A Q&A guide to Finance in New Zealand. The Q&A gives a high level overview of the lending market, taking security over assets, special purpose vehicles in secured lending, quasi-security, guarantees, and loan agreements. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring of debt agreements; enforcement of security interests and borrower insolvency; cross-border issues on loans; taxes; and proposals for reform.
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The lending market in New Zealand has experienced a significant slowdown over the past two years. A large number of finance companies, whose main area of business was funding property developments or second mortgage loans, have faced significant financial problems and, in many cases, have gone into receivership or entered into moratorium arrangements with their creditors. This resulted in the establishment by the New Zealand government of a Crown Retail Deposit Guarantee Scheme in October 2008. The scheme was initially for a period of two years but it was recently extended until 31 December 2011. Further, the tightened availability of funding over the last 18 months has resulted in a significant focus on lenders' market disruption clauses. Lenders took the opportunity to refine these clauses to cover circumstances where the benchmark rates no longer truly reflect the cost of funding the loan and where funding becomes impossible.
The Anti-Money Laundering and Counter-Financing of Terrorism Act 2009 aims to enhance New Zealand's anti-money laundering and countering the financing of terrorism framework and ensure the continuing strength of New Zealand's financial system. The Act applies to financial institutions and requires thorough customer due diligence, reporting of suspicious transactions, keeping records and the adoption of internal compliance programmes. The Act is expected to result in more thorough "know your customer" (KYC) and reporting requirements for secured lenders. However, the majority of its provisions are not yet in force. They will become effective after the Ministry of Justice has completed a consultation process with affected industries and the public.
Real estate in New Zealand is land, commonly referred to as real property, and includes any interest in land, such as a lease. Almost all land is registered under the Land Transfer Act 1952, which regulates interests in land. The term property includes everything that is capable of being owned, whether it is real or personal property, or whether it is tangible or intangible (Property Law Act 2007 (PLA)). The PLA covers both personal and real property.
A mortgage is the most common form of security granted over real estate. A mortgage operates as security and not as a transfer of interest in the land. A mortgage can (but is not required to) be registered on a central register, operated by Land Information New Zealand (LINZ). Registration of interests in land is almost entirely by way of e-dealing. The mortgagor signs an Authority and Instruction form in favour of a solicitor and provides the solicitor with evidence of identification. The solicitor then registers that mortgage on the central register. Once registered, a mortgage is indefeasible (that is, a mortgagee's interest is absolute against third parties, in the absence of fraud).
It is also possible to grant an unregistered mortgage over land or a general security agreement (GSA) (that is, an instrument which creates a security interest over all assets of the person granting it, including land). These unregistered security interests can be further protected by lodging with LINZ a caveat against the title to the land, which has the effect of preventing further dealings with the land without the secured party's consent. However, to obtain maximum protection a lender will normally want to obtain a registered mortgage as security.
Personal property is covered by the Personal Property Securities Act 1999 (PPSA). There is no specific definition of tangible property (although intangible property is defined (see Question 6)).
Tangible movable property is effectively goods as defined in the PPSA. Goods comprise:
Consumer goods, which are goods used or acquired for use primarily for personal, domestic or household purposes.
Inventory, that is, goods held for sale or lease.
Equipment, that is goods that are held other than as inventory or consumer goods.
Aircraft and ships.
Security over tangible movable property is typically in the form of a security interest created under the PPSA. The most common form of security interest is a GSA (see Question 2, Common forms of security). However, it is also possible to grant security over specified property in the form of an instrument, signed by the debtor, called a Specific Security Agreement (SSA). A lender will often take an SSA over the borrower's strategic or important assets, for example shares, contractual rights, radio spectrum licences, casino licences, fishing quota and ships over 24 metres in length.
A lender taking security over serial-numbered goods (such as motor vehicles and aircraft) should be careful when describing those goods in the security agreement and financing statement. It is possible to search the central register by reference to the serial number of the goods as well as the debtor's name.
