Insolvency Practice In NZ – The Creditors Perspective


This section deals with Commercial Insolvency, and it does so from the perspective of a supplier or a creditor of a business that is in financial trouble.

The main issues reviewed are the different types of insolvency options open to New Zealand businesses under the current legislation and precedents, as well as common practice employed by those operating in New Zealand.

Insolvency is a critical element of any economy. When a company fails there is a ripple effect through the wider community, and sometimes the best that can be done is a quick and transparent process that leads to the end of the business and some form of closure for those effected.

It is rare for unsecured creditors to receive any payment from a failed company, and this has prompted New Zealand to introduce the Voluntary Administration Regime (effective from 1st November 2007), that has been operating in Australia for over a decade. Most insolvencies in Australia move towards Voluntary Administration rather than liquidation or receivership. There are some significant differences to the New Zealand model that mean that liquidation will probably be the preferred method for ending the life of New Zealand businesses.

The purpose of this booklet is a beginners insight to the issues. It is not an exhaustive examination of all of the issues or options, but rather a brief guide to help you seek further information from your legal or accounting professionals.


Liquidation has been New Zealand’s main form of insolvency. The insolvency industry is lightly regulated and relies on the professional conduct of those in the industry, including insolvency practitioners, lawyers and accountants.

Liquidation is the effective end of a company’s life. It has a number of implications on different parties. Once a liquidator is appointed the Liquidator has total control of the company and the directors cease to hold any powers, although they are required to remain in office.

Commencement of Liquidation by Company

There are a number of ways a company can go into liquidation. In most cases, where the Company decides to call it quits, the shareholders will appoint a liquidator.

Because the resolution is a major transaction the rules governing this resolution are separate from normal board decisions, and these differ from company to company depending on their constitutions.

However, in almost all cases, the following should suffice:

The Company needs to call a shareholders meeting. In the notice enclose a copy of the resolution appointing a liquidator.

If all the shareholders are in agreement there is no need for a shareholders meeting. It only becomes an issue if there are some shareholders who may not agree on liquidation.

A special resolution usually requires 75% of all eligible shares voting for the resolution.

Importantly, in most cases, a board resolution is not sufficient to put the company into liquidation, unless the companies constitution makes provision for the board doing this.

Commencement of Liquidation by Courts

The courts can appoint a liquidator on a petition of the request of petitioning creditor. There are a number of processes the courts can use when putting a company into liquidation but the most common one is:

A. Creditor issues company with a statutory demand;

B. Company has ten days to go to court to dispute demand, and fifteen days to pay demand

C. After fifteen working days creditor can seek a court date to consider liquidation of Company. This must be advertised in the NZ Gazette and the local paper.

D. The courts will, on the appointed date, appoint a liquidator based on:

I. Unpaid and unchallenged Statutory Demand proving that the company cannot pay its bills

II. Lawyers confirmation that debt has not been paid

III. Court may appoint a liquidator recommended by petitioning creditor

Once a Liquidator is appointed

Once the liquidator is appointed all assets of the company are vested in the control of the liquidator. The directors are still directors but they hold no power.

In brief, a liquidator is required to:

A. Call a creditors meeting (in many cases)

B. Investigate the activities of the directors and affairs of company to pay demand

C. Take charge of the company’s assets

D. Realise the assets of the company for the best value

E. Distribute the assets according to the legislation

F. Report any criminal activity

G. Report on progress to the creditors and shareholders

In theory, a liquidator appointed by the shareholders is only an interim liquidator, and must be confirmed by the creditors at a creditors meeting. In reality, liquidators, once appointed, are rarely removed from office.

Legal Action against the Company

Legal action against the company ceases the moment the company goes into liquidation. The liquidator can consent for the action to continue, or the court can permit it, but typically all legal action ceases.

Restrictions on Companies appointing their own liquidator

A company loses the right to appoint their own liquidator ten days after court action has commenced to wind the company up. This is very important.

In theory it should make no difference if a liquidator is appointed by the Company or if the liquidator is appointed by the courts. In reality the difference can be significant. A liquidator has a lot of discretion as to how to treat the large number of issues that arise in each liquidation. A Liquidator appointed by the courts is likely to take a more aggressive approach to the directors obligations than one appointed by the shareholders.

What happens to creditors?

