Debt Recovery in New Zealand  

• Late payments in New Zealand are not regulated, meaning that interest and collection costs would essentially depend on the court.

• Courts are fairly efficient in delivering timely decisions, however favoring amicable and pre-legal methods are always advisable.

• In fact, this is advised as soon as possible, since the risk of the debtor becoming insolvent will impact the chances of recovering the debt over time.

1. Summary

1.1. General financial information

1.1.1. Financial information on domestic companies is usually difficult to obtain but it remains fairly reliable.

1.2. Key legal structures

1.2.1. Corporate debt liability is determined by legal structures, which can be described as follows:

• Sole proprietorship is available for individually managed small businesses for which no commercial structure is required. In this case, the owner shall be held liable for all commercial debts. One or more people may also decide to share ownership and responsibility by Partnerships, in which case the partners may collectively and separately be responsible. Alternatively, limited liability partnerships may offer the partners limited liability.

• Companies (as provided for in the 1993 Companies Act) may take two forms. Private Limited Companies(' Limited' or' Ltd') are the most favored legal entities because they do not require any minimum capital funds while the shareholders ' liability is limited to their contributions. Public corporations are used instead for larger structures that are willing to split their capital into tradable shares.

• The liability of the shareholders in those entities is naturally limited to the value of their shares. There is no minimum requirement of capital for New Zealand companies• Foreign companies may settle through branch offices that do not provide any limitation of liability. Regional branches most often take the form of private or public corporations. Joint ventures may be incorporated as companies, but they may also be established by contract (in which case there is no need for incorporation).

• Trusts are very popular New Zealand business entities insofar as they provide a way to control and protect assets while minimizing income. We are not used as such for running business operations.

1.3. Regulatory framework

1.3.1. As a Commonwealth Member State, New Zealand is a constitutional monarchy under the jurisdiction of Queen Elizabeth II. The legal system of the country is based on British law, and is built around the concepts of common law, justice and laws.

1.3.2. The judicial system is generally split into sixty-three District Courts (which in the first place have authority over all civil disputes up to NZD 200,000), specialist courts (dealing with housing, environmental conflicts, etc.) and a High Court (dealing with large business lawsuits in the first instance and as a Court of Appeal in certain non-business matters).

1.3.3. Then the Court of Appeal reviews the claims brought against decisions made by a District Court or the High Court in the first instance. Finally, the Supreme Court reviews decisions rendered in second instance, provided that this purpose has been granted a leave to appeal.

2. Receiving payments

2.1. DSO - Days Sales Outstanding

2.1.1 Transactions in New Zealand take place on average within 30 days (starting from the delivery month), although periods of up to 15 days may also be required if the deal is not properly negotiated. SMEs tend to pay more gradually than large companies.

2.2. Late interests

2.2.1. When payment was made early, interest would in principle be paid on the basis of current trial prices at the court's discretion, beginning from the date the loan was overdue. The parties' arrangement may also limit late payment interest, given that the negotiated amount is not as large as a fine (which is unlawful under common law). Nonetheless, this second option is not frequently invoked.

2.3. Costs of debt collection

2.3.1. The law provides no rule as to cost of collection.

2.4. Protecting ownership

2.4.1. Many countries authorize the use of Retention of Title (RoT), which helps to retain title to land over products before full payment of the relevant invoice. Property security in New Zealand is governed under the Personal Property Securities Act 1999 (PPSA), which states that RoT clauses, known as Security Interests, must be registered with the Registrar of Personal Property Securities. In practice, failure to register would have no impact on the validity of the right itself, however if insolvency proceedings are started, the lack of registration would not give the owner any priority. So it is important to seek legal advice.

2.5. Payments

2.5.1. The most common methods of payment are as follows: Electronic Funds Transfer (EFT) and Swift bank transfers are becoming increasingly popular because they are quick, safe and assisted by an increasingly integrated international and domestic banking network. Transfers for export transactions should be insured through an Export Credit Insurance, which helps to minimize the risk of sudden or unexpected insolvency of customers. Additionally, Standby Letters of Credit (a bank guarantees the credit worthiness of the applicant and the ability to repay) are valid assurances.

2.5.2. It may also be considered as irrevocable and confirmed Documentary Letters of Credit (a debtor guarantees that a certain amount of money is made available to a beneficiary through a bank once certain conditions specifically agreed upon by the parties have been met). Down payments may be discussed but might be interpreted as a lack of confidence.

3. Collecting payments

3.1. Amicable action

3.1.1. Although New Zealand's law is business-friendly and domestic tribunals are effective, friendly settlement opportunities should always be considered as an alternative to formal proceedings. Furthermore, before starting legal proceedings against a debtor, asset-significant as assessment allows to verify whether the company is issuing active and whether the chances of recovery are best. Therefore, it is important to be mindful of the debtor's solvency status: once insolvency proceedings have been started, debt management will indeed become difficult (see below).