Granting security over ships is subject to special rules. Subject to limited exceptions, security over ships longer than 24m must be registered on the Register of Ships (Ship Registration Act 1992). Security over ships under that length (or exempt ships) is not required to be registered. However, this is something of a grey area and registration of a financing statement on the Personal Property Securities Register (PPSR) is recommended.
The most common form of security over financial instruments such as shares and other securities is an SSA. It is common practice to specifically describe the relevant shares or other securities. Perfection normally requires registration of a financing statement on the PPSR. However, perfection can also be achieved by securing possession of the security (for example, by notation on the relevant register of securities).
The most common form of security over claims and receivables is an assignment by way of security. This is essentially the same as an SSA and is created in the same way. An SSA is sometimes granted over a significant contractual arrangement between the borrower and a third party.
Notice of an assignment is normally given to the third party, who must acknowledge the receipt. Following the acknowledgement, a financing statement in relation to the security interest will be registered on the PPSR.
Where a credit balance is held at a bank, and the bank intends to take security over the balance, it is common to use a "triple cocktail", which involves the:
Taking of security.
Creation of a flawed asset (that is, the deposit is not repayable until the loan has been repaid).
Contractual right of set-off.
The PPSA specifically provides that a lender may take security over a deposit held with it.
Intellectual property rights fall within the definition of intangible property under the PPSA.
The most common forms of security over intellectual property are a GSA and SSA, regulated by the PPSA (with the possible exception of patents). While the Patents Act 1953 might be considered to establish its own registration and priority rules relating to granting security over patents, the general view is that security interests in patents are covered by the PPSA.
Fungible assets (a pool of assets indistinguishable from each other that may change over time).
It is possible to grant security over future assets (after-acquired property). After-acquired property is defined in the PPSA, which specifically provides that a security agreement can cover after-acquired property. The financing statement in relation to a GSA will normally describe the collateral as "all present and after-acquired property”.
Although there is reference to fungible goods and securities in the PPSA, there is no separate regime affecting them. In practice, granting separate security over fungible assets is not common and they are most likely to be covered by a GSA.
There are specific rules under the PPSA in relation to:
Accessions (that is, goods that are installed or affixed to other goods).
Proceeds (that is, identifiable or traceable personal property derived from dealing with the collateral, such as cash or a right to insurance proceeds).
There are also separate registration regimes for licences granted under the Radio Communications Act 1989 and quota under the Fisheries Act 1996.
Sale and leaseback.
Retention of title.
Hire purchase and leasing transactions, including sale and leaseback, are common in New Zealand. However, leases for more than one year are considered security interests under the PPSA and recharacterised as securities. Therefore, the owner or lessor of the relevant asset is recommended to protect its position by registering a financing statement in respect of the transaction on the PPSR.
Factoring is considered a niche market, possibly reflecting the relatively small size of the New Zealand economy. In a factoring transaction, the purchaser of an account receivable is not given any particular priority under the PPSA and is treated as an unsecured creditor on the seller's insolvency. Those providing factoring facilities tend to take a GSA and, if necessary, enter into priority arrangements with holders of any existing GSAs (for example, a bank).
The position in relation to retention of title changed dramatically on the passing of the PPSA. Lenders or suppliers, funding the acquisition of goods, are now entitled to a purchase money security interest (PMSI) in the goods and can register a financing statement which gives them a special priority over other holders of security interests in the assets that are being acquired. In essence, if the PMSI holder registers a financing statement within ten days of the debtor taking possession of the goods, he obtains priority over the holder of a GSA. Otherwise, the GSA holder will have priority. Many suppliers of goods on a retention of title basis have lost priority by simply not registering on time or at all.
The PMSI provisions of the PPSA have been surprisingly underused and misunderstood by the suppliers of goods on a retention of title basis. This may be a reflection of a continuing ignorance in the commercial community of the change in the law.
Financial assistance rules. For example, if a company grants security to secure debt used to purchase its own shares (or the shares of its holding company), does this breach such rules?
Corporate benefit rules. For example, if a subsidiary grants security relating to a loan to its parent, does this breach such rules?