Creditors fall into several camps: those with security and those without. A rough guide to who gets paid, and the order they get paid, is outlined below:

Secured Creditors

Secured creditors have a claim against a specific asset. They have a claim over the asset of the company, such as a vehicle, that allows them to retrieve the asset and sell it to recover the money they are owed.

They can exercise this right regardless of the fact that the company is in liquidation. But it is important that the secured creditor has registered their security on the PPSR register. If they have not done so their security ranks below those of other secured creditors or preferential creditors.

However, sometimes a creditor will have a claim against all of the company’s assets. This is generally called a General Security Agreement, or GSA, and can mean that once their claim is satisfied there will be nothing for other claimants. It is not uncommon for a bank or finance company to have such a security.

The Liquidators Expenses

Once a liquidator is appointed the liquidator has a priority claim on all assets recovered in the liquidation. This includes any expenses incurred by the liquidator in the ongoing running of the business (staff wages from the date of liquidation, rent, etc)

Creditor Court Costs

The costs of a creditor who petitioned the court to liquidate the company. It is normal for these costs to be between two and four thousand dollars. In addition creditors who fund legal or other costs on behalf of the liquidation are entitled to receive their costs (as well as any money they were owed at the time of liquidation, before any other creditors are repaid out).

Staff Wages

The staff wages, earned in the last four months, and all holiday pay (up to a maximum of $16,420 per employee). Note, this section excludes company directors or their relatives.


The IRD is paid any PAYE and GST owing.

Unsecured Creditors

Once all of the above expenses are paid out, the unsecured creditors are paid. It is unusual for unsecured creditors to be paid in a typical liquidation.


Finally, it is the shareholders turn. When all other costs have been paid out in full, the shareholders can receive the balance of any funds. This almost never happens.

What happens to Shareholders and Directors?

One of the first things a liquidator will look at is the directors current account. This is money owing to the company by the directors or shareholders.

When a company is failing the director will often cease taking wages (which they have to pay PAYE on) and begin paying themselves drawings, effectively a loan from the company to the director. When the Company fails this loan becomes due, and the liquidator should call in the loan.

Often the director is not in a position to settle all of the loan, and the liquidator has to make a decision to either proceed to bankrupt the director or to settle for a smaller amount.

What happens to personal guarantees?

Most well written personal guarantees allow for the creditor to make immediate demand on the guarantor immediately on any act of insolvency by the company.

What if the directors have traded recklessly?

In some cases the liquidator can prosecute the director for trading recklessly and the director can be held personally liable. The burden is on the liquidator to prove reckless trading.

The courts set a high bench mark. In one case the judge declared that the director was personally liable for the companies debts because the director had:

“departed so markedly from orthodox business practice and involved such extensive and unusual risks to creditors that it can fairly be stigmatised as reckless”

The judgment in this case was seven million dollars. Reckless trading is a difficult charge to prove and is rarely prosecuted in New Zealand.

Preferential treatment for funding creditors

A very important recent change in the legislation is the protection it gives creditors who choose to fund the liquidator in pursuing assets. The creditor has the option of agreeing to fund legal action, and if successful the creditor would recover the costs of the legal action and also recover the value of their pre-liquidation claim. By taking the litigation risk, they improve their ranking against other unsecured creditors.

Voidable transactions

In some cases a liquidator can void a transaction. This is where one creditor has gained an advantage over other creditors in the last six months (or 24 months in some cases) by gaining payment of their account in preference to other claimants.

The yard stick for this is the ‘running account’ method. To see if a transaction is voidable the liquidator needs to be satisfied that the payment was inconsistent with a creditors running account with the company.

As an example, if the landlord was always paid on sixty days, but in the last three months pressured the company to bring their account up to date, the payment bringing the rent up to date could be voidable and the landlord would need to repay the money.


Voluntary Administration

Voluntary Administration (VA) is very new to New Zealand, although it has been used in Australia for over ten years. It became law in New Zealand on 1 November 2007.

VA is about trying to save a company that is trading profitably, or has a profitable core business, but has debts that make it insolvent. It is similar to the Chapter Eleven process in the United States. Very simply, VA is about getting the unsecured creditors to write off a large part of their debt so the company can trade on. Importantly, this includes the Inland Revenue Department.

This document looks at the risks to creditors of the new regime, and how you can ensure that you are not one of the creditors who gets to write off a large part of your debt allowing a rogue director to continue with their business.

