New Zealand: Recession - Facing The Challenge

Last Updated: 5 March 2009
Article by Martin Wiseman


The current economic conditions are creating challenges for all of us. The biggest challenges are likely to arise out of what we cannot control, for example, our suppliers, our customers, our landlords, our tenants and our financiers. Their behaviour is largely outside our influence.

Understanding legal relationships, rights and obligations with key stakeholders in a business is crucial to allow you to plan ahead. Dealing with a problem that arises out of the blue is significantly more challenging than if you have considered options in advance. Would you know what to do if one of your key suppliers or customers went into receivership, liquidation or administration?

The purpose of this brochure is to highlight a number of topics that may be useful for New Zealand businesses to reflect upon in light of the changes that have occurred to the commercial environment. While there are many challenges ahead, DLA Phillips Fox is well positioned to help your business through the economic downturn.


Company directors' duties and liabilities, while always important, are likely to be subject to greater scrutiny if a company is in difficulty or is taking actions outside the ordinary course.

With this in mind, directors should consider:

  • Their general statutory duties. For example, the Companies Act 1993 sets out certain duties that directors must comply with for the benefit of a company and other stakeholders. Specific duties prohibit the directors from reckless trading and incurring obligations that the company will not be able to perform. Advice should be sought if a company is facing insolvency, since creditors' positions must be protected. Where a director has concerns that a company is not able to pay its debts as they fall due, he or she could be held personally liable for the deterioration of the company's asset position should the company ultimately fail. Directors must seek advice in these circumstances on how to negotiate this unfamiliar territory.
  • Whether a company's constitution or any shareholders' agreement includes provisions relating to directors' duties, governance procedures to be followed and consents to be sought.
  • Specific obligations under a company's finance documents – for example, general information covenants or specific financial covenant reporting requirements – may necessitate discussions with a company's financiers about actual or potential events of default.
  • If the company is a listed company, it will have obligations to the New Zealand Stock Exchange or such other regulators relevant to the company, and obligations under the Securities Markets Act 1988, including keeping the market informed of the company's situation and developments.
  • Any claim that could be brought against a director by a shareholder pursuant to the derivative action provisions of section 165 of the Companies Act 1993.

If you would like any guidance on what matters to take into account when considering a particular corporate action, or assistance in drafting minutes and resolutions to document any such arrangements, we have a team of people who can advise you, including corporate, banking and restructuring lawyers.


Companies and directors need to be protected from the fallout of a recession.

A glance back to the scandals of the last recession corroborates the fact that allegations of fraud, misaccounting, bribery, corruption and other criminal acts are made against companies in these difficult times. In a recession, decisions that are made in the heat of the moment are often picked over years later. Hindsight is a wonderful thing! If not handled correctly from the outset, difficulties can escalate, leading to a dramatic impact on a business, its reputation and the livelihoods of the business owners and senior management.

No business can ever completely eliminate risk, but every business can plan to mitigate the cost and impact of intervention by:

  • Establishing an ethical compliance culture, with a global code of conduct supported by employee hotlines for both guidance and reporting. Tone from the top is critical, as is regular and proactive monitoring.
  • Being aware of where the business is most at risk. Regulators, prosecutors and litigators can assess where the business is most vulnerable from sources of information that are publicly available. Bear in mind that they are also in regular communication with their counterparts around the world. Understand their tactics and use this to fortify defences.
  • Proactively managing media communications and ensuring that all employees are aware of the correct communication channels. Establish a rapport with journalists before a crisis develops.
  • Having a clearly communicated document retention policy and plan for how to implement emergency preservation measures.
  • Seeking specialist regulatory and criminal legal advice from experts with experience at walking the tricky and, to many, unfamiliar tightrope of an investigation by an authority.


In a downturn, employers are forced to pay even greater attention to their workforce. With payroll obligations being one of the largest financial outgoings for any organisation, it is vital to ensure that the organisation has the right individuals and teams in place to help weather the storm. Attracting and retaining employees with the necessary skills, and at the right cost, becomes increasingly important.

Key factors for immediate consideration will include:

  • Reviewing current staffing levels to ensure that these are no greater than required to fully deliver your objectives.
  • Ensuring that the right policies, procedures and team structures are in place to enable the organisation to deal with fresh challenges and make changes quickly and efficiently.
  • Reconsidering all reward structures, including the reevaluation of existing incentive plans and planning for the future, to ensure that they are proportionate but remain competitive enough to retain the loyalty of key employees.
  • Ensuring that existing and new service contracts are appropriately drafted to reflect the demands of shareholders and corporate governance requirements.
  • Where changes to existing numbers of employees and/or terms and conditions are identified, managing the impact - both legal and human - on the staff of the organisation.

