Acuity podcast Episode 2: Insolvency and tough conversations

Businesses are struggling in these uncertain times and insolvency is a reality many CAs’ clients are facing.

CA ANZ business reform leader Karen McWilliams FCA and John Fisk FCA, partner at PwC New Zealand and chair of the Restructuring, Insolvency and Turnaround Association of NZ, join host Aly Garrett FCA to discuss the early warning signs – and how the key to survival is closely aligned to what the All Blacks do to stay world champions.

As well, Acuity podcast hack guru Andrew Van Der Beek shares transformational tech tool tips and CA ANZ President Peter Rupp speaks with John Schol CA, chief executive at Invercargill’s Malloch McClean, about his radical transformation from painter’s apprentice to accountant.

Listen to the podcast

Arbitration and insolvency disputes: A question of arbitrability

This article is being shared courtesy of INSOL.

“INSOL International is pleased to present a Special Report titled “Arbitration and insolvency disputes: A question of arbitrability” by the Hon Paul Heath QC, Bankside Chambers (Auckland and Singapore) and South Square, London and Dr Anna Kirk, Bankside Chambers (Auckland and Singapore).

Until recently it was commonly accepted that insolvency disputes fell outside the scope of arbitration. However, recent authorities suggest a more liberal approach to arbitration, albeit one where the boundary between those disputes that are or are not arbitrable, is somewhat blurred. A number of authorities suggest the line is determined by reference to whether a dispute involves “core” or “pure” insolvency issues, although the question may be asked what exactly the terms “core” or “pure” mean in this context? The purpose of this report is to consider these issues in order to distinguish those insolvency related disputes that are arbitrable from those that are not.

INSOL International sincerely thanks the Hon Paul Heath QC and Dr Anna Kirk for this thought-provoking and interesting Special Report on arbitration and insolvency.”

Read the article here

 

 

 

Mergers and Acquisitions involving distressed firms

The Commerce Commission has put out an article that targets practitioners involved in distressed mergers and acquisitions (M&A). They are attempting to get out ahead of a potential increase in M&A involving so-called ‘failing firms’ once the COVID-19 wage subsidy is discontinued.

The following article is written by Katie Rusbatch, Head of Competition, Commerce Commission and has been shared with RITANZ for the benefit of our members.

Mergers and Acquisitions involving distressed firms

The COVID-19 pandemic has had a significant impact on businesses, and its effects are expected to be felt for years to come. As businesses continue to navigate through these challenging times, acquisitions of firms[1] in financial difficulty may become more common. These acquisitions involving so-called ‘failing firms’ can be beneficial in terms of saving businesses and jobs. However, in certain circumstances such acquisitions can give rise to competition issues, even where the current viability of one or both merger parties is compromised. In this article, we set out the Commission’s approach to assessing acquisitions involving firms in financial or other forms of distress.

Those administering or advising businesses under financial stress should be alive to the possibility that these types of acquisitions can still give rise to competition issues in certain circumstances under section 47 of the Commerce Act.[2] Such issues can arise if a purchaser is a significant competitor or potential competitor, customer or supplier to the business being sold. Administrators and advisers should also be alert to the possibility that a competitor, customer or supplier may be willing to pay a higher price than other potential purchasers to obtain, or enhance, market power.

Whether a transaction is likely to substantially lessen competition under section 47 involves a comparison between the future state of competition ‘with’ the transaction (the ‘factual’) and the future state of competition ‘without’ the transaction (the ‘counterfactual’).

Often the appropriate counterfactual scenario in an acquisition will be the status quo; that is, a world where competition would continue to play out in the same way without the merger. However, where one or both merger parties are in financial distress, the likely state of competition without a transaction may look very different from the status quo.

For example, if a transaction does not proceed, it is possible that a firm and its assets will exit a market altogether. In such circumstances, the Commission may grant clearance to an otherwise anticompetitive acquisition on the basis that it involves a ‘failing firm’, because there is unlikely to be a material difference in competition in a market with and without the merger. However, if it is likely a firm or its assets would be acquired by an alternative purchaser, or it could recover (possibly after a period under administration), then the merger will be assessed against a future involving an alternative acquisition, or the status quo.

How the Commission approaches failing firm arguments

When assessing a failing firm argument, the Commission will consider two key questions:

  • Has the firm ceased operations or will it likely cease operations in the near future?

  • What is likely to happen to the assets of the firm without the acquisition? Is it likely the assets will exit the market or is there an alternative buyer?

