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CORPORATE RESTRUCTURING AND INSOLVENCY – 2017 IN REVIEW
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2017 saw the lowest level of corporate insolvencies since electronic records began in 1994. That said, the last 12 months were busier for many restructuring and insolvency professionals and 2018 promises increased activity. We look back on the key events of the last year and look forward to the year ahead.

Key events 

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Other notable insolvency events included the appointment of liquidators to Wynyard and Pumpkin Patch following the conclusion of their respective administrations (February 2017), the administration of Wicked Travel, and the liquidations of Asia Finance Corporation and Cranston Homes (all May 2017), the liquidation of A&G Price (July 2017), the liquidation of 123 Mart (September 2017), the administration of Acma Industries and the administration of Renaissance Brewing (both October 2017).

On the litigation front:

  • The Supreme Court allowed an investor to keep his original investment, but permitted the liquidators of the Ross Asset Management ponzi scheme to claw-back the fictitious profits (together with interest). RAM’s liquidators are now seeking to resolve claims with other investors.[1]
  • Despite the litigation between Property Ventures (in liquidation) and PwC settling in August 2017, the Supreme Court still issued a judgment saying that it would have allowed the liquidators’ litigation funding to continue (with some restrictions).
  • In the context of the voidable transactions regime, the Supreme Court in the David Browne Contractors case ruled that, in some circumstances, “due debts” will include both present and contingent debts.[2]
  • The Court of Appeal agreed with the High Court in striking down the Trends Publishing creditor compromise because insider creditors should have been in a different class to arm’s length creditors.  We understand that the case has been appealed to the Supreme Court.[3]
  • The Court of Appeal prevented liquidators from prying into the financial affairs of Brian Ellis, a director, so that they could work out whether he was worth suing.[4] 
  • The High Court ruled in favour of the liquidators of Northern Crest Investments, directing that Robt Jones Holdings had to pay back $752,000 plus six years of interest.

In other news, the voluntary administration procedure celebrated its 10th birthday.  Some perceive a creditors’ compromise as a more cost-effective alternative,[5] but the VA procedure has proved useful alongside a receivership for a retail insolvency.

The economy started 2017 with solid growth and high business confidence. In May 2017, the IMF indicated it was relatively upbeat about a New Zealand economy driven by low interest rates, a robust construction sector, strong immigration and improving terms of trade. It signalled, however, a heightened risk of overcooked growth.[6]

During the middle of the year, the previous Prime Minister was talking about New Zealand experiencing the longest period of sustained economic growth since the 1960s. He warned, however, that the growth contained the seeds of its own destruction unless it was matched by investment to meet demand.[7]

When NZ First chose to partner with Labour to form the present government, it indicated that an economic slowdown was approaching, and this influenced its choice of coalition partner.  However, in late November 2017, NZIER predicated that there would be another two years of continued economic growth.[8]  The release of the Government’s first Budget Policy statement in mid-December showed that the economic environment remains “reasonably benign”, underpinned by strong employment and low inflation.[9]

The year ahead

2018 has started with the IMF warning that global recession “may be closer than we think”, with an increase in debt levels across many countries.[10] 

This year marks a decade since New Zealand began to experience the sharp effects of the 2007 credit crunch, with the economy entering recession in the second quarter of 2008, preceded by the collapse of several finance companies.[11]  Lehman Brothers declared bankruptcy in September 2008 and the global economy experienced the worst financial crisis since the 1930s depression.[12] A number of commentators have queried whether we are on the brink of another GFC, pointing to high debt, rising interest rates overseas, a slowdown in global credit growth, over-priced assets and tight labour markets.[13]  Some blame the scale of quantitative easing that was used to recover from the GFC as the likely cause of the next crisis.[14]  Another downturn event would seem inevitable, but it is hard to say when the bubble will burst.

In New Zealand, economic confidence has fallen in the last quarter.[15]  In part, this may be because of the uncertainty that always follows a change of government. There appears to be a consensus that, over the next year, there will be a softening of growth, with the slowing housing market and falling immigration numbers, followed by stronger growth in 2019 and 2020.[16]

2018 has already seen the receivership and liquidation of Andrea Moore, the liquidation of auction house Mossgreen Webb’s, the liquidation of the company behind the international yoga festival Wanderlust and the liquidation of the company that previously operated the Wellington restaurant Five Boroughs.