We are well placed to bring our full range of skills to assist you to face the future with confidence.

Our experience of managing business reorganisations means that we understand the difficulties of effecting widespread change. We are also conscious of the potential impact of associated disruption, which may include industrial or collective action. Should a consequent reduction in staff numbers be necessary, we can provide guidance on compliance with local collective obligations or, where senior executives are at risk, managing departures in the appropriate manner.

We can also help ensure that your existing and future agreements with employees reflect current legal and commercial requirements while ensuring that the terms applicable to your board reflect the demands of an increasingly informed shareholder community focused upon corporate governance and the delivery of performance objectives.

In short, we can ensure that from engagement through to termination you are fully equipped to move forward in these challenging times.


Property may be a capital asset that is perceived to be declining in value, or it may constitute a fixed cost that becomes harder to support from a business's cash flow. In any event, the pressure to deal with property more effectively may become intense.

It is essential to plan how to deal with issues such as:

  • Rent default: Tenants may find it harder to pay their rent. Landlords need to know what steps they can take quickly to recover what is owed to them ahead of other creditors. Conversely, in difficult times, it may be better for landlords and tenants to agree and implement a rescheduling of the rent liability.
  • Quick sale or letting: Property is not a liquid asset. If people need to sell, they want to sell fast. Good preparation and advice on how to anticipate potential hitches in transactions will assist. If lease liabilities are to be offloaded, it is important to understand what incentives to new tenants are acceptable and appropriate.
  • Development issues: Construction and development projects take a long time to come to fruition. If a company is committed to a project which started in better times, it may need advice on how to deal with insolvent contractors or how to renegotiate its existing deals.
  • Tax: The tax implications of holding or disposing of property should be fully examined. A business should seek advice on the tax implications of any proposed transaction before commitments are made, to avoid nasty surprises later.

Our Property and Tax teams will help you in these areas. Our approach will be innovative, commercial and proactive.


In more challenging market conditions, companies will need to consider whether their corporate and operational structure continues to work in the best interests of stakeholders.

It may be that any of the following are necessary or advantageous to a company:

  • Reorganising group companies.
  • Divesting of assets or packaging assets with a view to selling non-core businesses.
  • Refinancing.

In undertaking any review of a business's structure, it is important to check:

  • That the business's constitutional and contractual documents do what they are meant to do, for example the ability to convene board and shareholder meetings with the necessary quorum in order to pass any required resolutions.
  • Whether any consents or approvals are required, for example from the business's funding bank, private equity investor and any class of shareholder and so on, to take the steps contemplated.
  • Whether and to what extent any proposed transaction affects the business's constitutional and contractual documents. For example, will it trigger any ratchet or anti-dilution protection or will it serve to terminate any of the business's key commercial contracts?
  • Whether statutory or regulatory requirements are able to be fulfilled relevant to the actions the business wishes to take. For example, will any transaction require shareholder or regulatory consent?
  • What the implications are that would arise from any change in structure.

There may also be opportunities for a business, such as:

  • Expanding into markets or overseas jurisdictions which are less affected by economic difficulties.
  • Seeking new investment for the business, perhaps from private equity sources or existing shareholders.
  • Acquiring assets whose value is not fully recognised by the market.

Our Corporate group has the expertise to advise you on the full range of corporate and corporate finance matters, whether they involve private equity, public equity, M&A or intra-group reorganisations.


When cash flow gets tight, businesses are often tempted to use the IRD as a bank, by not paying tax on the due date, or even worse, they simply stop making returns and payments. Before going down those routes, get advice.

Reducing tax leakage and increasing tax efficiency may be the last thing on your mind in these testing times, but 'thinking tax' can make a substantial difference to your business and should be a high priority.

Some points you may wish to consider:

  • Is the business structured in a tax-efficient way? Can it be improved upon?
  • Proposing to sell or repackage assets? Care should be taken to avoid unanticipated tax charges and to ensure maximum use is made of any available tax reliefs and losses.
  • Refinancing or restructuring debt? Any debt restructuring requires a careful analysis as this can have surprising results. Watch out in particular for waivers or releases of debt as these can give rise to tax liabilities.
  • If taking on new equity investors in your company, do you understand the potential impact on imputation credits and losses?
  • Ensure unnecessary GST liabilities are not incurred. Reclaim all GST possible and ensure that GST that could be saved by using tax grouping is not being lost.
  • Are you comfortable that there is nothing in your returns that the IRD could query?

