Insolvency Practitioner's Recommendations - Essay Sample

Introduction

Companies get into financial difficulty for a range of reasons. Directors have to act in good faith and react to the situation early enough. Where there is a reasonable prospect of recovery, a compromise may be acceptable to the company's creditors. Under Part 14, the director, receiver, creditor, or liquidator can propose a compromise scheme (Harper et al., 2018). According to New Zealand Legislation (n.d.), the proposer must have reason to reckon that the company will be insolvent within the definition of section 287. Part 14 expresses the inability to settle debts threshold for creditors in terms of cash flow insolvency. The purpose of a compromise proposal is to increase the possibility of some classes of creditors receiving more than they would if the company become liquidated.

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Insolvency Situation

Mokoia Developments Ltd is facing the insolvency situation after the disaster and negative publicity. Therefore, as the director, Arthur can first mitigate these allegations' risks as directed by the insolvency practitioner. For instance, when a company approaches insolvency, it becomes the directors' obligation to place creditors' concerns before those of the business as a whole. This particular shift in focus is needed to avoid personal liability for company claims and potential unlawful trading accusations (Harper et al., 2018).

Creditors' concerns should be at the forefront of Arthur's plan as the company director with an intent of minimizing creditors losses as the ultimate aim. By sincerely engaging them in meetings during such a financial crisis gains their trust. As per the insolvency practitioner's recommendation, Mokoia proposing a Part 14 compromise will enable Arthur to mitigate the creditors' issue. The underlying principle in Part 14 is that creditors representing a majority in number, which is receiving the approval of at least 50% by number and 75% in value of debts, can commit all creditors to a compromise (Harper et al., 2018). Legal rights also determine the class in which creditors vote, not their commercial interests.

Identity of Interests

A complete identity of interests or rights is not a requirement within a class. If all creditors aim to maximize the return on their debts and are expected to vote accordingly, differences will not matter. As documented in New Zealand Legislation (n.d.), those proposing a compromise are entitled to take a broad classification approach. Despite differences in creditors' commercial interests or legal rights, they can vote based on a class-promoting view by casting their votes together. Consequently, Mokoia would have settled the small creditors' claims, and Shakey Earth Ltd is to its favor; it would be possible for the class of large creditors to vote in favor of the compromise. Since other creditors have no continuing role in the development, having their claims stayed until completion of the project would not affect the development process. The large creditors voting in one class would probably favor the settlement proposed by Mokoia Development Ltd. They would ultimately receive their full payment when the funds existed after Mokoia realizes a reasonable profit margin.

The insolvency practitioner also advised Arthur to fully settle the due amount of $5m to Chisholm Construction Ltd because it has an active and direct continuing role in the project's development process. Paying Chisholm its due amount means the continual development process. Therefore, the construction company will continue working on the apartment project for the next six months, enabling the director to seek another $5m until completion. By Arthur being positive and confident, the apartments will start selling given time, and he will recover incurred expenses.

Compromise

Compromise from the Company Act definition is a compromise between a company and its creditors, excluding the City Council as outsiders (New Zealand Legislation, n.d.). The City Council would not be a party to the concessions, and so would not be notified. Although they had given notice of their intent to sue Mokoia for the damage to the public land of an estimated cost of $10m to repair, it would have less impact on the project if the compromise is favorably passed. Part 14 regulates concessions approved by the company and its creditors. As a result, Arthur should follow the insolvent practitioner's advice because it will not impair the construction project's continuation.

According to Harper et al. (2018), Part 14 of the Companies Act's introduction was because the regime under the Companies Act 1955 was slow, cumbersome, and expensive. Both Parts 14 and Part 15 provide schemes for companies to enter into agreements with their creditors. Compromise schemes are meant to facilitate the recovery of insolvent companies or those at risk of insolvency. Also, Part 14 directs concessions supported by the company's creditors, while Part 15 governs the court's compromises.

In action, the creditor-supported compromises under Part 14 are relatively infrequent (Josling, 2010). That is notably attributable to the procedures that do not intuitive interim claims on allegations by creditors in the interval between the proposal and creditors' voting period. A Part 14 compromise may also cancel part or all of the company's debt, vary debt terms, vary the creditors' rights, or relate an alteration of the company's constitution affecting the debt repay. Once creditors approve the Part 14 compromise, it binds all creditors and secures the company and the notified class of creditors.

Similarly, the court-approved concessions following Part 15A occur rarely in practice. That is partly due to the procedure is somewhat costly and cumbersome (Josling, 2010). In part 15A compromises, the court usually makes terms and conditions that fit the situation. Such terms and conditions may not correspond to the company's constitution and Act. In practice, the courts' applied tests in approving Part 15A compromises has become an amalgam of intelligent and honest business personality test and a fair and equitable trial.

Unlike the rule in Part 15, Part 14 and Part 15A do not provide a compulsory stay of proceedings awaiting approval (Josling, 2010). However, the court has the option to sojourn any proceeding concerning debts and restrain creditors from taking any action to demand payments of the debt from the date the proposal's notice is issued. For instance, there is no mandatory court application, creditors imply holding meetings and voting on the scheme, and only binding if the majority is in number and 75% in value voting in favor (Harper et al., 2018). Dissenting creditors also must apply to the court for relief; otherwise are bound.

Josling (2010) stated that the stay is minimal compared to Part 15, hence viewed as a weakness of Part 14. Minimal means to stop creditors enforcing their debts against the company while a proposal is being considered. In essence, it cannot be ordered until a notice of request is given to creditors and ends ten working days after notification of the vote (Josling, 2010). The creditors must apply within this period after receiving information on the result of the vote. Also, the dissenting creditor may only apply for an order that the compromise is not binding on the following grounds; insufficient notice, material irregularity, unfairly prejudicial.

Conclusion

Thus, part 14 is used where an administrator is not required, and there is a need for urgency (Josling, 2010). It only applies to compromises with creditors, not schemes involving shareholders; thus, it is rarely used, although it enables a binding strategy that minimizes cost. Besides, a critical consideration in the contractual sense of the word like a proposal to accept only part of an undisputed debt is binding, unlike common law. They are deemed to be approved if passed following clause 5 of Schedule 5 by the majority in several voting creditors, usually possessing 75% in value (Harper et al., 2018). Therefore, repealing Part 14 and 15A of the Company Act would be sensible since they no longer have any purpose.

References

Harper, M., Arthur, M., Kalderimis, D., Foote, H., & Bennett F. (2018 August 26). New Zealand: Classification of creditors in Part 14 compromises. Mondaq.
https://www.mondaq.com/newzealand/insolvencybankruptcy/730750/classification-of-creditors-in-part-14-compromisesJ

osling, M. (2010). An analysis of the rights test in determining classes of creditors. The University of Auckland. 18(3):110-137.
http://hdl.handle.net/2292/14519

New Zealand Legislation. (n.d.). Companies Act 1993. http://www.legislation.govt.nz/act/public/1993/0105/latest/DLM319570.html.