Corporate Insolvency - With Hon. Paul Heath QC
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**Chris Patterson 00:06**
Hello and welcome to the Law Down Under Podcast with barrister Chris Patterson. We will provide you with insights into the law in New Zealand and Australia, its application, and the law's future. Each episode features a new guest who will inspire interest in the law and give you a greater understanding of the legal issues that have helped shape our justice system down under. We thank you for tuning in and hope you enjoy the podcast. We're very privileged and excited to have with me on the podcast today, the Honourable Paul Heath QC, who currently practices as an arbitrator and mediator from Bankside Chambers, both in Auckland and Singapore. His primary area of interest is insolvency law, particularly cross-border insolvency. This interest has led to his association with South Square London, which is the leading set of insolvency barristers in London's city halls. He is an active member of its arbitration and mediation unit. These roles dovetail into his present position as co-chair of Insol International ADR Colloquium, which is endeavoring to promote the use of arbitration and mediation in cross-border insolvency disputes in a manner designed to complement the public role of courts in such cases. He graduated with his law degree from the University of Auckland in 1978 and practiced in a firm of barristers and solicitors in Hamilton from the mid-1981 until 1998 when he went to the independent bar. Simultaneously, he was appointed as a Queen's Counsel during the period between 1997 and 2002. Paul was the first consultant in the Law Commission of New Zealand, leading projects on electronic commerce, cross-border insolvency, arbitration, and, more generally, insolvency law review. He was appointed as a judge of the High Court of New Zealand in 2002 and retired in 2018. After serving 16 years on the High Court bench between 2003 and 2017, Paul sat regularly as a member of the criminal and civil appeal divisions of the New Zealand Court of Appeal. During his time in practice, Paul appeared on three occasions in the Privy Council and was New Zealand's delegate to the Working Group Number 5 of the United Nations Commission on International Trade Law when dealing with cross-border insolvency issues. Since his retirement from the bench, he has undertaken assignments for the World Bank, Seoul International, and the Asian Development Bank, primarily in the area of judicial capacity building. Presently, Paul holds a part-time judicial office as a chief justice to the Pitcairn Islands and a Judge of the Court of Appeal of Kiribati. Paul was a co-consulting editor of "Heath and Well on Insolvency," a leading New Zealand text on insolvency law. Paul's international reputation in insolvency law was recognized in 2000 when he became an international fellow of the American College of Bankruptcy. Paul, good afternoon, and welcome to the podcast.
**Paul Heath QC 03:07**
Good afternoon, Chris. Thank you for having me.
**Chris Patterson 03:09**
Thank you very much. It's an absolute pleasure to have you here. I'm not sure if the listeners can see, but I am sitting here with my own copy, which I have had for many years, "Heath and Well on Insolvency Law in New Zealand." It's actually one of the better insolvency texts within the Commonwealth. Occasionally, I've had to look at various insolvency texts for Australia, Canada, and the United Kingdom. Your book is immensely easy to read, follow, and get straight to the point, which, from a practitioner's point of view, is a great asset and a great read.
**Paul Heath QC 03:45**
Thank you very much; the publisher will be delighted to hear that.
**Chris Patterson 03:49**
I should probably mention it to them. But of course, your other co-editor on this, Michael Whale, has always been a leading insolvency practitioner here in New Zealand. Look, I thought I might start off with a bit of a quote. It's a quote from Nicholas Murray Butler, who, in 1901, was the president of Columbia University. He gave a speech called "Politics and Economics" at the 140/3 annual banquet of the Chamber of Commerce in the State of New York that year. But what he said is this, and this may be known to some people: he said, "The limited liability corporation is the greatest single discovery of modern times." I think that's a great quote because companies affect just about every single person in Australasia in one way or another. Either we work for them, they provide us with services, etc. It's really hard to imagine how the modern world would have existed without having the limited liability company as a vehicle to enable investment and rewards to be distributed. Anyway, before we carry on, are we really talking now on the topic of insolvency. Now insolvency has two parts: the corporate part and the personal part, known as bankruptcy. We're going to focus on corporate insolvency rather than bankruptcy. But before we get into that, I did want to ask you a question at a high level. In New Zealand, bankruptcies are administered by the Official Assignee, which is part of the state. In Australia, there are private bankruptcy practitioners who administer private bankruptcy. Do you have any views on the pros and cons of having private practitioners administer bankruptcies rather than having an entity like the Official Assignee?
