Over the last couple of years, we have developed the habit of periodically pushing up the periscope to try to determine the ‘big five’ insolvency issues on the horizon.
Below is a retrospective assessment of how we did last time and our best guess as to what will dominate the next 12 months.
The big five for 2015
- financial distress for dairy farmers as payments drop
- more activity from the Financial Markets Authority (FMA) as it flexes its muscles
- a slow down in voidable transaction claims
- tough times ahead for directors: Steigrad, criminalisation of corporate wrongdoing and litigation funders, and
- (once again) delay in implementing the regulation of insolvency practitioners.
Over the past 12 months, the significant insolvency events have been the receiverships of the Southern Cross Forest Product group companies, Bullet Freight and Helipro, the Postie Plus and Shanton administrations, the clawback litigation relating to the Ross Asset Management Ponzi scheme and, more recently, the receivership of Arena Capital.
On the horizon?
The continued growth of the New Zealand economy over the last year has been supported by low interest rates, high net migration and construction activity (particularly in Auckland and Canterbury), as well as a drop in fuel prices. These factors have translated into a slow down in traditional insolvency appointments.
Investigating and forensic accounting work continues to keep many insolvency practitioners busy but, like last year, there have been relatively few receiverships or liquidations of any scale. In part, this trend has been driven by the banks’ preference for managing customer default outside of formal insolvency processes.
While the recent drop in commodity prices and the rise in petrol prices will hamper economic growth, we see this work-out trend as likely to continue, unless a formal appointment offers clear commercial advantages or the relationship between lender and borrower breaks down.
1. Recently the Reserve Bank reported that “financial stress in the dairy sector could rise markedly if low global milk prices persist beyond the current season” and that this was a potential risk to New Zealand’s financial system. International dairy prices have fallen dramatically since 2013 while dairy debt has trebled since 2003 to $34 billion (more than 60% of total rural debt). According to the Reserve Bank, about 30% of this debt is concentrated among the most indebted 10% of farms.
There has been speculation that some farmers will be confronted by “receivers at the farm gate” if debt becomes unsustainable. While this will be the reality in some cases, our experience is that the banks will look to support the majority of distressed clients, providing that they are frank about their situation. Insolvency practitioners will have a key role to play behind the scenes in helping lenders and farmers manage debt and cashflow issues. The long-term outlook for the dairy industry remains positive with demand from China (and, further down the track, India) forecast to be strong.
2. We expect the FMA to continue to flex its regulatory muscle and use the enforcement powers available to it. It made four major enforcement announcements in May and successfully applied for the appointment of receivers to Arena Capital Limited (trading as BlackfortFX). We anticipate that there will be opportunities for insolvency practitioners to assist the FMA and issuers over the next 12 months in the regulation of capital markets and financial services in New Zealand.
3. Now that the law on voidable transactions is more settled, and pro creditor, we would expect that liquidators will be pursuing fewer claims against creditors. Where claims are made, attention may shift to whether the creditor received payments in good faith and without knowledge of insolvency. The recovery actions taken by the Ross Asset Management liquidators, in the unique context of a Ponzi scheme, will continue to be of interest. There remains a sense of disquiet about how the whole regime operates, with a number of practitioners keen to put some boundaries on the claw-back of payments.
4. One of the most lasting effects of the GFC is the continuing spotlight on director conduct. Last year’s amendments to the Companies Act have now criminalised serious breaches of directors’ duties. This criminalisation provoked criticism, but the fact that each of these new offences now requires an element of both knowledge and dishonesty does deal with the most serious concerns. As a result, we consider this law should not create a substantial additional barrier to properly conducted workouts. On the civil front, there are now a number of litigation funders operating in New Zealand and they have already supported court actions by liquidators against directors. We would anticipate that these funded actions will become more commonplace in the future. The Supreme Court’s decision last year in the Steigrad litigation has left some directors in the awkward position of having no insurance cover available for defence costs where plaintiffs (often insolvency practitioners) have asserted a charge over insurance monies. Most D&O policies have now been restructured so that defence costs are separate. In many cases, the impact of Steigrad will be to reduce the amount of cover available to meet claims.
5. At the time of writing, the Insolvency Practitioners Bill is still languishing at number 31 on the Parliamentary Order Paper. The momentum behind the Bill has subsided as the effects of the GFC have receded and we will be surprised if it makes it into law this year. Practitioners will continue to look to RITANZ initiatives for self regulation as a more desirable way of moving forward.
The big issues for 2014
Our ‘top five’ picks for last year were:
- a continuing focus on insolvent transactions
- more recovery actions relating to the finance company collapses
- a revival of enthusiasm for voluntary administration (VA)
- Supreme Court guidance on IRD priority, and
- continued delay in implementing the regulation of insolvency practitioners.
How it went
Continuing focus on insolvent transactions
This year has seen the release of two significant court decisions. In February, the Supreme Court expanded the “good faith defence” in section 296(3) of the Companies Act. Where a creditor “gave value” through the original transaction, that creditor can now defeat a voidable transaction claim by proving that it acted in good faith, with no suspicion of insolvency. A few months later, the Court of Appeal ruled that the peak indebtedness rule is not part of New Zealand law, meaning that liquidators cannot choose the point of “peak indebtedness” as the starting point for their calculation of whether a creditor received a preference. See our earlier commentaries here
Recovery actions relating to finance company collapses
Most of the litigation relating to the finance company collapses has now worked its way through the system. There is, however, more to come. A class action has been mooted against various parties related to South Canterbury Finance. In addition, although the High Court rejected the claim in the Feltex representative action, an appeal has been lodged and is set down to be heard in April 2016.
Revival of enthusiasm for voluntary administration
The year started with the appointment of an administrator to Shanton Fashions Limited, a retail chain with over 30 stores. The company returned to the control of its directors at the watershed meeting, a unique outcome in our experience (liquidators have now been appointed to the company). The number of VA appointments continues to be low, but we continue to believe that, in the right circumstances, the regime can lead to a better outcome for creditors than liquidation.
Supreme Court guidance on IRD priority
In November, the Supreme Court overruled the Court of Appeal by deciding that the IRD stands behind liquidators and employees when cash is available in liquidation and PAYE is owed. This decision, which upholds the payment waterfall in Schedule 7 of the Companies Act, would no doubt have been welcomed by insolvency practitioners after the Court of Appeal had upset previous industry practice. See our earlier commentary here
Continued delay in implementing the regulation of insolvency practitioners
Tick. See above.