However, if the lease is for a period of 10 years and/or it was agreed within the lease agreement that no event could render the lease frustrated, it is very unlikely that the doctrine would be applicable.
Unlike the provisions of the Auckland District Law Society deed of lease, which might allow reduction to/stopping payments of rent on a temporary basis, in the event of a frustrated lease, the remedy is the termination of the lease. For this reason, before raising the doctrine of frustration, the tenants should carefully consider how losing the lease would impact their business after they are able to start operating their business again. The tenants would need to balance the long-term implications of the lost lease, against the immediate liquidity issues.
Conclusion
The doctrine of frustration is a complex principle that should be relied upon carefully. If the tenant incorrectly relies on the doctrine, the tenant might be repudiating the lease and could become liable for the landlord’s losses.
[2]Planet Kids v Auckland Council [2013] NZSC 147.
If you need help with assessing whether your lease is suitable for termination in light of COVID-19 crisis, or if you need assistance to carry negotiations with the landlord, feel free to contact one of our experts at Norling Law for a free 30-minute no-obligation consultation which can be booked here.
On 3 April 2020, Finance Minister Grant Robertson announced further relief for businesses impacted by COVID-19 crisis.
The Government will be introducing legislation to make several temporary changes to the Companies Act 1993 (“the Act”) with the aim of helping companies running and keeping staff in jobs. The proposed changes are intended to help New Zealand economy to recover as quickly as possible from the current crisis and are expected to last for a period of six months.
Grant Robertson confirmed that the proposed legislative changes will be drafted as soon as possible, and the Government will be asking Parliament to make some of these changes retrospective from the date of the announcement.
Some of the changes that the Government intends to implement are summarised below.
To become law, the proposed changes will need to be agreed to by Parliament, and modifications could be carried out prior to them being passed into law. Accordingly, this is an interim update.
Changes in Director’s duties
The Act is proposed to be modified to provide directors of companies which face insolvency issues because of COVID-19 a ‘safe harbour’ from various obligations under the Act. This is quite similar to the position adopted by Australia and it appears our government is following in their lead.
Currently, a director of a company could be breaching various obligations contained under the Act, including an obligation not to allow the company to trade recklessly (s 135 of the Act), by allowing a company facing cash flow issues to continue trading. Breach of such obligations could make the director personally liable for the amount equal to some or all of the debts of the company.
If agreed to by Parliament, over the next six months, directors’ decision to continue trading will not result in a breach of duties under the Act if:
In the good faith opinion of the directors, the company is facing or is likely to face significant liquidity problems in the next 6 months as a result of the impact of the COVID-19 crisis on them or their creditors;
The company was able to pay its debts as they fell due on 31 December 2019; and
The directors consider in good faith that it is more likely than not that the company will be able to pay its debts as they fall due within 18 months (for example, because trading conditions are likely to improve or they are likely to able to reach an accommodation with their creditors).
The ‘safe harbour’ is intended to allow the directors of companies to keep the companies trading, rather than prematurely closing up, which could subsequently allow the companies to return to viability once the COVID-19 crisis has eased.
Grant Robertson has emphasised that the proposed changes do not mean that the directors could disregard the consequences of their actions completely. Grant Robertson said:
Other protections in the [Act], such as those addressing serious breaches of the duty to act in good faith and punishing those who dishonestly incur debts, will remain in place.
Cases of dishonestly and/or ill conduct will still be subject to civil and, in more serious cases, criminal penalties.
Ability for Business Debt Hibernation
Changes will also be made to enable businesses affected by COVID-19 to put existing debts into hibernation.
This will be known as a Business Debt Hibernation regime and would happen in circumstances where there is an agreement of 50% of creditors (in number and value) of the business. The creditors will have one month from the date when the proposal is put to them to vote on it, and in the event it is passed, the proposal would bind all creditors (other than employees) and would be subject to any conditions agreed with creditors.
There will be a one-month moratorium on enforcement of debts from the date when the proposal is put to creditors, and a further six months if the proposal is passed.
Grant Robertson said:
Going into a Business Debt Hibernation will give businesses the space to talk to their creditors about prioritising paying some debts, and deferring others for six months.
It will also be proposed that any further payments made by the business to third party creditors would be exempt from the voidable transaction regime (apart from related parties’ creditors). This is to encourage other business owners to transact with the business that is under the Business Debt Hibernation regime without being concerned that payments received by them could later be clawed back by the liquidator in the event the company still ends up being placed into liquidation.
The Business Debt Hibernation regime is intended to enable companies, which otherwise could face liquidation as a result of unpaid debts, to survive.
This could be a great way for businesses to kick the can down the road if they are facing insolvency and to give a fighting chance at survival.
Proposed Extension for Compliance with Deadlines
A temporary relief will be granted to companies, limited partnerships, incorporated societies and other entities which are unable to comply with various deadline requirements under their constitutions or rules because of COVID-19.
Creation of Additional Powers to the Registrar of Companies
Powers will be provided to the Registrar of Companies to temporarily extend deadlines imposed on companies, incorporated societies, charitable trusts and other entities under legislation.
It has been indicated that the Registrar will use its powers to relax the statutory deadlines in some of corporate governance legislation, for example relaxing the statutory deadlines for holding of AGMs, filing annual returns and etc, and also relax deadlines for the Registrar office itself to carry out their functions, such as processing applications.
Deferment of Insolvency Practitioner Regulation
This is unusual. For years, the governments have been working on a regime to regulate insolvency practitioners. It is much needed. It was due to be implemented in June 2020.
The government now proposes to defer the regime for up to 12 months.
More Use of Electronic signatures
Changes will be carried to allow the use of electronic signatures where necessary due to COVID-19 restrictions.
Conclusion
It will be interesting to see the exact shape that the proposed changes to the Act will take.
If you have questions about the upcoming changes, or how they would impact your business, feel free to contact one of our experts at Norling Law for a free 30-minute no-obligation consultation which can be booked here.
