When companies enter liquidation, unsecured creditors often face the prospect of significant losses. However, New Zealand’s Companies Act 1993 provides an innovative mechanism that allows these creditors to take a more active role in the recovery process, potentially improving their chances of repayment.
The legal framework
Under clause 1(1)(e) of Schedule 7 of the Companies Act 1993, unsecured creditors can fund specific recovery actions during liquidation. In return, they receive “super priority” status, meaning they’ll be repaid both their original debt and recovery costs before most other creditors. This provision represents a significant departure from traditional liquidation processes, where unsecured creditors typically have limited options for recovery.
How funding agreements work in practice
Consider a practical example: A company in liquidation owns valuable equipment stored overseas, but the liquidator lacks funds for recovery. A creditor can step forward to fund the retrieval operation. If successful, they’ll receive priority repayment of both their original debt and the recovery costs from the proceeds of the equipment’s sale. Only after these amounts are paid will the remaining funds be distributed to other creditors.
This mechanism extends beyond physical asset recovery. Creditors can fund various recovery actions, including:
• Legal proceedings against company directors
• Investigation of potentially voidable transactions
• Recovery of overseas assets
• Complex forensic accounting investigations
Benefits for unsecured creditors
For unsecured creditors, this funding mechanism offers several advantages. Rather than passively awaiting the outcome of liquidation, they can actively participate in the recovery process. This is particularly valuable in cases where standard liquidation might yield little or no return.
However, success depends heavily on choosing the right cases to fund and having access to appropriate expertise. Professional guidance is often crucial in assessing the viability of potential recovery actions and executing them effectively.
The role of professional expertise
Firms specializing in insolvency, such as Waterstone, play a vital role in this process. With their combined legal and investigative capabilities, they can:
• Assess the likelihood of successful recovery
• Develop effective recovery strategies
• Execute complex recovery operations
• Navigate legal requirements efficiently
As New Zealand’s only insolvency firm with in-house legal expertise, Waterstone offers comprehensive support throughout the recovery process. Their integrated approach helps ensure that funded recovery actions have the best possible chance of success.