What is Voluntary Administration

Voluntary Administration is the placing of a troubled company in the hands of an Administrator. A moratorium is placed on the companies debts, but the Administrator is able to continue to trade the company while an agreement is reached with the creditors. Strict time limits apply to this moratorium, and if agreement can not be reached, the company must go into liquidation.

The Administrator is personally liable for most of the companies costs during administration, and must focus on negotiating a Deed of Company Arrangement (DOCA) that outlines how the company will be run and how the creditors will be compensated. The DOCA must be agreed by the creditors and the company board.

If the DOCA is agreed, the period of Voluntary Administration ends, and the company moves to a new status, that of a company under a DOCA, and the Voluntary Administrator will become (in most cases) the Deed Administrator. The Deed Administrator is only responsible for enforcing the DOCA, and is no longer in total control of the company.

The Five Phases of Voluntary Administration

1. Appointment of an administrator
The appointment of an administrator is commenced by a company resolution of the Board (although it can be done by the courts or a creditor in some cases).

2. Initial Creditors meetings.
A meeting of creditors is convened within 8 working days after appointment of the administrator. The purpose of this initial meeting is to confirm, or change, the Administrator.

3. Ongoing Administration
As the Administrator comes to grips with the issues facing the company, he can continue to run the business as a going concern.

4. Watershed Creditors Meeting
Twenty five days after the appointment of the Administrator, the Administrator must present to a second creditors meeting a proposal for the restructure of the company (The Deed of Company Agreement or DOCA), or a recommendation for the liquidation of the company.

The creditors can accept the DOCA or not.

5. DOCA or liquidation
The board has fifteen days to consent to the DOCA, at which time the company moves from being in Voluntary Administration to being governed by the Deed. The Deed is administered by the Deed Administrator (typically the Voluntary Administrator), and the Deed expires at a set time or once events specified in the Deed are reached (repayment of companies debt, after ninety days, etc).

Obligations and Powers of the Administrator

The administrator must investigate the company’s affairs and form an opinion on what is in the best interests for creditors from either a deed of arrangement, administration to end, or the company to be wound up.

The Administrator has powers very similar to that of a liquidator, ie: almost total power to run, sell all or part of a companies assets, cancel leases, nullify contracts, fire staff, etc.

The Administrator has obligations to secure two creditors meetings within six weeks to decide on the future of the company, in addition to running the company and protecting company assets.

The Watershed Creditors Meeting

At the Watershed meeting the Administrator must present to the creditors the DOCA. The directors also have an obligation to attend.

The creditors have three options:

The administrator is the chairman of the meeting, and in order to pass, a resolution requires:

  1. Accept the deed of arrangement
  2. End the Administration
  3. Put the company into liquidation

A majority in number (i.e. at least 50%+1) and 75% in value of creditors votes.

However, in the event that both criteria are not met, the Administrator has the casting vote. So, if most of the creditors support the DOCA, but one large creditor with forty percent of the money owing opposes, the Administrator can side with the majority and force the DOCA through.

After the Watershed Creditors Meeting

If a deed of arrangement is approved by the creditors, the board must approve within fifteen days or face liquidation.

If termination of administration is preferred, the company reverts to the position before administration. The administration can also be terminated if the meeting is not held within the prescribed time or there is no resolution passed at the meeting.

If liquidation is chosen, the company would go into liquidation immediately. If the company fails to execute the deed within the prescribed time then the company goes into liquidation and the administration is terminated.

The Deed Of Company Arrangement: DOCA

Once the creditors and the company’s board agree to the DOCA, the company comes out of VA and is returned to the board and its directors for daily running.

There will be a Deed Administrator who will oversee the Deed, but not the running of the Company.

The creditors are prevented from taking any action against the company except as allowed for by the DOCA. Typically a DOCA will provide for the creditors to receive a percentage of their total amount owing over a period of time.

Although once Voluntary Administration ends the directors resume control of the company, the DOCA may impose limitations on the company by empowering the Deed Administrator in some way; such as appointments to the board must be approved by the Deed Administrator, capital purchases to be subject to Deed Administrator approval, and so on.

The legislation is silent on the operation of the DOCA. Australian examples are many and varied where creative provisions have been used to ensure that the directors, who ran the business into trouble in the first place, are constrained for a set period of time. This has the benefit of installing confidence in the creditors as to the wisdom of dealing with the company moving forward.