These are just a few aspects where getting the right advice at an early stage could make a significant difference to the amount of tax payable on a transaction or give rise to real tax savings in the future.

We have extensive experience in giving strategic and practical advice on a wide range of tax matters, in New Zealand and internationally. We are happy to discuss any issues you may be facing or ways of increasing your tax efficiency.


Some businesses will need additional financial support and understanding from their lenders and, while difficult to achieve in a credit-starved environment, a refinancing with more lenders and/or investors may be the best option available to some.

In a more demanding business environment, companies will need to consider whether their current third party debt arrangements:

  • Offer sufficient flexibility to develop their business and take advantage of opportunities that may arise.
  • Provide acceptable headroom on financial controls to allow for a certain margin of downturn in profits or cash flow in the business without jeopardising the financing structure.

In addition, companies will be looking closely at the regulatory and financial health of their lenders to ensure that cash assets are deposited in reliable institutions and that the operation of their day to day banking requirements runs smoothly and without issue.

Our Financial Services team is experienced in advising on all aspects of debt funding (including commercial bank lending and in the capital markets) both domestically and globally.

As a member of the DLA Piper Group, we have access to dedicated teams working in each major jurisdiction enabling our clients to tap into deep resources of experience and lender/arranger contracts.

In conjunction with our Restructuring group, we are able to advise borrowers and issuers on amendments to their financing arrangements when required and explore potential 'stressed' scenarios before they arise.

We can offer innovative financing solutions in a timely, commercial and cost effective manner.


Taking proactive steps to deal with finances is critical. Financial difficulties will be commonplace.

Once a company becomes unable to pay its debts as and when they fall due (one of the definitions of insolvency) the duties of the directors require consideration of the creditors of the company. This is an entirely different environment to trade in and the rules are different. Failure to adhere to the new obligations could lead to personal liability. Where a company is insolvent or the directors should have known that the company was unlikely to avoid insolvent liquidation, advice should be taken by the company's directors.

There are a lot of options available in a distressed situation and a clear understanding of the duties, rights and obligations of all the relevant stakeholders allows a business to maximise its chances of trading through difficult times without risking personal liability.

Being able to react to a financial crisis with speed is crucial. Taking steps to ensure continuity of supply and enforcement of rights with speed where a supplier or customer enters administration will be very important. Dealing with these matters requires a specialist set of skills. Our Restructuring and Insolvency lawyers are market leaders and can assist you with these issues.


Liquidity has contracted significantly in recent months and as one institution after another buckles under the strain of the credit crunch, enormous exposures are mushrooming. People are uncertain about the legal position of trading counterparties, collateral givers and depositors.

This is a time when the issue of missing or inadequate documentation takes centre stage and where the impact of conflicts of laws takes on a special significance in resolving contractual and proprietary claims.

To this end, market participants and users are looking at their respective positions and need help to unravel the issues to achieve legal certainty. Particular issues to address will include:

  • Are proprietary claims available or have arrangements been made which reduce the respective rights of the parties to contractual claims only, which do not have priority over the general body of unsecured creditors?
  • Securities held through intermediaries raise questions about the nature of the end-holder's legal interests. Proprietary rights may be demoted to merely contractual claims when considered in the context of foreign laws, or bilateral arrangements may be subject to recharacterisation risk.
  • The incidence of failed or suspended settlement may have enormous repercussions on the proprietary interests of counterparties.
  • Do close-out netting arrangements cover an appropriate range of transactions and other agreements between the parties?
  • Trading strategies with investment firms may increase the volume of margin calls and force liquidation of positions at considerable loss.

We are well equipped to assist clients with credit related, close-out netting and other issues in relation to ISDAs and other market-standard documentation across a large number of jurisdictions.

Managers should be thinking about the robustness of their business systems, including asking the following questions:

  • Are client relationships adequately documented so that there are readily identifiable contractual arrangements governing the course of dealings in order to minimise uncertainty? Is information up to date?
  • Are suppliers (such as custodians, intermediate brokers, clearing and settlement systems and IT service providers) in good shape and is there a need to reassess the robustness of the external parties they rely on for delivery of services to their clients? Have contingency plans been reviewed and stress tested?
  • Do they understand the products that they are selling/ buying and do they make sense? Have suitability issues been adequately dealt with in the context of the customer base to which products have been sold?
  • Do they have adequate senior management oversight of processes in order to make sure that regulatory risks are elevated appropriately within the organisation?