**Paul Heath QC 05:59**
I don't think there's any real objection in principle to that happening. It tends to be that bankruptcies, in general, have fewer assets in terms of being able to distribute to pay costs. So private practitioners, I'm not sure exactly how much they would be prepared to be involved in this sort of work. The Official Assignee, on the other hand, fulfills the public service of ensuring that the estate is resolved efficiently and effectively for the benefit of creditors. In New Zealand, it seems to have worked quite well. When I was at the Law Commission, we did raise that as a consideration for insolvency law reform, but it didn't gain any traction with the officials.
**Chris Patterson 06:53**
Well, I do know that in Australia, the use of private bankruptcy insolvency practitioners, as you are correct, is more often than not. In fact, a very large percentage of bankruptcies just don't have enough money left in the bankruptcy estate to make it worthwhile to pay someone privately to go through that. But there are sometimes exceptions to that. All right. Well, what I wanted to ask you is why insolvency law. I mean, you were at Auckland University in the late '70s. When did the interest in insolvency spark? When did the spark ignite?
**Paul Heath QC 07:38**
Like most things, I fell into it. It was when I was at university, I came from a family where we'd had nobody go to university, let alone do law. So it was a bit of a trial for my parents to help me get through university. So I took a bursary with the government, and the department I happened to get into was the Commercial Affairs Division of the Department of Justice, which then ran the Official Assignee's office. So for three years, during my time at university, I actually worked during holidays with the Official Assignee and did things like closing up a fish and chip shop after it had been left empty for a few days, working out who would take what furniture. One thing that this experience taught me as a lawyer was how much practitioners relied on speedy advice from lawyers of a practical nature when they wanted to do something. After my time at the university or at Commercial Affairs, I was there as an in-house lawyer for probably two or three years, started appearing in court at that time, and then looked to go to the private sector and ended up in Hamilton, where I spent a couple of years doing general practice. Then I got back into the insolvency area, primarily through the Official Assignee in Hamilton and other insolvency practitioners down there.
**Chris Patterson 09:20**
You would have been operating under the 1955 Act. What did you see as the improvement in the insolvency aspects within the 1993 Act? What did you see as the improvement when the new act came into effect?
**Paul Heath QC 09:40**
The intention was to be more streamlined. There were many occasions in the 1955 Act where consent was required from the court to do various relatively minor things, causing difficulties and additional costs when dealing with those matters. The 1993 Companies Act did a couple of key things with insolvency. One was to remove those impediments. So you no longer had creditors' voluntary liquidations and members' voluntary liquidations, and you just had one liquidation, with everything subject to the supervision of the court. The second thing was, at least in part, codifying directors' duties. This was done for accessibility so that people could read the statute and have some idea of their obligations as directors. While it's not a complete code, it does cover the essence of what's required. Most directors who read it carefully will have a good idea of their obligations and what they need to do to fulfill them.
**Chris Patterson 11:02**
Well, New Zealand has a lot of companies. Just to give you some statistics, in 2002, there were 286,425 companies. Seven years later, just after the GFC, the number of companies in New Zealand had nearly doubled to 526,627. Last year, we were close to 700,000 companies. So New Zealanders love companies, and we've got lots of them. Your point about directors' duties is well made. Anecdotally, I suspect many directors out there haven't read their duties and don't really understand them very well. I imagine this becomes apparent when dealing with corporate failures. You presided as a judge over one of the more spectacular corporate failures, the South Canterbury Finance case, which went on for quite some time. I won't ask for specific comments, but it must have been a significant case. What was that experience like?