3.2. Legal proceedings

3.2.1. Ordinary proceedings. The parties may use a simpler process before the Disputes Tribunal before commencing the ordinary legal action, providing that the allegation is below NZD 20,000. Usually, these trials are more effective than regular prosecutions because they are casual, private, faster and cheaper than ordinary proceedings inasmuch as a tribunal mitigates the arguments of the parties and thus removes judges and lawyers.

3.2.2. If the amicable phase fails, or if the debtor questions the claim, there remains the option to initiate legal proceedings. A lawsuit must be lodged with the District Court (or the High Court, depending on the amounts involved), and must be served on the debtor if allowed. The latter is given a month to file a response (when the argument is placed before the High Court for 25 days).

3.2.3. The court then considers the claims of the parties and often encourages them to come to a compromise before the proceedings are continued. When the conflict can not be resolved by the parties themselves, the judges are gradually trying to mitigate conflicts in litigation (Judicial Settlement Conference), but the courts can continue through substantive proceedings if no settlement can be found.

3.2.4. Usually, courts award relief in the form of fair compensation, penalties, actual outcomes, connection orders (i.e. freezing and seizure), claims (of a privilege, statute, etc.), as well as compulsory and prohibitive injunctions. While they are uncommon in law, punitive damages can be paid.

3.2.5. Required documents. Copies of unpaid invoices, last payment record, copy supplier contract, credit order form, production evidence if necessary (AWB BOL for export).

3.2.6. Time limitations. Claims in New Zealand must be brought before the court within six years, beginning with the discovery of the loss or damage caused by the wrongful act (or omission). Following recent amendments, the 1950 Limitation Act applies to focuses on incidents that occurred until December 31, 2010, while since then the 2010 Limitation Act applies to insists on activities. A late knowledge period has been included under the new Act, thus offering the parties greater flexibility. Having said that, time limits would not preclude cases from being taken before the court unless a claimant makes a counterclaim case.

3.2.7. Precautionary measures. Pending a final decision, precautionary measures can help to protect the interests of the debtor. The courts can, in fact, order interim measures aimed at protecting assets (attachment orders, order restrictions). Nonetheless, the complainant will prove that they have a strong case and that imposing such steps will deter irreparable harm. In practice such measures are seldom awarded.

3.2.8. Appeal lodging. The losing party is allowed to lodge an appeal leave before the High Court or before the Court of Appeal (depending on which court made a first instance decision), within 28 days of execution. In other cases, appellate hearings are not available directly but must be issued by the qualified judiciary, which would usually focus solely on legal issues. If a request for judicial review was filed, both questions of law and fact would be considered by the courts.

3.2.9. Enforcing court decisions. A verdict shall be enforceable as long as it becomes official (i.e. when all the areas of appeal are exhausted). If the debtor fails to satisfy the judgment, a petition for liquidation may be filed before the High Court against the debtor, but the court would normally request that the financial situation of the debtor be examined (Order for Examination) or that its assets be seized and sold (Distress Warrant).

3.2.10. Duration of a legal action.  It could take from 28 days (default verdict) to a year to reach a final decision. Sheriff compliance or review could be done within two months, although unquestioned winding-up litigation could require three months. Global litigation would always take longer and cost more than domestic litigation–the disparity may rely on numerous factors that could be quantified on a case-by-case basis and meaningfully.

3.2.11. Costs of a legal action.  In general, the defeated party may have to pay court fees and annex costs but the legal costs of the successful party would often be partially compensated

3.3. Alternatives to legal action

3.3.1. Alternative Dispute Resolution Methods (ADR). Alternative Dispute Resolution Methods are not needed insofar as domestic courts have prompt decisions; however, the use of ADR is growing in New Zealand, where mediation and arbitration are gradually being used as a means of avoiding ordinary legal proceedings within the business community.

3.3.2. Mediation requires the appointment of a mediator who is in control of having the sides reach a compromise. The mediator, in other words, has no authority to decide on behalf of the parties and can not bind the parties to a decision. The arbitration is only final where a settlement agreement is reached at the conclusion of the negotiations between the parties. The Mediator serves as mediation facilitator.

3.3.3. Arbitration involves the parties agreeing to rely on an independent and impartial third party arbitrator who is authorized on their behalf to settle the dispute. The decision of the arbitrator shall be binding upon the parties.

3.3.4. ADR can be cost-effective as an out-of-court mediation process, usually eliminating appeals, enabling secrecy to be maintained and delivering a legal judgment that can then be implemented before the courts, if necessary. The legal tribunal may also be regarded when including international transactions.

