During corporate insolvency procedures stakeholders’ roles undergo a transformative shift. This impacts shareholders, directors, and creditors, while navigating their way through this specialised legal area. Below are some considerations that might shed light on these changing roles.
Shareholders
In New Zealand, when a company enters an insolvency procedure, shareholders find their rights curtailed as the focus shifts to creditors. Primarily, shareholders lose their capacity to influence the company’s affairs, ceding control to appointed liquidators, administrators, or receivers who manage the respective company assets.
A liquidator must still have regard to the views of shareholders of a special resolution passed at a meeting held for the purposes of commencement of liquidation.[1] Although, shareholders distribution rights rank below those of creditors, who, particularly secured creditors, receive precedence in asset distribution from the company before any residual funds reach shareholders, often leaving little to no dividends to distribute.[2]
Insolvency practitioners are required to adhere to professional standards and legal requirements, ensuring impartial and ethical conduct,[3] and obligations to provide necessary information. Additionally, while some provisions to bring actions do not allow shareholders to bring them, shareholders still have some rights to bring actions.[4]
Insolvency practitioners also have responsibilities to the company itself, including managing the company’s affairs in a professional and transparent manner, ensuring compliance with relevant laws and regulations, and maximizing the value of the company’s assets for the benefit of all stakeholders. This is particularly so, in the case of an administration, which allows the company to seek protection from its creditors while a plan for restructuring or reorganisation is developed.
Ultimately, the ethical behaviour of insolvency practitioners and expectation to conduct their duties with diligence, integrity, and impartiality indirectly benefits shareholders by ensuring fairness and transparency in the insolvency process, in addition to insolvency practitioners’ duties to the company indirectly benefitting the shareholders.
Directors
The onset of insolvency triggers significant shifts in directors’ rights, focusing on creditors’ entitlements and the processes of insolvency administration.
Directors are bound by a duty to prioritise the best interests of creditors over shareholders, as mandated by the Companies Act 1993. This duty manifests in the suspension of directors’ powers, often replaced by a liquidator or administrator tasked with managing the company’s affairs.
Directors are obligated to extend full cooperation to the appointed insolvency practitioner, facilitating access to company records and participation in proceedings. Importantly, directors face potential personal liability for breaches of duty, such as engaging in insolvent trading or fraudulent conduct.
Like shareholders, directors do retain limited rights to challenge decisions made by liquidators or administrators deemed adverse to the company’s interests.[5]
Creditors
Naturally, as it follows from the above, creditors’ rights assume a pivotal role in insolvency proceedings, with the overarching objective of guaranteeing equitable treatment for creditors and optimising debt recovery. These rights encompass several key provisions aimed at empowering creditors throughout the insolvency procedure.
Firstly, creditors possess the right to comprehensive information, including updates on proceedings, their roles, and potential recovery avenues. Additionally, they are entitled to participate in pivotal meetings, exercising voting rights on critical decisions like the appointment of liquidators or administrators. Moreover, creditors retain the right to substantiate their claims by providing proof of debt, thereby ensuring accurate assessment and distribution of assets.
Priority in asset distribution further underscores creditors’ rights, with secured creditors typically holding precedence over unsecured counterparts.
Crucially, creditors maintain the ability to challenge transactions preceding insolvency, object to directors’ discharge of liability, and scrutinise proposed distribution plans for fairness and legal compliance.
Conclusion
In the intricacies of corporate insolvency in New Zealand, shareholders experience a shift in their considerations, directors shift duties towards creditors and solvency, balancing compliance, and mitigation of personal liabilities. Concurrently, creditors wield significant rights aimed at ensuring equitable treatment and maximising debt recovery. Through timely advice, stakeholders can navigate the labyrinth of insolvency, safeguarding their interests and striving towards equitable outcomes amidst the challenges of financial distress.
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[1] Section 258 of the Companies Act 1993 (the “Act”).
[2] Section 313 of the Act.
[3] Insolvency Practitioners Regulation Act 2019, and codes of conduct through required memberships of either the New Zealand Institute of Chartered Accountants (NZICA), or the Restructuring Insolvency and Turnaround Association New Zealand (RITANZ).
[4] for example, section 247 of the Act (power to stay or restrain certain proceedings against company), section 284 of the Act (order for court supervision of liquidation – with leave of the Court), and section 286 of the Act (application for order to enforce liquidator’s duties).
[5] Including those orders referred to in above footnote n4.
