New Zealand Insolvencies Lowest in 20 Years, Creditors Recoup Debts in Just Over 1 Year

Company insolvencies in New Zealand were the lowest in almost two decades, according to the Insolvency and Trustee Services (ITS). Failed Kiwi companies also have an average turnaround of 15 months, according to the World Bank, resulting to quicker debt recovery time. With a favourable economic environment, coupled with pro-business regulations, it is no wonder the World Bank ranks New Zealand as the easiest country in the world to do business with.

Creditor-Friendly Insolvency Options

There were only 86 corporate insolvencies in New Zealand from July 2018 to June 2019, according to the ITS. Of the 86, 10% were voluntary liquidations. All the rest of the corporate insolvencies were a mix of either receivership or liquidationPersonal insolvencies also drastically declined because of the introduction of alternative insolvency options, such as the No Asset Procedure (NAP) and the Debt Repayment Order (DRO), for individuals or sole traders with debts of less than $50,000.

The World Bank report, which looks into the laws of countries relating to the setting up and winding down of businesses, and the resolution of insolvencies, attributes New Zealand’s high score to the country’s widespread use of electronic system. The financial institution pointed out that the top 20 economies in the world use an electronic system for registration, tax filings, and insolvency applications.

Quick Debt Recovery

The time it takes for an insolvency case in New Zealand to wrap up depends upon the type of insolvency. The ITS said the usual life cycle is three years for a personal bankruptcy process and one year for a NAP. The average turnaround though for corporate insolvencies in New Zealand is 15 months, according to the World Bank. This is a relatively short period, compared to other countries.

The faster turnaround time can be attributed to the ease in the insolvency process. The ITS, which assists those who are looking to file a NAP, DRO, or bankruptcy, serves as an online one-stop-shop for applications and for updates in the insolvency proceeding. Because the electronic system has helped reduce the amount of time it takes for a business to wrap up, creditors in New Zealand need to wait for only a short period before getting paid the debt that they are owed.

Accessible Debtor Information

The country’s companies register, which requires Kiwi companies to have a unique business number, also allows creditors to quickly access the information they need about the insolvent company and allows them to immediately make accountable the individuals that are listed as directors in the registry. Knowing who to recoup money from, when the company has no more assets, aids in the fast debt recovery for creditors, including foreign creditors who are collecting international debt in New Zealand.

Recently, Auckland-based travel agency, Guru Travel Limited, went bust without any warning even. More than 200 people who pre-booked summer vacation trips are owed a total of $370,000. A quick search at Companies Register would reveal who Guru Travel’s director is (Shareen Ramastre), how much is the unsecured debt ($323,362), and who the appointed liquidators are. The accessibility of the information aids creditors in their debt recovery process against Guru Travel.

Most Insolvent Companies Are in Auckland

Most of the companies that filed insolvencies are from the Auckland area. This is not surprising because a majority of the businesses in New Zealand are also found in the Auckland area. Less than 10% of the failed companies are from the Christchurch area, while the rest of the companies in insolvency are scattered across the country.

It is also interesting to note that less than 1% of enterprises in New Zealand had 100 or more employees but they engage 48% of the country’s workforce. A majority, or 70%, of all Kiwi enterprises, had no paid employees. About 27% of enterprises in New Zealand had one to 19 employees. The country is dominated by small businesses, but most of the people are employed by large companies. Many of the companies are in the construction industry, followed by the health care and social assistance industry, and the retail trade industry.

Adverse Legal Action Top Reason for Failure

Many of the companies are in insolvency because of adverse legal action. Recently, Cullen Group’s companies were sent to liquidation following a $112 million tax judgment and a $43 million judgment in favour of another businessman, Owen Glenn, in case for alleged fraudulent misrepresentation in their joint ventures.

The ITS also listed the following as other top reasons why Kiwi companies are in insolvency proceedings:

  1. failure to provide for taxation
  2. inability to collect debts
  3. lack of business activity
  4. ill health
  5. lack of sufficient working capital

Changes to Refine Insolvency Process

The insolvency process in New Zealand is continuously working on improving its already excellent insolvency environment. In fact, just this 13th of January, amendments to New Zealand’s Insolvency Act of 2006 came into effect. These amendments are meant to improve protections for consumers and workers when companies go bankrupt. Among the prominent changes are as follows:

  • bankrupt companies are required to honour up to 50% of the value of gift cards or vouchers held by consumers
  • payments to workers instead of notice and long service leave will be protected the same way as wages
  • claw-back period for commercial creditors is reduced to six months, while the claw-back period for “related party” creditors is extended from two years to four years.

You can read detailed information about the amendments here.