**Paul Heath QC 12:40**
It was a significant case. The trial lasted for five years with 72 sitting days. It's the longest case I've ever handled. The only one that came close was the Nathans Finance case, also related to a failed finance company.
**Chris Patterson 13:38**
You've reminded me that Mr. Hubbard, the founder of South Canterbury Finance, was a local hero, and the case must have attracted a lot of local interest.
**Paul Heath QC 13:57**
Yes, it did. Interestingly, there was a bit of a split among local people, with some supporting him and others not. Mr. Hubbard had passed away before the trial started, so the focus was on the three defendants and their roles in the company.
**Chris Patterson 14:12**
You mentioned that Mr. Hubbard had some unconventional habits, such as driving a beaten-up car and working at his kitchen table. It wasn't your standard error of failure case.
**Paul Heath QC 14:27**
Indeed, he wasn't known for displaying the trappings of wealth. He had an interesting way of conducting himself.
**Chris Patterson 14:44**
What made the case particularly newsworthy was that South Canterbury Finance had been included in the Treasury's retail deposit guarantee scheme shortly before its failure, with a payout of around $1.6 billion.
**Paul Heath QC 15:00**
That's correct. It was a significant amount of money involved. The other litigator was John Fair, who subsequently became a high court judge as well.
**Chris Patterson 15:39**
He did. He started as a master, I think, and then became an associate judge when the name changed, and ultimately, a justice. I had the privilege of appearing before him in one of his last trials, which I think he was glad to see the end of. Some of those cases involved elements of corporate fraud and property development. I believe you've also witnessed a few property cycles throughout your career, both as a practitioner and a judge. These cycles tend to follow the same pattern: property values go up, developers get busy, property prices level out or go down, and developers find themselves in an awkward situation. The GFC in 2008-2009 likely contributed to a significant increase in liquidations. To provide some statistics, in 2002, there were 1,912 liquidations in New Zealand. In 2009, towards the end of the GFC, the number nearly doubled to 3,434, with the Official Assignee handling 377 of them. It seems that insolvency practitioners are currently facing challenges with fewer liquidations, given the New Zealand economy's positive outlook. However, the silver lining for them might be found in the property market, as New Zealanders have a strong affinity for property and companies. The sunny days may be on the horizon for insolvency practitioners, but it's essential that corporate failures are kept in check to ensure that people don't lose money.
**Paul Heath QC 18:29**
I had some prior exposure to cross-border insolvency through Insol International and the IBA. When I became a Law Commissioner, I continued to work in that sphere. The cross-border insolvency project aimed to address the challenges posed by globalism. We live in an era where money can be transferred across the world in nanoseconds, and we need a system that allows us to retrieve assets located in different countries to pay creditors in various jurisdictions. The project aimed to balance the globalization reality with questions of sovereignty, with a focus on fairness and efficiency. The three key objectives were to ensure we don't lose anything, align with major trading partners, and address issues around fiscal policy to attract offshore investors.
**Chris Patterson 21:00**
Absolutely, and I understand that New Zealand needs capital and must provide a legal framework to attract overseas investment. Our laws must instill confidence in overseas corporations and investors, ensuring they can invest in New Zealand with a set of laws that regulate behavior. Now, let's dive into the concept of corporate failure. We'll focus on insolvent liquidations and how they work in New Zealand. How does a company go from trading to being placed into liquidation?
**Paul Heath QC 22:39**
Certainly. The process usually starts with the directors making decisions about how the company operates. Insolvency can result from poor decision-making, fraud (although less frequently than assumed), or external factors like the recent pandemic, which significantly impacted businesses with sound fundamentals. Once directors realize the company is insolvent or near insolvency, they must decide whether to arrange for the benefit of creditors, disclose everything, and attempt to salvage the business. This can be done informally with unanimous agreement or through the voluntary administration regime or a compromise under the Companies Act. Voluntary administration is like the intensive care unit for corporations. The key focus is to determine if the company can be sold as a going concern or if parts of the business can be hived off and sold while liquidating the remaining assets.
