New Zealand: Leave Required Before First Voluntary Administration In New Zealand

Last Updated: 15 January 2008
Article by Michael Bos

The new Voluntary Administration regime commenced in New Zealand on 1 November 2007, and got off to an eventful start. It was necessary for the first administrators to apply to the Court (Icon Digital Entertainment v Westpac New Zealand Limited) for permission for their own appointment.

It appears that the first company to be placed into voluntary administration was the operator of the Sounds music store, Icon Digital Entertainment Limited (Icon).

Significant for insolvency practitioners was the need for an application to be made to the High Court for leave to appoint the administrators.

The application for leave was required due to amendments to section 280 of the Companies Act 1993 (the Act) which exclude a person from acting as a liquidator or administrator (under section 239F) without leave of the Court, where:

  • The insolvency practitioner or fi rm has within the two years immediately before the commencement of the liquidation or voluntary administration, provided professional services to the company (unless the liquidation is a solvent liquidation); and
  • The insolvency practitioner or their fi rm has a continuing business relationship with the company or any of its secured creditors within the two years immediately before the commencement of liquidation or voluntary administration (unless the liquidation is a solvent liquidation).

The prospective administrators, as would be the situation with most insolvency practitioners and their firm, had a continuing relationship with Westpac which had appointed them as receivers of various companies and procured their appointment as investigating accountants. They had provided financial services to Icon by way of an independent financial review. Therefore it was arguable that leave was required to appoint the prospective administrators as administrators.

The decision on the application provides some guidance as to the form of the application for leave and the principles to be applied.

The application was made by the company, Icon, with Westpac which held a security agreement over Icon, named as the respondent and consenting to the application. The grounds of the application relied significantly on the very factor which disqualified the prospective administrators from the appointment, namely that through their role as investigating accountants they had knowledge of Icon which placed them in the best position to carry out the administration.

The Decision

The Court in granting the application expressed the view that the prospective administrators' involvement with Icon did not compromise their independence or their ability to carry out the task of voluntary administrator. In particular the Court noted:

  • The prospective administrators' appointment as investigating accountants, although made at Westpac's request, was under contract with Icon, but was to act independently of Icon and Westpac; and
  • There was no reason to consider that the prospective administrators were not independent from Westpac by the mere fact that they had undertaken professional appointments in relation to other companies in the past.

An interim order was granted on the condition that the prospective administrators notify all creditors of the application and the orders made, at the same time and in the same manner as notice of the first meeting of creditors was given pursuant to section 239AO of the Act. Leave was also reserved to any creditor to oppose the making of final orders when the application was called again by the Court.

Implications

As the decision in Icon illustrates, there will be a need in a number of voluntary administrations for leave to be obtained for the appointment of voluntary administrators. The concern over the need for such applications, given the limited number of experienced insolvency practitioners and the relationship between most insolvency practitioner firms and the major trading banks and financiers, was raised by a number of submitters on the Insolvency Reform Bill. However no changes were made to the provisions. It appears from the Icon decision, that the onus will be put back on creditors to point to some grounds more than a mere continuing business relationship to avoid the appointment of voluntary administrators. Therefore the application of the provisions in these circumstances would appear to have achieved little benefit. The provisions would seem only to have driven up the costs and delays in appointing voluntary administrators.

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This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

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