In seeking to answer these questions, we look to supporting evidence, including:

  • evidence that the firm has been liquidated or placed into administration;

  • financial statements, management accounts, budgets, and forecasts;

  • internal documents relating to the viability of the firm or assets;

  • any plans to restructure or improve performance;

  • independent appraisals or valuations;

  • evidence of genuine efforts to sell the firm or assets; and

  • any other offers for the firm or assets, including the identity of other likely purchasers and the timeframe under which an alternative transaction would likely take place.

The Commission will not accept a failing firm argument without close scrutiny. That said, we recognise that COVID-19 may impact the ability of some firms to produce the level of supporting evidence that might otherwise have been possible. We will consider each acquisition on a case-by-case basis and we encourage parties to engage with the Commission as early as possible when considering a potential acquisition.

In assessing failing firm arguments and acquisitions in general, we will take into account the impact of COVID-19 on the financial positions of companies. In doing this, however, we will have regard as to whether the relevant COVID-19 effects are transient, or more permanent in nature.

Guidance for advisors involved in distressed M&A

New Zealand has a voluntary clearance regime for anticipated, but not completed, acquisitions. If the Commission grants clearance to an acquisition, this gives the parties legal immunity for the transaction, so long as it is completed within 12 months. Where clearance is not sought, and the Commission considers an acquisition would be likely to breach section 47, the Commission can apply to the court for an injunction, or divestiture and/or penalties of up to $5 million for a body corporate and $500,000 for an individual.

If you are involved in a potential acquisition and are unsure about how it might affect competition, you should seek advice from a lawyer experienced in competition law. The Commission can give guidance in such circumstances, but it does not give legal advice.

More information about the Commission’s role in relation to business acquisitions, including our approach to assessing failing firm arguments, is available in our Mergers and Acquisitions Guidelines, which are available on our website.

If there is sufficient interest in this issue, the Commission is open to conducting a seminar or webinar discussing its process in relation to failing firms. Please contact the Commission on mergers@comcom.govt.nz if you would find this useful.

This article does not constitute legal advice and should not be relied upon as such.

[1] Unless otherwise specified, references to ‘firms’ in this article include parts of firms such as business units, divisions and assets.

2 Section 47 of the Commerce Act prohibits acquisitions of shares or assets of a business that result, or are likely to result, in a substantial lessening of competition in a New Zealand market. It covers mergers where they involve such acquisitions by one or both of the merger parties (as virtually all mergers do).

Authored by Katie Rusbatch, Head of Competition, Commerce Commission

 

Update to members – Licensing 1 September 2020

Members will be aware of the new licensing regime that comes into effect on 1 September 2020.  As we transition to the new legislation, there will be several immediate changes which will impact on Accredited Insolvency Practitioners that we want to update you on.

Under the legislation, any individual who is not a member of an Accredited Body has to comply with section 57 of the Insolvency Practitioners Regulation Act 2019, in order to be eligible to apply to be a Licenced Insolvency Practitioner and to take Insolvency Engagements as from 1 September 2020.

Section 57 provides for an exemption for overseas practitioners, members of a recognised body, or members of religious societies from the requirement that states you must be a member of an Accredited Body.

Read more “Update to members – Licensing 1 September 2020”

‘Steep’ rate of business failures coming

Maria Slade, NBR interviews RITANZ chair, John Fisk.

2021 will be the watershed year for firms going bust, liquidators say.

New Zealand has “kicked the can down the road” and can expect a slew of company collapses next year, a leading insolvency practitioner says.

Measures such as the wage subsidy have put the brakes on business failures but there will be a lag, says PwC partner John Fisk, who is also chair of the insolvency industry body RITANZ (Restructuring Insolvency and Turnaround Association New Zealand).

“I think 2021 will be the watershed year when a lot of this starts to become a real issue,” he said.

Read more “‘Steep’ rate of business failures coming”

RITANZ responds to Licensing delays

RITANZ has tirelessly advocated for the protection of creditors and licensing of insolvency practitioners over the years and were delighted when the government enacted the Insolvency Practitioners Regulation Act and the Insolvency Practitioners Regulation (Amendments) Act which was set to come into force and effect on 17 June 2020.

As a result of the COVID-19 lockdown the government rushed to introduce relief measures to keep businesses afloat and money flowing through the economy. RITANZ worked closely with MBIE and other stakeholders to drive the insolvency measures and provide tangible mechanisms and amendments to legislation to give directors of companies a toolkit to work with during these unprecedented times.