What about the IRD

The IRD is an unsecured creditor for the purposes of the Watershed meeting. They are bound by the DOCA.

However, if the company goes into liquidation, the IRD is a secured creditor. In the event of a liquidation, the IRD ranks ahead of all but the liquidators costs, some staff costs and secured creditors.

It is assumed by some commentators that the IRD would prefer liquidation in most cases and therefore not support the DOCA. This author does not support this view. In most cases of Voluntary Administration there would be a secured creditor who would be taking the lion’s share of any assets in liquidation. Therefore the IRD may typically do better in keeping the company alive than in seeing it move to liquidation.

Rights of Creditors in a Voluntary Administration

The creditors meet twice, initially to confirm the appointment of the Administrator, and again to confirm the DOCA, or to liquidate the company.

If you are a secured creditor, and your security covers all, or virtually all of the companies assets, (ie: you hold a GSA or a PPSR security against ‘all current and future assets’ or similar): then

  • You have ten working days from receiving notice of the appointment of an Administrator to enforce your rights to repossess your assets, or appoint a receiver.
  • If you wait longer than ten days, you lose your rights and must wait for the outcome of the Administration to run its course.

If you have a security over some, but not all of the companies assets:

  • You have no more rights than an unsecured creditor.
  • You will be unable to collect your assets, the Administrator will be able to continue to use your assets
  • The Administrator will be obligated to pay any lease costs, but not capital loan repayments.
  • If your security covers perishable stock, you can enforce your rights and recover your assets unless the courts prevent it.

For all creditors:

Enforcing a personal guarantee during the period of Voluntary Administration is prevented by the new legislation.

Supplying Goods and Services to a Company in Administration

The Administrator is personally liable for all debts incurred during the Administration, and is able to use any company assets not covered by a security to cover the running costs of the business going forward.

The Administrator is not able to use items covered in a PPSR or other enforceable security to recover his costs.

A large exception to this rule is rental or other lease agreements that the company may be contracted into. The Administrator has seven days to either agree to continue to lease, or to serve notice on the leassor that the property is not needed.

The leassor will not lose their rights as a creditor in the company, but they will not be able to enforce a claim against the Administrator personally for non payment of any rent.

Issues for Secured Creditors in Voluntary Administration

The ten day rule is very important, but it only applies to those creditors with a security over all, or virtually all, of the companies assets.

This brings into play a key element in Voluntary Administration; the consent of major secured creditors.

Before a company enters VA, it would be prudent for it to discuss the options with any such secured creditors. The secured creditors could then decide to support or not support the appointment of an Administrator. If the company went ahead and appointed an Administrator without the consent of the secured creditor, the secured creditor could appoint a receiver within the ten day period and effectively prevent the Administrator from running the company.

Protection for Secured Creditors (over most of the Companies Assets) in Voluntary Administration

In addition to the ten day rule, there is section 239ACT (2) (a). This provides that a secured creditor only loses his rights if:

  1. The DOCA states that the secured creditor loses their rights.
  2. The secured creditor votes for the DOCA.

Simply put, a secured creditor cannot lose their rights unless they consent to losing their rights. They are prevented from enforcing their rights during the course of the Administration, (except for the first ten days) but they gain their rights after the end of the Administration when the company either goes into liquidation or into the DOCA period.

This gives a secured creditor considerable power. It means that they have a veto on the DOCA. The company cannot effectively trade if the secured creditor chooses to exercise their rights once the period of Voluntary Administration ends.

Protection for Secured Creditors (over only some of the Companies Assets) in VA.

These secured creditors have significantly reduced rights. Their rights exist only if they began proceedings prior to the appointment of a Voluntary Administrator. However, even then the Administrator can petition the courts to prevent the enforcement proceeding if the asset is considered essential to the running of the business.


Powers of a Liquidator and Administrator

A liquidator has total power over the assets and affairs of a company. They can sell assets, fire staff, hire new staff, sell goods, trade, not trade, take legal action etc. They have the same powers that the board would have.

However, a liquidator can also interview directors, staff and professional advisors under oath. Although the answers cannot be used in a criminal trial against the people answering, lying to a liquidator is perjury. If you are concerned you have broken the law you need serious legal advise, as a liquidator is legally obligated to report criminal offenses to the relevant authorities.

