Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

An insolvency safe harbour in New Zealand?

As Australia is about the review the first two years of operation of its 2017 safe harbour reforms,[1] New Zealand is looking at introducing the same type of reforms as a means of lessening the negative impact of its own insolvent trading laws.

The Companies (Safe Harbour for Insolvent Trading) Amendment Bill, is a private member’s Bill the words in its title being the same as those used in Australia.

NZ has insolvent trading provisions different to those in Australia, primarily under s 135 of the NZ Companies Act 1993, with less restrictions on directors than imposed by Australia’s section 588G.

The Bill proposes a safe harbour protection under what would be s 138B of the Companies Act. Its purpose is said to be to allow directors ‘to continue to act in the best interests of the company despite the possibility of trading insolvently and without attracting civil liability’.

Arguments similar to those raised in Australia are given in favour of the Bill:

  • the potential liability under NZ law causes directors to act conservatively, resigning and prematurely appointing an external administrator;
  • fear of insolvent trading discourages directors from trying to implement restructuring proposals to turn businesses around;
  • the appointment of external administrators often leads to the destruction of value and job losses; and
  • a safe harbour option would allow directors to retain control of the company while receiving restructuring advice from professional advisers in a framework that still provides for the interests of creditors.

The ‘defence’ would be available to a director if, after suspecting the company is or may become insolvent, the director starts to develop one or more courses of action, or commence to take a course of action, reasonably likely to lead to a better outcome for the company.

The directors “must … obtain advice from an appropriately qualified entity who was given sufficient information to give appropriate advice”. As under Australian law, that term is properly not defined so as to allow a broad range of advice to be sought.

The Bill follows the significant High Court decisions in Mainzeal[2] where the directors were found liable for insolvent trading over a long period in the amount of NZ$36 million. Those decisions are said to be on appeal.

Given the more flexible insolvent trading laws in NZ, it may be questioned whether NZ needs safe harbour reforms at all, or at least to the extent provided in Australia.

A new insolvency profession

This Bill arrives in the context of what will be a new insolvency profession in NZ with the commencement of the co-regulation regime for insolvency practitioners in July 2020.

The Bill may be seen as a means of building on that new regime by broadening the scope of work for insolvency professionals into restructuring. While the need for insolvency practitioners to maintain independence is fundamental in NZ law, and which may limit the scope for giving safe harbour advice, NZ courts appear to take the more commercial approach that is evident in Australia.

Bankruptcy

The other area of potential new insolvency work in NZ comes from another private members bill – the Insolvency (Private Administration of Personal Bankruptcy) Amendment Bill – which would open up the trusteeship of personal insolvencies to private practitioners. As we have explained, NZ is different from both Australia and the UK in that the government Official Assignee has in effect a monopoly on personal insolvencies in contrast to its sharing of corporate insolvencies with the private profession.

And Australia

It remains to be seen whether Australia will accord reciprocal rights to licensed NZ insolvency practitioners to practise in Australia, beyond, for example, prescribing NZ under the Schedules.[3]

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[1] Corporations Act 2001 s 588HA

[2] Mainzeal Property and Construction Limited (in liq) v Yan [2019] NZHC 255; Mainzeal Property and Construction Limited (in liq) v Yan [2019] NZHC 1637

[3] Sections 20-20(4)(i).

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