Mike Gedye ([email protected]) Professor of Commercial Law University of Auckland Business...

Judging the success of voluntary administration in New Zealand

Mike Gedye([email protected])Professor of Commercial LawUniversity of Auckland Business School

and

Camille VenturinaUniversity Summer Scholar

• The NZ data was compiled by my University Summer Scholar, Camille Venturina, whose excellent work I gratefully acknowledge.

Two caveats

• Generally, academic lawyers are not experts in empirical research and statistical analysis.

• I am not going to answer the issues raised, rather I hope to engender discussion.

A brief history• Voluntary Administration introduced in November 2007 by the Companies

Amendment Act 2006 inserting a new Part 15A into the Companies Act.• Closely follows the Australian regime and is the equivalent of

administration in the UK and Chapter 11 Bankruptcy in the US.• Significant difference with US model is that in US debtor management

remains in charge.• Although commonly referred to as a corporate rescue regime, s 239A

makes clear that there are 3 alternative objectives of VA, namely:1. saving the company; or2. saving as much of the business as possible; or3. getting a better return on closing the business than an immediate

liquidation would achieve.• The VA in itself is a short term procedure during which creditors etc

cannot take action against the company and during which a strategy to achieve one of the stated objectives can be developed or implemented.

• Any longer term strategy to achieve one of the stated objectives is then implemented via a Deed of Company Arrangement (DOCA) that follows the initial VA.

How to define whether a VA has been successful?

• First, agree which are the important and appropriate objectives of the regime:• A better return than from an immediate liquidation (ie a

comparison with the next best alternative);• Saving as much of the business as possible –

• Although there is no explicit comparator here, I believe this is implicit so we could rephrase this as “Saving more of the business than would be saved without VA.”

• Saving the “company.”• But does this really matter? Surely, what is important is saving

the future productive and employment potential of the business, not the corporate shell. The saving of the “company” (in contrast to the business) is a too narrow definition of success so I propose to exlude it from my definition.

Are distributional consequences relevant to defining success?

• There are 4 unsecured creditors and 3 shareholders of a distressed company. The company and its business cannot be saved.• Under one insolvency outcome, 1 creditor receives $101

and the other 3 creditors and the 3 shareholders receive nothing;

• Under another insolvency outcome, the 4 creditors receive $25 each and the 3 shareholders nothing;

• Under a third outcome, the 4 creditors receive $20 each and the 3 shareholders receive $10 each.

• Which outcome is the most “successful”?• Does it make a difference if secured creditors are involved?

Proposed definition of success• A particular voluntary administration is successful if either:

• It resulted in a greater aggregate return to creditors than would have been achieved through an immediate liquidation; or

• It resulted in saving more of the business than would otherwise have been saved.

• Discussion / refinements?• But this does not define whether the NZ regime has been

successful• How many successful VAs need we point to before we can

say the regime has been successful? What was expected from the regime?

By the numbers

• Over the years, I have gained the impression that VA has been more popular in Australia than in NZ, but what do the figures show?• Nb comparison between the NZ and

Aus statistics should be treated with caution because the reported figures are compiled differently

By the numbers

New Zealand 2008 – 2014:• Liquidations: 20,367 90.4%• Receiverships: 2,038 9%• VAs: 128 0.6%• Total: 22,533

(figures obtained from MOBIE under Official Information Act)

By the numbersAustralia (initial appointment) 2004/2005:

• Liquidations: 3,875 59%• Receivers/controllers: 387 6%• VAs: 2,359 36%• Total 6,621

Australia (initial appointment) 2014/2015:


By the numbersAustralia (total appointments) 2004/2005:


Australia (total appointments) 2014/2015:

• Liquidations: 9,226 75%• Receivers/controllers: 1,804 15%• VAs: 1,326 11%• Total 12,356

Factors supporting VA in Aus

• Aus tax department can issue notices making directors personally liable unless they promptly implement an insolvency procedure;

• To avoid the adverse PR of being seen to be the cause of a company’s downfall, some lenders prefer to have a VA initiated by the company before taking enforcement proceedings.

Some conclusions so far• Figures confirm that VA has been far more popular in

Aus than in NZ, where it has never really taken off; but• Figures also suggest that it’s popularity is declining in

Aus.• Why and why?• So if we measure success of the regime by frequency of

use, the NZ regime has not been particularly successful.• Nor are the numbers increasing: peaked at 30 in 2011

then declined to 17 in 2012, 17 in 2013 and 10 in 2014, over which period liquidations declined only from 2753 to 2595.

Latest case law may further discourage use of VA

• Bluenergy Group Ltd [2015] NSWSC 977• Complex facts put simply: company put into VA, secured creditor did not

vote for DOCA that discharged all claims, secured creditor later appointed second VA. The first VA challenged the validity of the second VA and the SP’s right to vote in it.

• Held: The equivalent of NZ s 239ACT preserved the secured creditor’s proprietary interest only in the assets on hand and only to the extent of the debt provable at the date of the DOCA (see, eg, paras 35, 36, 66, 67). The secured creditor was otherwise bound by DOCA, which discharged its debt except for the purposes of realising its security and so it was no longer a creditor entitled to vote in the second administration.

• The case is under appeal but until clarified or overturned may make secured creditors nervous about allowing a VA to proceed without exercising the s 239ABL right to appoint a receiver during the decision period.