A liquidator has the power to access the company’s bank records, accounting documents and legal paperwork. Accountants and lawyers have no power to refuse the documents, even if the company did not pay them for the work they have done (although they can claim some of their fees as a preferential claim).

An Administrator does not have the power to void transactions that were made by the company, which a liquidator does. However, an Administrator can put a company into liquidation.


A creditor with a security interest over some of the companies assets can appoint a receiver to manage the company.

In that event, the directors cease control of the company, and the receiver will run the business, for the benefit of the creditor that appointed him.

This section will not deal with how a secured creditor achieves this. This section deals with the impacts of a receivership on a company and its creditors.

First, some terms:

The Grantor

Legal people love obscure words. My favorite is defalcation, which means stealing but sounds so much less offensive.

When it comes to receiverships the legal people call the company who gives a security interest to someone else a Grantor, as in they have granted something. If a company allows a bank to take a security interest in company property then that company is called the Grantor.

So, if Wally’s Trucks Limited agrees that the ANZ Bank can have a debenture over Wally’s Trucks Limited, Wally’s Trucks becomes the Grantor. The ANZ is the debenture holder, and in the event that Wally’s Trucks does not met the payments, the ANZ will be entitled to appoint a receiver or a Voluntary Administrator.

The term Grantor has always seemed pretty silly to me, but then Courtney Love seems pretty silly to me, so what do I know? I will use this term here, and if you hear in your travels you will not be stumped.

The Debenture or General Security Agreement

A Debenture (also known as General Security Agreement)is a loan backed up by some security over a company or its assets. The Debenture document will give the creditor rights in the event of a breach of the loan agreement. In some cases, the Debenture holder can take over the asset (as in a bank selling a house if the mortgage is unpaid), or it can appoint a receiver to run the Company.

The Receivership

Once Appointed, the receiver must:

  • Give written notice to the grantor (debtor company)
  • Give public notice, in the NZ Gazette and relevant newspaper, detailing
  • Date of appointment
  • Receivers office address
  • Receivers full name
  • Brief description of the property in receivership

All documents from the company must make it clear that the company is in receivership.

The receiver has the power to run the business in receivership, including hiring staff, managing property, selling assets, entering into contracts. The receiver can call up unpaid capital.

The Directors

In a receivership the directors’ powers are suspended sufficiently to allow the receiver to do his job. They do not cease to be directors, and can undertake some action in the name of the company. In reality, this is limited to legal action.

The company in receivership, the grantor, must make available to the receiver all documents, bank details etc, available to the receiver.

A Liquidator acts in the interest of all creditors. A receiver only acts in the interest of the Debenture holder that appointed him.

The Receiver

The receiver has a primary duty of care to the debenture holder who appointed him. However, the receiver also has a duty of care to the company and other creditors not to act in a negligent manner. If a receiver is negligent he risks being held liable by other creditors and by the company.

The receiver has a statutory obligation to obtain the best price for the assets. He cannot, therefore, sell the assets cheaply to recover just enough for the debenture holder at the expense of other creditors and the grantor.

The receiver must, within two months, and again after every six months after his appointment, report on the progress of the receivership. These reports are to go to the grantor and the appointing debenture holder. If appointed by the Court, the court must also receive a copy of his reports.

A receiver can be held personally liable for other costs of the company in receivership. In most circumstances the receiver will seek an indemnity from the appointing creditor before accepting a receivership.

Reporting Crime

A receiver must also report any defalcations he becomes aware of during the receivership (and you thought you would never have need of that word). The Receivership Act requires the receiver to report to the IRD if the company has not been paying taxes. Filing fraudulent returns is considered proffering a document for pecuniary advantage and is covered by the Crimes Act (which the receiver must report on).

Priority of Security Interests

Once a receiver has sold a property or asset, any security interests in that property that are subordinate to the security interests of the appointing creditor is vacated. The ranking of priorities when it comes to paying out the surplus is specified in the PPSA. If there is anything left over, this money will be paid out by the receiver according to the following:

  • Any person with a security interest registered under the PPSA
  • Any person with a security interest not registered under the PPSA
  • The Grantor

Once the Receiver has recovered funds from the sale of the secured asset, the receiver pays off any other securities, the company in receivership (the Grantor) and any other security interest in the asset ceases.

