This article first appeared in the National Business Review on 26 June 2009.
The credit crunch and the international financial crisis are driving real, fundamental change across financial institutions, business, regulators and professional services organisations.
Businesses are having to adjust to the fact that there just will not be the amount of debt available that there once was and to restructure their financial arrangements accordingly. This "deleveraging" process is taking place worldwide, and New Zealand will not be immune.
Financial restructuring is often traumatic, but companies that restructure effectively in difficult periods can emerge and succeed. The imperative from a policy perspective, therefore, is not to protect the economy against change but to avoid unnecessary casualties.
New Zealand’s current financial laws fail this test and the risk is that, unless there is law change, the body count from the recession may be higher than would have been the case under a more salvage-oriented regime.
Over the last decade, many jurisdictions have moved to a culture in their financial and insolvency framework that gives primacy to corporate rescue. But New Zealand has yet to reflect this change in any meaningful way.
The United Kingdom, for example, has abolished receivership, other than in exceptional cases, in favour of an administration procedure which involves all creditors and ring-fences a portion of the distressed company’s funds for unsecured creditors. This approach is more consistent with the international, particularly European, trend toward collective rescue proceedings in which unsecured creditors are able to play a role.
Voluntary administration is a sensible option that allows a company limited breathing space from its creditors while an independent expert reviews the company’s business, estimates the likely liquidation outcome and proposes a restructuring plan to creditors.
While New Zealand introduced VA in 2007, the results have been patchy and the take-up rate low. In the 18 months since introduction, there have been only 40 voluntary administrations here compared to Australia which averages over 200 VAs every month and where the VA policy is regarded as a success.
The New Zealand VA process differs significantly from the Australian in one vital respect – the position of tax. In Australia, if the company has failed to meet its tax liabilities, then the Australian Tax Office (ATO) can issue the directors with a notice requiring them to direct the company to:
- comply with its remittance obligations; or
- make an agreement with the ATO in relation to payments; or
- appoint a voluntary administrator; or
- appoint a liquidator.
If the company does not take one of these steps within a 14-day period, then each director can be personally liable for the unpaid amount of the tax the company was required to collect. Accordingly, Australian directors are incentivised to act early in times of distress.
If New Zealand business is really going to get the maximum benefit from our voluntary administration law then we need to do a few simple things.
One: abolish the Inland Revenue Department’s priority on receivership and liquidation and substitute the Australian notification process. New Zealand is on its own retaining this relic and the benefits of losing it will be more efficient tax collection and earlier recognition of problem companies for creditors.
Two: allow businesses that restructure through voluntary administration to retain the benefits of tax losses and allow the business an exemption for tax on any debt forgiveness.
Three: properly regulate insolvency practitioners. The independence and integrity of the administrator is crucial in a successful voluntary administration. Both Australia and the UK regulate insolvency practitioners but in New Zealand you only have to be 18 and sane to take appointment as a receiver, administrator or liquidator. International insolvency practitioners find it unthinkable that such complex roles can be performed without any qualification, experience or insurance requirements.
Another area which needs serious attention in order to improve business conditions is real enforcement of our existing laws in order to promote market integrity. In comparison to the Australian Securities and Investments Commission, our regulators do not undertake much enforcement work. Either New Zealand has considerably more honest directors than across the ditch or our regulators simply do not have the enforcement resources of Australia.
It may be that the funding should come from business. Limited liability protection is the greatest invention of commercial law, but today we give it away for almost nothing. As the Law Commission has previously suggested, why not increase the annual filing fee for a company to $1000 (still cheap for the amazing benefit limited liability provides) and use that money solely for the improvement and enforcement of our existing business laws.
The Obama Administration has recently announced “a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression”. In New Zealand, we need to recognise that it is time for some new thinking of our own.
We must ask ourselves whether we have the best laws, the best enforcement of those laws and the best regulatory structures to support the entrepreneurial spirit on which capitalism depends. If we answer those questions honestly, then we will realise that we need a transformation of our own.
Michael Harper is a partner at Chapman Tripp, specialising in business restructuring. The views expressed here are his own and may not reflect those of the firm or its clients.