Judging individual successes• A paucity of information:

• In 37% of cases no report or accounts were filed;• In 39% of cases accounts were filed;• In 33% of cases the administrator’s report to creditors

was filed.• The VA’s accounts are little use.• Potentially, one useful source of information is the s 239AU

administrator’s report to creditors but the obligation to file this only arises if the company is put into liquidation and even then this obligation seems often ignored.

• Should there be more rigorous reporting requirements and enforcement of these? Should the administrator’s report to creditors be filed at the time?

Is entering a DOCA a measure of success?

• Approximately a third of VAs resulted in a DOCA. Of course this leaves 2/3 without a DOCA - perhaps suggesting more

preparatory work should be done before entering VA

• Presumably, the 1/3 of VAs that produce DOCAs indicates that in these cases, the creditors believe they would get a better result than immediate liquidation so if this outcome eventuated, the VA can be considered a success.

• But an audit of the available administrators’ reports to creditors and comparison with final outcomes appears to show that the DOCA proposals put forward to creditors are often overly optimistic.

Some examples based on report to creditors vs final accounts or liquidator’s report

1. 6c estimated return from immediate liquidation, 34c estimated from executing DOCA, 11c actual return;

2. 10c estimated return from immediate liquidation, 50c estimated from executing DOCA, 47c actual return;

3. 9c estimated return from immediate liquidation, 60c estimated from executing DOCA, 0c actual return.

• BUT• Estimates may be overly pessimistic or optimistic;• Final return to creditors is not a measure on whether the business or part of it

has been saved.• Even where both the administrator’s report to creditors and a final report or

liquidators report is filed, there is no reconciliation between the two. An explanation of departures from previous reports should be required.

• However, it is clear a number of companies have successfully used VA to get a better return to creditors.

Is ultimate liquidation a measure of failure?

• Around 85% of VAs to date have ended in liquidation and doubtless many of the others are yet to get there.

• But this says nothing about whether the VAs resulted in a better return to creditors or whether the business (as opposed to the company) was saved.

Anecdotal measures of success

• “The VA process had played a key role in saving the businesses by providing a stable environment to restructure the assets and provide the opportunity for a sale”

- The VA for the Whitcoulls group

Can receivership achieve the same results as VA?

• Pre appointment investigations and restructuring can lead to saving business whether ultimate procedure is VA or receivership.

• Eg, Mediaworks restructuring was successfully concluded via a receivership.

• Successful restructurings are likely to involve much behind the scenes work prior to appointment and ultimately this may be more significant than the insolvency mechanism chosen.

• Senior English insolvency lawyers have suggested to me that it is not obvious that more businesses are saved in the UK now that [administrative] receivership has been replaced by Administration.

Use of VA by receivers• Unlike in the case of Voluntary Administration, Statutory Management

and, to a lesser extent, liquidation, no moratorium against taking action against the debtor company is imposed on creditors and the holders of proprietary rights when a receiver is appointed.

• This may hinder a receiver’s ability to restructure or sell off a business as a going concern and in both Australia and NZ has led receivers to cause the company to go into voluntary administration to gain the benefit of the moratorium.

• This is not directly one of the statutory functions of VA but is likely to facilitate one of the desired outcomes so is probably not objectionable.

• However, without Court approval, the receiver cannot be the administrator (s 239F(2)) and a double layer of costs may result so it is not ideal.

Cost Issues• Use of a single insolvency practitioner in multiple roles can result in cost savings

but this must be balanced against risk of conflict of interest. Although a receiver cannot be an administrator or liquidator, an administrator can be a liquidator (and indeed under s 239 ABY is the default liquidator):• Is this a case of the cost savings justifying the risk of a conflict?

• It has been suggested in Australia that a voluntary administration costs 5x a simple liquidation. In the UK, it is similarly estimated that an administration costs 5x a CVA.

• In Whitcoulls group administration, VA’s remuneration totalled $2,147,421 and legal fees > $1m. VA fees were being charged at Aus $625 per hour for a partner down to $190 per hour for a secretary.

• In an interview I conducted with management of a company that had successfully navigated a VA, it was stated that the VA’s remuneration almost derailed the rescue. The business was profitable excluding the VA costs but initially unprofitable when these were included.

• It should be mandatory to build estimated cost implications into proposals but this is often not done and leads to a misleading comparison of the options, potentially breaching the Fair Trading Act.

• Any ideas for reforms that may reduce costs?

Other Possible Reforms• Adopt UK model essentially abolishing receivership and replacing it with

VA.• Given current Australasian practice, this idea is not as radical as it may first

appear:• Although receiver owes primary duty to secured creditor and administrator

acts for all stakeholders, because a receiver owes secondary duties to other stakeholders and an administrator is subject to secured creditor’s proprietary rights, in practice the duties may not be significantly different.

• This would allow more consistent use of the moratorium which would apply in all cases.

• Adopt US model of debtor in possession. Arguably, this may have potential cost advantages.• This is under consideration in Australia but I suspect is unlikely to go

anywhere.• Reinvigorate reporting requirements for administrators to increase

transparency.• Abolish preferential creditors to prevent IRD veto and to make proposals

more equitable to all creditors.

Conclusions• Insufficient data to draw hard conclusions on

success of regime and often even whether individual VAs have been successful:• Better reporting required.

• But clearly at least some VAs have met the statutory objective of either returning more than an immediate liquidation or preserving aspects of the business.

• Research raises sufficient issues to justify further consideration by Government (ideally in conjunction with Australia).

Mike Gedye ([email protected]) Professor of Commercial Law University of Auckland Business...

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