**Chris Patterson 24:43**
Let's discuss voluntary administration, which offers an alternative to directors when they find themselves in a situation where the company is either solvent, insolvent, or they lack confidence that they can trade their way out or raise capital. I believe it was introduced into law about a decade ago.
**Paul Heath QC 25:16**
I believe it may have been around 2007, or possibly a bit later.
**Chris Patterson 25:23**
Yes. However, it doesn't seem to have become a popular option, as most companies either succeed or fail and go into liquidation. Would you agree with that perception?
**Paul Heath QC 25:44**
Voluntary administration is generally more suitable for larger companies because they can bear the associated costs. Unfortunately, about 95% of New Zealand companies are small to medium-sized businesses that can't afford this. The law aims to target bigger companies that could have a significant impact on the economy. The process is designed to salvage businesses with directors who are trying to manage them sensibly and honestly. Bank involvement often plays a crucial role. Experienced insolvency administrators can help guide directors, but the outcome depends on whether the directors are willing to listen.
**Chris Patterson 28:16**
I understand that voluntary administration is essentially designed for companies that are sound commercial enterprises but need time to make changes or overcome a challenging period. It's a mechanism to buy time, preventing certain creditors from demanding immediate payment and allowing the company to attempt recovery or avoid liquidation.
**Paul Heath QC 30:45**
Yes, that's accurate. As long as the mechanism isn't abused, it can work well. However, the pressure on companies due to time constraints can lead to misuse, especially when creditors attempt to extract payment for disputed debts. The mechanism is meant for undisputed debts, and misuse can cause undue pressure and conflicts.
**Chris Patterson 32:09**
I agree, especially when deadlines are used strategically, such as near Christmas. People might wait until the last minute to serve a statutory demand, hoping to disrupt the legal profession's holiday break. We need to be mindful of how this process can be abused, particularly in terms of timing.
**Paul Heath QC 32:46**
Indeed, timing can be crucial, and it's vital to ensure the statutory demand process is used appropriately and not to create unnecessary pressure. A more balanced approach can be beneficial to both creditors and debtors.
**Chris Patterson 34:49**
I agree, the letter gives the other party notice and also provides a safeguard for costs in case the dispute escalates. It helps in protecting the creditor's position and is a practical approach to the statutory demand process.
**Paul Heath QC 35:40**
Absolutely, the letter serves a dual purpose, providing notice and cost protection. It can be instrumental in safeguarding the creditor's position. It also encourages the other party to engage and clarify their stance before taking more formal steps.
**Chris Patterson 36:10**
Once a statutory demand is served, and if the debt isn't paid or disputed within 15 working days, it creates an act of insolvency. Why would a creditor want to use a statutory demand to create an act of insolvency?
**Paul Heath QC 36:46**
The primary purpose is to establish a rebuttable presumption of insolvency. This presumption allows the creditor to initiate legal proceedings, claiming insolvency based on the non-compliance with the statutory demand. The debtor can contest this presumption, but it gives the creditor a starting point for their case.
**Chris Patterson 38:01**
Indeed, advertising the application can have a significant impact on the company's perceived creditworthiness. The debtor company can oppose the application, but there are time constraints for both parties. This process helps flush out other creditors who may want to be involved in the proceedings.
**Paul Heath QC 39:23**
Advertising the application serves the purpose of bringing other potential creditors to light and providing them with the opportunity to join the proceedings. It's an essential part of the process to ensure fairness and transparency.
**Chris Patterson 40:42**
Directors' duties under the Companies Act are primarily to the shareholders, and they don't have duties to creditors while the company is solvent. However, there's often a lack of understanding among directors and stakeholders regarding when directors should start considering the interests of creditors.