On 5 May 2020 the COVID-19 Response (Further Management Measures) Legislation Bill was introduced and had its First Reading in Parliament 8 May 2020. The Bill includes the proposed Safe Harbour and the Business Debt Hibernation amendments to the Companies Act 1993 which make up the backbone of this tool kit.  RITANZ prepared a written and oral submission for the Select Committee supporting the Safe Harbour provisions and Business Debt Hibernation regime but asking that any delay to implementing Insolvency Practitioner regulation be as short as possible, if needed at all.

Read more “RITANZ responds to Licensing delays”

COVID-19 Insolvency law relief: What’s in the Bill, and how to use it – an article by Bell Gully

The government has released the details of its proposed insolvency law relief package. The proposed changes will be welcomed by directors, many of whom are facing difficult choices about whether and how to continue to trade through the COVID-19 crisis.

The package forms part of the COVID-19 Response (Further Management Measures) Legislation Bill that was introduced yesterday afternoon. The Bill is expected to be progressed quickly, with Parliament’s Epidemic Response Committee expected to report on the Bill by next Tuesday, 12 May 2020.

The Bill is broad in scope and amends or modifies some 45 different pieces of legislation. In this update we focus on two of the proposed changes to the Companies Act 1993: relief from directors’ duties and a new business debt hibernation scheme. We then outline when and how directors might make use of them.

Directors’ duties relief

The Bill proposes significant, but temporary amendments to the two directors’ duties that apply specifically to insolvency scenarios:

  • the duty not to trade recklessly, and

  • the duty not to allow the company to incur obligations without a reasonable belief that they will be met when due.

Together, these duties protect the interests of the company’s existing creditors. They also protect the interests of new creditors that may arise from ongoing trading. Effectively, the duties prohibit directors from taking unreasonable business risks at the expense of creditors who will not be paid.

Read the full article here

Insolvency relief in sight for businesses affected by COVID-19

The Beehive has released the following press release today:

“Support is on the way for businesses facing insolvency due to COVID-19, with the Government introducing a package of measures in Parliament today to further boost New Zealand’s economic recovery.

“The Government is ensuring businesses affected by the economic impacts of COVID-19 can access the assistance they need to stay afloat as we get New Zealand moving again,” Minister of Finance Grant Robertson said.

Changes to insolvency and company law are progressing through the COVID-19 Response (Further Management Measures) Legislation Bill, which contains a range of measures to support business through the pandemic.

To read the full press release

View the Bill online

Hospitality insolvency – when the music stops

The hospitality industry is usually a good barometer of economic change; in times of prosperity, the champagne flows, but it is also one of the first industries to feel the pinch when the market turns south.

Prior to the Covid-19 lockdown, the sector was already facing some serious challenges, which should have been a warning sign for the wider economy. Now the impact of the pandemic will be monumental, and hospitality owners will need to make some difficult decisions if they are to weather the storm.

In recent years the increase in property values nationwide has led to significant rent, rates and OPEX rises; the Christchurch and Kaikoura earthquakes have raised insurance and building compliance costs, which landlords are looking to pass on to tenants; supplier costs have increased significantly; and despite many businesses urging the Government to defer the minimum wage rise, (from $17.70 per hour to $18.90 per hour), the increase came into effect on 1 April 2020 – another blow to business owners already facing huge financial hardship. Read more “Hospitality insolvency – when the music stops”

Guidance for NZ companies in financial distress

To help Chartered Accountants, the Restructuring Insolvency and Turnaround Association New Zealand (RITANZ) and Chartered Accountants ANZ have published this guide. It outlines some of the options available as part of the relief measures introduced by the New Zealand Government around insolvent trading laws in the Companies Act 1993. These include the temporary safe harbour protection and the business debt hibernation scheme.

The guide also highlights the importance of only dealing with an Accredited Insolvency Practitioner listed on the RITANZ or CA ANZ websites. Choosing the right person to assist your client in these difficult times is a critical decision. It is important that your clients are placed in the hands of an experienced practitioner, not just for themselves but also to ensure that you fulfil your own obligations as a professional advisor, particularly given the financial stress the clients may find themselves in.

The five page guide also outlines the next steps if the temporary relief options can’t save the business as well as support available for those affected emotionally.

RITANZ Guidance for New Zealand companies in financial distress