During crises and financial upheaval, even long-established business relationships can come under considerable strain. Contractual partners may try to take advantage of volatile markets, or attempt to breach agreements that have become costly or burdensome.

All agreements, bilateral or multiparty, from joint ventures, shareholders' agreements, loans and trades to supply or outsourcing contracts, can become a burden and obstacle. But handled correctly they can be key to a business's survival.

It is essential to have an informed overview of the options available to a business should it come to enforcing and defending its legal rights, stopping unwanted interference by third parties or seeking redress for damaging mistakes made by partners, advisers or strangers.

We have first class strength in dispute resolution, whether by litigation, arbitration, mediation or other mechanisms. The breadth of dispute resolution experience across DLA Phillips Fox means that we can provide advice and representation in a wide range of disputes. We work closely with our exclusive alliance partner DLA Piper, which has one of the largest, strongest and broadest dispute resolution practices in the world. We have a long and successful track record both within and across borders in resolving complex business and regulatory problems.


Supply chain is integral to any business and the ability to meet its customers' requirements.

Put simply, if suppliers don't deliver, then the business will not deliver. While this is true even in normal markets, in the current environment it is not simply non-performance that one needs to be concerned about, but also the prospect of suppliers simply disappearing from view with little, if any, prior notice.

For this reason, it is essential that existing arrangements with business-critical suppliers are reviewed to establish:

  • What levels of comfort are currently provided in the contracts regarding ongoing quality of delivery?
  • What up to date due diligence exists regarding the trading status of the supplier and the likelihood of it being able to continue to perform over the coming months?
  • What audit/information provision rights are there in the relevant contracts and could they be activated so as to remove any lingering doubts?
  • What forms of termination rights are there in the contract? For example, is it linked to actual nonperformance or insolvency or would a breach of banking covenants or deterioration in credit rating itself trigger a termination right?
  • What kind of contingency arrangements are in place in case a supplier fails? In a multi-sourcing environment, for example, are there other panel suppliers who would be able to step in so as to pick up responsibility for the affected services?
  • Given the enhanced risks associated with trading in the current troubled markets, are there any key provisions in the contracts which merit review and renegotiation?

With our extensive experience of advising on both the customer and supplier sides in relation to large scale supply arrangements (including outsourcing, technology procurement, logistics, supply agreements and facilities management) we are ideally placed to guide you through these issues. We can help a business take the initiative in dealing with its supply chain, rather than waiting for the bad news to break and reacting with less than perfect information and preparation.


Given the current market conditions, it is particularly important to take care when selling goods or providing services to customers on credit.

If the provision of credit is unavoidable, then terms of trade with clear payment obligations and, where possible, retention of title in goods until payment should be provided to and signed by customers. When properly documented and registered, a retention of title in unpaid goods that are identifiable will take priority over a general security, such as a bank charge. This will help to protect businesses from the effects of a customer's insolvency. When selling goods or services on credit, businesses should ensure:

  • They have in place with their customers effective terms of trade which would enable them to enforce payment.
  • That their customers have signed their terms of trade, particularly where a retention of title clause is included.
  • They register retention of title clauses on the Personal Property Securities Register within the required timeframe to ensure priority is maintained.
  • They manage credit exposure to customers to reduce the risk of not being paid in the event a customer is unable to pay its debts.
  • That where customer insolvency is apparent, they trade on a cash upfront basis only.

Our Commercial Contracts team can assist with drafting or review of your terms of trade and invoicing procedures. Our Restructuring and Insolvency team can assist you with any specific insolvency related concerns.


More difficult markets mean that greater focus will be placed not only on ensuring that systems and services continue to operate as efficiently as possible, but also that they do so with the minimum possible cost.

At times like these, it becomes critical to re-examine existing arrangements so as to ensure that businesses are getting everything that they are entitled to and to identify ways of improving service and reducing costs. Particular issues to address include:

  • Identifying commitments made by suppliers which would deliver value to the business, but which might have been overlooked.
  • Considering the impact of pricing regimes and, in particular, whether they deliver the degree of flexibility your business may require over the coming months.
  • Assessing options for adjustments to the services and systems being provided, so as to ensure that they continue to reflect the requirements of your business.
  • Identifying means of cost reduction, whether by the exercise of benchmarking style review mechanisms or other contract clauses.
  • Examining term and termination options, particularly with a view to re-tendering strategies for achieving cost reductions and/or service improvements, even within the term of a major engagement.
  • Ensuring that all new contracts entered into reflect the new realities of the market rather than simply repeating old provisions and precedents.

We have extensive experience advising clients through these kinds of issues and in undertaking wide ranging contract audits that deliver real and tangible value.