3.3.5. Foreign forums. For the same reason, it is not necessary to use a foreign forum to obtain an enforceable decision, but domestic courts would nevertheless allow the parties to a contract to choose, by mutual agreement, the law applicable to that contract, and to select the court which will have jurisdiction over disputes. As a rule, the written agreement of the parties to settle their commercial conflicts in an international court (i.e. under foreign law or before a global tribunal) would be valid if it does not violate public policy.

3.3.6. Enforcement of foreign awards. It is rather unusual to use foreign forums to obtain enforceable decisions against domestic debtors, though foreign decisions issued against foreign debtors may be enforced in New Zealand if the debtor has assets therein. As in most countries, in order to become enforceable the foreign decision must first be recognized through an exequatur procedure (under Part 23 of the Rules of the High Court).

3.3.7. For example, the court would verify whether the foreign court has jurisdiction to decide on the case, whether its decision in the issuing jurisdiction is final and enforceable and whether enforcement would be incompatible with public policy.

3.3.8. Furthermore, the reciprocity factor implies that, unless the issuing country has a reciprocal recognition and enforcement treaty with New Zealand (as provided for under the 1934 amended Reciprocal Enforcement of Judgments Act), domestic courts would not automatically enforce the foreign decision.

3.3.9. In this case it would indeed be appropriate for the complaining party to bring legal action before the trial, demanding that compliance be issued. New Zealand is a signatory of the 1958 New York Convention on the Recognition and Conduct of International Arbitral Awards. Domestic courts should therefore therefore accept and execute rulings made in international arbitration proceedings.

4. Managing insolvent debtors

4.1. Insolvency in New Zealand

4.1.1. Insolvency is regulated under the 2006 Insolvency Act and is defined as being unable to pay one's debts as they fall due. Bankruptcy extends only to natural persons while liquidation relates to the insolvency of corporations. Several mechanisms aim at supporting financially challenged companies through rehabilitation plans.

4.2. Insolvency proceedings

4.2.1. Out-of-Court proceedings. Informal out-of-court proceedings may be held to achieve a Statutory Compromise (under the Companies Act 1993), but all shareholders would have to consent and enforce a Deed so that only one borrower could well override such an agreement. Unlike a Deed of Company Agreement (DOCA), any later liquidator would not provide the creditors with protection from unfair preference claims.

4.2.2. Voluntary debt restructuring is a modern recovery program in New Zealand, influenced by American insolvency laws. It is governed under the 2007 Company Law and involves arranging a debt relocation (or write-off) with order creditors to enable continuity where the core business is still viable. The corporation is operated indefinitely by an agent (often chartered accountant) and a suspension is imposed on the debt repayment commitments of the business while an agreement is reached at the meeting of creditors. The administrator must submit a proposal for restructuring which, if approved, will become the company's new Deed of Company Accord (DOCA). Nevertheless, the statute does not provide any restrictions on how much of the debt can be paid off. Strict time limits apply to the moratorium protection and the company goes into liquidation if agreement can not be reached.

4.2.3. Winding up proceedings. Liquidation may be launched upon request by both the claimant (voluntary liquidation) and creditors (compulsory liquidation). The prosecutions are usually carried out by a government assignor or by a liquidator from the private sector (often a chartered accountant). The company is sold and the selling profits are allocated to the shareholders according to their respective pre-insolvency entitlements.

4.2.4. Alternatively, receivership proceedings (as laid down in the Receiverships Act of 1993) may be instituted with a view to realizing the rights of certain secured creditors (with a debenture containing the terms of a loan to the company and defining the assets that secure the loan) over specific assets of the debtor.

4.2.5. Priority rules. The priority principles usually apply when transferring the profits to the shareholders (under the 1993 Companies Act), but the proceeds of the liquidation would be allocated as follows in reality. First, they will pay for secured creditors (such as licensed Retention of Title Rights owners, fresh money suppliers during bankruptcy proceedings, etc.), for the various fees arising from the insolvency proceedings, and for the different costs granted to creditors by the judge. The claims of employees would also be paid out (up to a certain point). The proceeds would finally compensate preferential tax creditors, leaving the remaining proceeds (5 per cent to 10 per cent on average) to unsecured creditors.

‍

4.2.6. Cancelation of suspect transactions. Liquidators usually have the right to ask the court to cancel certain transactions concluded prior to the insolvency proceedings. Every action taken by the debtor found to be adverse to the creditors will normally be invalid. It may be called a span of between six months to two years.

4.2.7. Duration of insolvency process. In New Zealand, insolvency cases last on average a year and a half.

4.2.8. Required documents.  Copies of unpaid invoices, last payment record, supply contract for copies, credit demand for copies, evidence of production if necessary (export AWB BOL).