If the receiver is unable to sort out competing claims on any surplus, he can deposit the funds with the court and let a judge sort it out.


Secured Creditors Putting a Company into Voluntary Administration, or Receivership.

Before a secured creditor can put a company into receivership or liquidation, they will need to have a Debenture in place, and the Debenture will need to have been breached.

The Debenture

A Debenture is a loan backed up by security over all of a company’s assets. The Debenture document will give the creditor rights in the event of a breach of the loan agreement. In some cases, the Debenture holder can take over the assets (as in a bank selling a house if the mortgage is unpaid), or it can appoint a receiver to run the Company.

In the debenture document there will be trigger events that will allow the debenture holder to appoint a receiver. These are typically:

  • Default in payments
  • Appointment of a liquidator or Administrator
  • Company ceasing to trade
  • A compromise with creditors
  • Breach by the Company of some obligation in the debenture agreement (such as debt to equity ratios)
  • The Companies actions are threatening the debenture holders security.

Unlike a Statutory Demand, there is no formal process set down in legislation for the appointment of a receiver, but the following are minimum requirements:

  • Appointment must be done according to the terms of the Debenture agreement
  • Appointment of the Receiver must be done in writing
  • Receiver must be a person not barred by legislation from being a receiver
  • The Receivership begins once the Receiver accepts the appointment

In most cases the Debenture will specify that the Company must receive a demand for payment before the appointment of a receiver. However, this is not a legislative requirement.

The next section deals with the demand for payment, prior to the appointment of a receiver, where the requirement for a Demand is allowed for in the Debenture.

The Demand

Most Debentures will allow for a demand for the payment to be made, and in New Zealand most of these documents allow for the payment of the due amount “on demand”.

This is important, because a Debenture Holder can put a business into Receivership in as little as one hour.

If a company is in default of the Debenture agreement, and the agreement allows for payment ‘on demand’, the Debenture holder can wait as little as one hour before appointing a receiver.

To quote one judge:

“a debtor who is required to pay money on demand must have it ready, and is not entitled to further time in order to look for it”

The key is, the Debenture holder has to give the company as much time as required to effect payment. Effectively, as long as it takes to reach for a cheque book.

If the debtor company admits that they cannot pay the demand, the Debenture holder can appoint a receiver on confirmation that the demand will not be met.

A prudent Debenture holder may give the debtor several days to collect the money, but if the Debenture allows for an ‘on demand’ repayment, they are not obliged to.

Commencement of a Receivership

A receivership occurs when the creditor has breached the debenture agreement. The obligation is on the creditor to prove that default, and if the receiver is subsequently found to have been improperly appointed, the creditor can be liable for substantial damages.

A receiver is usually appointed by the Debenture holder according to the terms of their Debenture. However, if the debenture documentation is unclear, the debenture holder can seek an order from the courts to proceed with a liquidation.

If you have a debenture or GSA over a company, and they are in default and your debenture allows for it, then you can elect to appoint a receiver or a Voluntary Administrator to run the company. There are advantages and disadvantage of either approach.


Liquidations follow receiverships like night follows day. Once you appoint a receiver the company is typically forced to go into liquidation. Therefore, the circumstances that you would want to appoint a receiver are:

  1. Re-sale value of the asset will substantially cover the value of the amount outstanding.
  2. The business has no ongoing value.
  3. You have no faith in the management of the company.
  4. You need someone to look after your interest and not those of the wider creditor base.

Voluntary Administration

With Voluntary Administration the opportunities are greater, but so are the risks. A Voluntary Administrator, appointed by a secured creditor, can put the company into liquidation, and the liquidator will be one chosen by the Voluntary Administrator. This allows for the secured creditor to choose the liquidator and maintain control of the process.

The advantage here is that, in the event that there are funds to be recovered, the secured creditor can fund the action confident in the knowledge that, if successful, they will be able to claim their legal and actual pre-liquidation debt back.

A secured creditor would consider appointing a Voluntary Administrator over a receiver if:

  1. There was value in the business as a going concern
  2. There was some residual confidence that the existing management or directors could continue to run the business
  3. There was a desire to put the business into liquidation and there was an expectation that the Voluntary Administrator would make this decision.
  4. There was insufficient value in the assets covered by Debenture to cover the value of the amount outstanding.