**Paul Heath QC 40:59**
Directors need to strike a balance when their company is in the twilight zone between solvency and insolvency. While the Companies Act emphasizes duties to shareholders, directors have a duty to protect the interests of creditors once the company is insolvent or near insolvency. This balance is crucial to encourage entrepreneurship while ensuring creditor protection.
**Chris Patterson 42:00**
The distinction in the treatment of directors' duties based on the type of company (large or small) can be challenging. Large corporations have a different dynamic compared to one-person companies, where personal guarantees often come into play. Finding a balance that works for both situations is vital.
**Paul Heath QC 42:18**
Exactly, striking the right balance is essential to make the director's duties under the Companies Act equally effective for both large corporations and small one-person companies. The need for personal guarantees in small businesses makes this distinction an important consideration.
**Chris Patterson 45:00**
Entrepreneurs play a crucial role in New Zealand's economy, and risk-taking is inherent in entrepreneurship. Some view bankruptcy or corporate failure as a learning experience, while others may abuse the system. It's essential to strike a balance to encourage entrepreneurship while ensuring creditors are protected.
**Paul Heath QC 45:40**
Indeed, striking that balance is vital. Entrepreneurs need the freedom to take risks, but there must also be safeguards in place to protect creditors' interests. Regulation is an important step to ensure the insolvency process works efficiently and fairly.
**Chris Patterson 46:28**
There's an option for shareholders to pass a resolution to appoint a liquidator, but this can raise concerns among creditors, who may suspect that the liquidator is not acting in their best interests. The reputation and experience of the appointed liquidator can help alleviate these concerns.
**Paul Heath QC 47:12**
Indeed, concerns can arise when shareholders appoint a liquidator, and it's essential for creditors to have trust in the process. The choice of an experienced and reputable liquidator can help address these concerns.
**Chris Patterson 49:23**
The regulation of insolvency practitioners was introduced to ensure that those who handle insolvency matters are trustworthy and capable of safeguarding creditors' interests. It also aimed to harmonize the regulation of insolvency practitioners in trans-Tasman insolvencies with Australia.
**Paul Heath QC 51:09**
In most liquidation cases, the primary duties of a liquidator include identifying the assets of the company, realizing those assets, and distributing the proceeds to creditors. They need to collect assets, manage their sale, and ensure that creditors are paid in the correct order. Examination powers allow them to gather information and assess potential recoveries from third parties or company insiders.
**Chris Patterson 52:43**
The examination powers of liquidators are far-reaching and allow them to collect essential information. It's crucial for liquidators to use these powers responsibly, ensuring fair and proper procedures while collecting valuable evidence to help in the insolvency process.
**Paul Heath QC 52:57**
Examination powers can be wide-ranging, and it's crucial to strike a balance between effective investigation and ensuring that the process is conducted fairly and responsibly. This requires experienced legal counsel to assist liquidators and maintain ethical standards throughout the process.
**Chris Patterson 54:34**
Undoubtedly, for a liquidator who takes over a company, it can be a complex task, especially if the company's affairs are intricate and records are lacking. There's also a significant number of small companies in New Zealand that may not have maintained proper records.
**Paul Heath QC 55:17**
You're right; many smaller companies face difficulties with record-keeping. This issue can lead to problems with tax payments and other obligations. The absence of records can make it challenging to prove responsibility for specific debts, necessitating the compensation of creditors who've suffered losses.
**Chris Patterson 56:39**
A key role of a liquidator is to identify the company's assets, realize them, and distribute the proceeds to creditors. Liquidators use examination powers to collect essential information, often with the assistance of experienced legal counsel. Proper execution of these powers ensures the insolvency process is conducted fairly and effectively.
**Paul Heath QC 57:15**
Absolutely. These powers, such as avoidance of transactions, are critical to addressing issues like preferential payments made prior to liquidation. However, there's a delicate balance between ensuring a fair distribution to creditors and not jeopardizing ongoing trading companies that might later be pursued to return funds they believed they were entitled to.
