Belly-up firms' reprieve

By IRENE CHAPPLE

Struggling businesses may be pulled back from the brink under a revamp of New Zealand's insolvency laws, but some details of the proposed changes are coming under criticism.

The Government plans to introduce voluntary administration for troubled businesses, which would aim to save the business or, if failure was inevitable, maximise the financial return to creditors.

That approach would be an alternative to the current regime where failing businesses are put into liquidation by creditors or directors and outstanding funds are recovered by selling assets or coming to agreement with creditors.

Under the proposed voluntary administration regime, firms which qualify would be given a 28-day moratorium on creditors' claims, while they attempted to trade through their difficulties.

But while few people would disagree with the intention, insolvency practitioners and lobbyists say the actual impact is debatable.

The key changes, including the planned introduction of voluntary administration, were announced in February, but the draft bill was revealed last week and is now open for public discussion.

The Government says the bill should to be ready for introduction to Parliament by the end of the year.

Its proposed voluntary administration regime is based around Australia's, operating for 14 years.

As well as voluntary administration, the Government is mooting several other changes including the licensing of insolvency practitioners, stricter regulation of "phoenix companies" - those which rise from the ashes of a failed company, leaving the original firm's debts unpaid - and a new criminal offence for directors who intend to defraud creditors.

Personal bankruptcy is to be streamlined and the protection and limits for employees' claims will be increased.

But it is the voluntary administrations regime that could - although not everyone agrees - have a substantial impact on how business operates in New Zealand.

Most commentators spoken to by the Herald were keen for New Zealand to move to such a regime, if only for the sake of the few businesses which collapse unnecessarily. But views are divided on its effectiveness.

John Vague, of McDonald Vague, who has 25 years' experience in insolvency work, believes voluntary administration would, in many cases, simply add a layer of cost to an inevitable insolvency process.

Ultimately such costs reduce the amount that creditors get back.

However, Vague does believe the complexities associated with larger companies can justify voluntary administration. But the bulk of New Zealand business is small and going through a process of voluntary administration is, says Vague, a waste of time and money.

Preferential treatment for repayment of IRD debt, which will remain under the proposed law, also frustrates Vague and others.

The Institute of Chartered Accountants director of Government relations and strategic projects, David Pickens, cautiously supports the voluntary administration proposals. However, he says it will make little difference to New Zealand business unless the IRD's status as preferential creditor, behind employees, is dropped.

Pickens says Australia does not have such a preference. He argues the IRD - frequently the largest creditor in small insolvencies - does not actively chase the debts, relying instead on its preferential status.

If it did, directors would be forced to admit their financial difficulties much earlier and creditors would ultimately have better returns.

Australia's rules also mean directors can be personally liable for tax debt: "That means there is a very strong incentive to come forward earlier [rather than] continuing to trade," says Pickens.

But both Pickens and Phillips Fox partner Michael Bos, an insolvency specialist, agree the scheme is useful for the businesses it may be able to save.

Going for broke

Insolvency law proposals:

* Business rehabilitation will be encouraged with a voluntary administration regime.

* Consumer debtors with no assets will be given an alternative to bankruptcy.

* It will be a criminal offence for directors to intentionally defraud creditors by using phoenix companies. Restrictions on the reuse of the original company's name.

* Insolvency practitioners may be registered.

* Employees' claims will receive higher priority.

Next steps:

* Submissions close June 11. Government expects the bill to be introduced to Parliament by the end of the year.

The Ministry of Economic Development