A Voluntary Administrator has to be mindful of seeking the best return of all the creditors, and not simply the creditor who made the appointment. A receiver has a more narrow focus, and works solely for the creditor who appointed him. However, the receiver cannot be negligent and destroy the value for other shareholders.

A Voluntary Administration can achieve more for a secured creditor than a receiver because an Administrator has a wider set of options to realise value. In most cases, the secured creditor will receive any payment first because they will have a claim over the assets of the company, and they can veto any DOCA by exercising their rights to appoint a receiver once the company comes out of administration.

However, once an Administrator is appointed, the secured creditor loses control of the process.

A company owes me money, what are my legal options?

Below is a list of options for getting tough with people who owe you money. If your customers owe you money and you wish to keep them as customers, then you need to work with them, helping them through their issues, and, if possible, increasing your protection.

The following is for getting tough.

Default Listing

Every trading company relies on its good name. In our modern world, a mans word is, well, not worth as much as his credit rating.

If someone owes you less than one thousand dollars, there is little to do except the normal debt collection tricks:





Phone again

Personal Visit

Listing the Debt with Veda Advantage (formally Baycorp)

Issue a Stat demand

A Statutory Demand (or Stat Demand for short), is a demand for payment and has quite specific process that needs to be followed. Your lawyer can give you some advice on ensuring that the process is followed correctly. In summary, a debtor has ten working days to challenge a stat. demand and fifteen to pay. If they do not challenge in the first ten days they are in trouble as knocking a stat. demand out after ten days is expensive.

Process of liquidating a defaulting debtor company

Once the fifteen days has lapsed, the following is the procedure that can be used to liquidate a non-paying debtor:

  1. Apply to the High Court with an application to appoint a liquidator
  2. Serve a copy of the application on the Debtor Company. This should be at the registered office of the Debtor Company.
  3. Advertise in the newspaper the application for liquidation
  4. Submit to the court a statement or affidavit proving the advertising of the liquidation, as well as proof that the application was served
  5. On the appointed date, the court will hear your application. If successful, you may need to consider who you want to appoint as a liquidator. If not, the court is likely to appoint the official assignee.

In practical terms, getting a court date to liquidate the company is usually enough to prompt the Debtor Company to pay their bills.

However, remember at this stage they have only ten days to appoint their own Liquidator or Administrator once you have served notice of your court action. At this point the debtor will be facing escalating legal bills and a major decision; to fight the process and risk having a liquidator chosen by you appointed by the courts, appoint their own liquidator, or settle and settle quickly.

Other Legal Options

There are a wide range of legal options if your stat. demand is challenged. The Gaze Burt document deals with this in more detail.


Supplying goods to a company

Sale of Goods Act

The 1908 Sale of Goods Act states that, once the purchaser takes possession of a good, they own it. If they haven’t paid for it, then they owe the seller a debt, but they own the goods.

Romalpa Aluminum

In 1976, a Dutch Company delivered Aluminum to Romalpa Aluminum, an English Company. Before they delivered the aluminum, the Dutch got the English to sign an agreement stating that the aluminum in question would remain the property of the Dutch until the English had paid in full.

The English did not pay, and instead went into receivership. After much wrangling, it was agreed that the Dutch still owed the aluminum, and they were able to take it back.

Thus, ‘Romalpa Clause’ or ‘Retention of Title Clause’.

Personal Property Securities Act

This piece of legislation came into effect in 2002. It states that any security interest must be lodged with the Personal Property Security Register.

This has not made Romalpa clauses irrelevant, but it means that security interests registered on the PPSR take precedence over unregistered Romalpa clauses. A Romalpa clause can be registered under the PPSA but often is not.

Supplying fixed items: (Vehicles, fixed equipment, computers, etc)

If the item is leased, you continue to own it, but you must register your interest in the PPSR to protect yourself.

Even if the equipment is leased, and you retain title, if your interest is not secured by registration on the PPSR, you can lose your asset in favour of a registered security (such as on a GSA).

Again, you own the good, but if you do not register it on the PPSR you will lose it.

An example:
There was a fine horse called Generous was owned by a firm called NZ Bloodstock. They leased it to a firm called Glenmorgan. Glenmorgan defaulted on the lease, and NZ Bloodstock came and got their horse. Glenmorgan was placed into receivership by SH Lock.

SH Lock had a GSA over the whole company.

NZ Bloodstock did not have a PPSR Security. The receiver took the horse back, sold it and gave the money to SH Lock.