**Chris Patterson 59:48**
The avoidable preferences regime has posed challenges for insolvency practitioners and the legal system, with different iterations attempting to strike the right balance. This area has been a significant focus in insolvency matters in New Zealand, with the Supreme Court offering guidance to navigate these complexities.
**Paul Heath QC 1:02:04**
The construction industry has seen a unique payment regime through the Construction Contracts Act. It aims to maintain cash flow by providing a mechanism for payment claims and schedules. However, in larger projects, this process can sometimes stall when significant disputes arise, highlighting the need for further review in such cases.
Chris Patterson 1:03:48
Let's move into the last topic for the podcast. I know we've touched earlier on cross-border insolvency, but I want to dive a little deeper. One of the cases you adjudicated on in the High Court was Williams and Simpson, number five. You made the comment that there has to be compelling reasons why a Universalist approach should not be applied when you have cross-border insolvency. This is where there was an application for relief brought under Section 8 of our cross-border insolvency act. It's one of the two mechanisms, and I'll get you to talk about the UNCITRAL Model Law on cross-border insolvency as well. Can I go back to the point you were making that there have to be compelling reasons why a Universalist approach should not be applied?
Paul Heath QC 1:04:46
That comes back to the proposition I mentioned earlier about the need for entities in different countries to have a level playing field when they're dealing with each other. Creditors in both countries should have a clearer idea of how things might be resolved. Therefore, departing from that approach should have some compelling reason. If I can talk about the UNCITRAL Model Law, it fits nicely with making the UNCITRAL Model Law as plus first is access, which means that insolvency practitioners from overseas are entitled to come to New Zealand to seek relief. The second is recognition, involving the court in New Zealand recognizing a proceeding as either a foreign main or foreign non-main proceeding. Foreign main proceeding means the company's center of main interests is in the country from which the liquidation request has been made. Recognition of an enterprise as a non-transitory activity. In the Williams case, Dr. Simpson was a retired doctor from New Zealand living in London, who got into trouble with Boyd. He was domiciled in New Zealand, not carrying on business. So neither of the limbs that would apply worked. Section Eight was designed as a fallback to seek relief similar to what you'd get under the Model Law. It appears in the Insolvency Cross-Border Act. The aim was to get the money that was in New Zealand, gold and silver bars stored away. Using the example from Australia, the court there faced the same problem. The judge worked out what should happen assuming tax is payable and released a notional share to the tax department. The rest of the money went to the creditors. The compelling reason issue arose because the New Zealand Inland Revenue was a creditor. If English law didn't recognize the New Zealand living unit, it could have meant that the New Zealand revenue would miss out on the repatriated funds. In essence, New Zealand's commitment is not based on reciprocity but on providing a fair and balanced approach when dealing with cross-border insolvency cases.
Chris Patterson 1:10:14
So, New Zealand aims to provide a level playing field, helping overseas companies, and hoping that foreign jurisdictions will assist New Zealand companies in return. It's about promoting fairness in international trade and ensuring the interests of all creditors are protected.
Paul Heath QC 1:11:54
Exactly. Especially given New Zealand's role in exporting and providing credit to overseas companies, it's crucial to know the risk profile when dealing with foreign jurisdictions in insolvency cases.
Chris Patterson 1:13:07
I started this discussion with a quote from author Erica Hall, which I think is fitting to close with. "A large corporation is like Australia, it's impossible to see the whole landscape at once, and there are many things capable of maiming or killing you." I'd like to thank my guest, the Honourable Paul Heath QC, for joining me on the podcast today.
Paul Heath QC 1:13:11
My pleasure, thank you for the invitation.
Chris Patterson 1:13:11
Thank you for tuning in to this episode of the Law Down Under Podcast. You're welcome to join the discussion on my podcast page at patterson.co.nz. Thanks for supporting the podcast, and tune in again for more on the law, its application, and the future of the law here down under.