February has also seen some turbulence in global share markets, with the New Zealand share market also experiencing some resulting volatility. Fletchers is warning of “further material losses” in its Building and Interiors division. The Warehouse has already signalled a big profit drop this year, as it takes steps to improve performance and profitability.[17]

So, what will keep insolvency practitioners busy this year? While there are signs that economic growth is slowing down, a recession is unlikely, unless the real economy suffers from an external shock, natural disaster or significant adverse weather event, such as a bad drought. 

Insolvency practitioners will no doubt continue to see activity from:

  • The construction sector, which has struggled to keep up with demand for housing and infrastructure. Both labour and resources are scarce and there is not much spare capacity in the sector.[18] The problem could be made worse if restrictions are placed on immigration.  We are yet to see what effect the CCA retention reforms will have on the next construction industry insolvency, but they are likely to add a layer of complexity.
  • The retail industry.  While retail sales continue to grow, retailers will continue to face challenging times. Disruption has become the new normal in the industry. Efforts need to be focused online, with a surprising number of retailers not maximizing their online presence.[19] At the same time, retailers cannot forget the “theatre of retail” and the value of creating a physical experience for shoppers.

In general, the employment law changes signalled by the Government could also add extra cost to employers in the construction and retail areas.[20] A change in immigration policy could have a marked effect on a number of New Zealand businesses, particularly in the construction and tertiary education sectors. If infrastructure cannot be built to support the thriving tourism industry, we will also see a drop-off in vital export receipts.

Reform will also continue to be top of mind for the insolvency industry. This year should see progress on the long-awaited licensing of insolvency practitioners.  At the end of last year, the Insolvency Practitioners Bill was (somewhat belatedly) adopted by the new Government and is set to be amended by a yet-to-be-released supplementary order paper.  The Bill has been around since 2010 and the industry will wait with interest to see which of the Insolvency Working Group’s recommendations are included in the SOP.

In addition, RITANZ is nearing completion of its Code of Conduct for members and we expect that the Code will be distributed to members shortly.

Insolvency practitioners will be watching developments in Australia with interest. Legislation came into effect in September last year that creates a ‘safe harbour’ for directors in certain circumstances. The legislation also stays the enforcement of ipso facto clauses on the appointment of an administrator or managing controller (due to take effect on 1 July 2018).  These reforms will help promote a better restructuring and turnaround culture in Australia and merit serious consideration in New Zealand.

Further, in October last year, the Federal Treasury released a consultation paper on deterring illegal phoenix activity.  It will be interesting to see the response to that paper.  The Federal Government has also decided to appoint a Royal Commission to look into banks, insurance companies and superannuation funds.  The Commission’s findings will no doubt affect all New Zealand lenders and will be of interest to insolvency practitioners. 

FOOTNOTES

[1] Click here to read our article about the case.

[2] Click here to read our article about the case.

[3] Click here to read our article about the case.

[4] Click here to read our article about the earlier High Court decision.

[5] National Business Review, 27 October 2017.

[6] New Zealand Herald, 9 May 2017.

[7] National Business Review, 12 June 2017.

[8] National Business Review, 29 November 2017.

[9] PwC, 14 December 2017.

[10] New Zealand Herald, 23 January 2018.

[11] New Zealand Herald, 20 August 2017.

[12] New Zealand Herald, 10 August 2017.

[13] New Zealand Herald, 21 November 2017, 14 December 2017 and 24 January 2018; Sunday Star Times, 13 August 2017.

[14] New Zealand Herald, 14 January 2018.

[15] Westpac McDermott Miller Consumer Confidence Index, 19 December 2017; NZIER quarterly survey referred to in National Business Review, 16 January 2018.

[16] New Zealand Herald, 1 December 2017.

[17] Inside Retail, 11 January 2018.

[18] New Zealand Herald, 24 August 2017.

[19] Stuff, 22 October 2017.

[20] Click here to read our article about these proposed changes.

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