PPSR trumps a Romalpa clause. It even seems to trump clear title. If you are leasing equipment to a firm, register your interest.

Oh, and make sure the lease is signed, and you have a retention of title clause in the agreement, preferably in bold and properly drafted by your legal advisor.

Supplying cost-of-sale goods

Two classes. Identifiable stock (ie: Televisions) and Mixed Goods (nails).

Identifiable Stock.

If the procedure outlined below is followed, then you will retain clean title no problem. If your customer falls over, you have title.

However, if the company sells the goods, the party buying them has clean title, and you will only have a financial claim against the liquidated company.

Mixed Stock.

In theory no difference, in reality, very difficult.

A Romalpa clause becomes worthless if your goods becomes mixed in with someone else’s. Nails, once banged into a house, become part of the house.

However, under the PPSA, things are more interesting. So long as your paperwork is in place you cannot lay claim to your nails, but if your nails constitute 1% of the house, you can claim 1% of the value of the house.

Once the goods are sold.

Once the goods are sold your title in the goods are extinguished. However, you can still lay claim to the proceeds of the sale. Easier said than done, but that is the theory.

The seven things you can do to protect yourself

  1. You need a Romalpa-style clause, signed by your customers, stating that title in the goods remains with you until they are paid for in full.
  2. A clear description of the goods being supplied. (Be mindful here. If you normally supply Videos to a store, and begin supplying DVDs, your title could lapse. Best to call it electronic equipment, including Videos).
  3. Your right to allocate payment. This is important. If you supply ten cars and the debtor pays for five, allocate the payment across all cars, leaving them all unpaid. This way you can lay claim to all ten.
  4. Have your customer sign the terms of trade. Do not just give them a copy. Keep the signed copy safely.
  5. Register your interest in the PPSR. The website is easy to use. www.ppsr.govt.nz. Be aware that you must also register releases of security interests promptly once you are paid.
  6. If possible, get a GSA over the assets of the company, allowing you to appoint a receiver or Voluntary Administrator.


No Asset Procedure

In 1869 the British Debtors Act abolished imprisonment for failing to pay a debt (although debtors who could pay but did not could still be locked up for six weeks). Things have been getting easier for debtors ever since.

In New Zealand Bankruptcy has provided a end point for individuals in financial trouble. It was a definitive close of their past debts, and a significant period, three years, where there were real (but not always vigorously enforced) penalties for becoming bankrupt.

The stigma of this hiatus was considered by some to be too onerous and on December the Third a new insolvency regime for individuals came into force: The No Asset Procedure, or NAP.

NAP is bankruptcy lite.

There are two key elements to NAP: Admission Criteria, and The Procedure.


There are five requirements

  • The total debts must be less than $40,000
  • The debtor must have no realizable assets
  • The debtor must not have been a bankrupt or have used the NAP before.
  • No creditor seeking to bankrupt the debtor (where bankruptcy would get a better result for the creditor than the NAP.
  • No means of repaying the debts

The criteria means that if the debtor has the means of repaying the debt, the Official Assigned can decline the application. Also, if a creditor has proceeded bankruptcy proceedings the application can be declined.

The Procedure

Once admitted to the program, the Debtor is administered by the Assignee similar to the way a bankrupt would be, except that the process tskes only one year rather than three.

All debts owing by the Debtor are suspended for the duration of the NAP, and wiped at the end of the process.

Some debts are not excluded, such as Student Loans, and any amounts owing under Child Support or Family Support obligations.

Unlike bankruptcy there are no restrictions on travel and limited supervision by the Official Assignee as the assumption is that there is no ability to repay debts.

Secured Creditors

Although the obligation for the debtor to repay the debt is extinguished, the security that the creditor has in the asset is not.

The creditor has the right to recover assets, such as vehicles, property etc.
Once a debtor enters the NAP there is no requirement to recover the asset. The debtor may choose to continue to pay for the asset, but if the asset is recovered any shortfall between the money owing and the disbursements from the sale of the asset cannot be recovered.

It is important to verify your documentation with respect to the NAP to ensure, where possible, security is obtained. You need to be aware of the increased risks of supplying credit to customer groups who may be more inclined to seek the protection of this new regime. Processes like credit checks and verification of previous credit history become more important when assessing the credit worthiness of potential customers.