In the current recession, CFOs will focus on cutting costs and postponing unnecessary expenditure.

The costs of developing, protecting and maintaining intellectual property rights (IPRs) are not immune from this spotlight. There are steps businesses can, and should, take to rationalise development and IPR portfolio spend, but decisions need to be taken strategically in order to:

  • Take full advantage of business opportunities arising in these turbulent times.
  • Grow or expand in markets more resistant to the effects of the credit crunch.
  • Create new revenue streams from existing IPRs or strategic acquisition of new IPRs.
  • Defend against litigation claims.
  • Keep pace with or stay ahead of competitors.
  • Protect your IPRs from unauthorised use.
  • Place yourself in the most favourable position to access funding, debt financing or other investment.

In these times it is critical to implement and maintain high standards of housekeeping:

  • Could valuable and essential IPRs be walking out of the door unprotected and not owned by the business as it is restructured for the recession? Are IPRs used by the business held by the right members of the group? Do your employment and consultancy contracts properly address IPR ownership and confidentiality?
  • Is the business continuing to pay registration fees for trade marks, patents and designs that it does not exploit? Can local licensees/distributors be made to bear these costs?
  • How secure are key licences of IPR? Has recent financial due diligence on licensors been obtained? Do you know, and are you prepared for, what will happen if critical licensors to the business become insolvent? Do you have escrow arrangements, a fallback strategy?
  • Does the business have the correct performance incentives in its licences to third parties? Are you seeing declining revenues or rights tied up which are not being fully exploited? Can these arrangements be renegotiated or terminated?
  • In a recession businesses look to protect their IPRs more vigorously. Are you leaving yourself open to expensive litigation claims owing to unauthorised use of a third party's IPRs? Ensure you implement and enforce appropriate internal policies.

With our extensive experience of advising across all intellectual property rights and throughout the life cycle of your products, we are ideally placed to guide you through these issues. We can help you in developing and implementing an IPR strategy which could reduce your bottom line spend on IPRs and leave you in the best position to survive the financial crisis and forecasted recession. And you could steal a march on less agile competitors when trading conditions improve.


A company's good reputation is key to its success.

Losing that could very quickly lead to loss of confidence on the part of the shareholders and customers. It is vital that businesses have a strategy in place for dealing with crisis events (such as a failure of financial performance, breach of corporate governance and regulatory issues) to ensure that the reputation of the business is protected and upheld.

The strategy should address:

  • Internal reporting: You need to have up to date information about what is going on with your business. If a crisis happens, you need to ensure that you can quickly and accurately assess the facts. Was there a regulatory breach? Was there a failure to report certain events? It will help you if you have set up codes of conduct internally and if there is a central repository of information about whether those codes have been complied with.
  • External monitoring: You need to have a process for monitoring what is being said about your company externally, both in traditional print media and online. You need to have up to date market information, so that you can quickly respond to a crisis.
  • Manage the flow of information: Clear systems should be in place to manage the escalation of any event and minimise its impact on your business. Everyone within your business needs to know how external communications should be handled and what are their respective roles/responsibilities. Will there be one spokesperson? Who will it be? Will there be a written document? Who will sign off communications and respond to the media? You should consider setting up internal guidelines for media comment.
  • Prepare your key spokespeople and your press office: Ensure, before your key spokespeople respond to a potentially hostile and critical media looking for a good story, that they are prepared.
  • How recently have they been media trained? What are your agreed lines of response? Are they robust enough to mitigate negative media interest? Is your press office prepared to move from a 'peacetime' to a 'wartime' footing and does it have the necessary experience to do so effectively?
  • Understand and engage with your key stakeholders: Who are your local, regional and national friends and allies? Which are the key stakeholder relationships that you must manage (employees, suppliers, clients and local politicians)? Who might make credible positive comment about your good track record and history? What kind of relationships do you have with the local, regional and national media that may interest themselves in your organisation?
  • Quick, open, honest reaction: Your response needs to 'set the record straight' from your business's point of view. It needs to be quick, but your business will also be respected more if your response is as open and honest as possible.
  • Be prepared to take action to protect your reputation: If the worst happens and your company finds itself in the media spotlight, we can assist to manage the crisis and ensure that your version of events is communicated. This will be done through proactive media advice from our team. We will help ensure that your side of the story is told. We also stand ready to use litigation to get a public apology and correction of incorrect information. We have expertise in helping our clients manage their reputation through a crisis.

Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further − by connecting you to a global network of legal experience, talent and knowledge.

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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From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.