The law relating to financial assistance in New Zealand is contained in the Companies Act 1993 (Companies Act), which abolished the previous prohibition on financial assistance without court approval. Financial assistance can be granted in a number of ways, the most common of which is by securing the consent of all entitled persons (that is, shareholders and anyone else named as an entitled person in the company's constitution). The directors who pass a resolution authorising a company to provide financial assistance must also certify in writing that the company is, and after the giving of financial assistance remains, solvent.
The fact that an act is not in the company's best interests does not affect the company's capacity to execute the act (section 17(3), Companies Act). However, directors must act in the company's best interests (section 131, Companies Act). Directors can act in the best interests of the company's holding company if authorised to do so by the company's constitution.
A lender normally obtains a certificate from the borrower's director(s) stating, among other things, that the board has resolved that the company's entry into, and performance of, the relevant transaction is in the company's (or, as the case may be, its holding company's) best interests.
Where a lender obtains a legal opinion in respect of the proposed transaction, the opinion typically assumes that the transaction is in the company's best interests. Generally, the giving of a guarantee by a subsidiary for another company in the group is considered to benefit that subsidiary as the funding is obtained for the benefit of the corporate group as a whole. The only exception is where a subsidiary is insolvent or at the risk of imminent insolvency.
A company cannot enter into a "major transaction", unless it is either (section 129, Companies Act):
Approved by a special resolution.
Contingent on approval by a special resolution.
A major transaction is one involving the acquisition, disposition, or incurring of obligations the value of which is more than half of the value of the company's assets immediately before the relevant transaction. The giving of security over all of a company's assets does not constitute a major transaction.
Where a loan constitutes a major transaction, it is common practice for the lender to obtain confirmation from the borrower's director(s), normally contained in the relevant director's certificate, that either:
A special resolution has been passed.
All entitled persons have agreed in writing to the transaction.
A loan may be void if the company's directors have an interest in the transaction. The term "interest" is defined in the Companies Act but generally does not include being a director of more than one company in a group of companies. It is common practice for the lender to obtain confirmation in the relevant director's certificate either that:
There is no interest.
Where there is or may be an interest, all of the company's entitled persons have agreed in writing to the transaction.
A person that is effectively responsible for land can be held liable for breaches of the environmental legislation (Resource Management Act 1991). This generally excludes a lender who merely holds security over the land. However, once the lender acquires possession, it can become liable under environmental laws where it has the power to avoid environmental damage but fails to do so (for example, by failing to contain contamination). In practice, the regional authorities administering environmental laws are sympathetic to secured lenders in these circumstances, unless there has been an actual failure to address a known environmental problem.
Subordination, both contractual and structural, is common in New Zealand in all types of lending. Section 313(3) of the Companies Act specifically allows a creditor to accept a lower priority in respect of a debt than it would otherwise have had.
Subordination is common when secured lenders are dealing with mezzanine debt or shareholder loans. A subordination agreement normally achieves the following:
The junior creditor agrees to subordinate its rights in relation to the debt to those of the senior lender.
The junior creditor and the borrower agree that the junior debt will not be paid until all of the senior debt is repaid.
Certain payments can usually be made to the junior creditor (for example, interest). Normally, a subordination trust will be created for any payment by the debtor to the junior creditor in breach of subordination. These subordination arrangements are recognised by the courts.
Secured debt is not commonly traded in New Zealand. The debt markets in New Zealand are relatively small, and syndicated and bilateral lenders seldom sell their secured debt. Accordingly, there is no established secondary debt market. However, the sale of secured debt is possible and syndicated agreements in particular allow lenders to transfer their participation. Recently, most trading in secured debt has resulted from lenders seeking cashflow in times of reduced liquidity.
Is a trust created under the law of another country recognised in your jurisdiction?
Can a security trustee enforce its rights in the courts in your jurisdiction?
Trusts are recognised in New Zealand. Foreign trusts are also recognised, provided the normal requirements are satisfied (this generally involves certainty of intention, subject matter and object(s)).
Lending to a trust may be risky and it is necessary to ensure that:
The trustees are duly authorised to borrow and give security.
The trustees' indemnity from the trust property is effective and will not be prejudiced.
The question whether a trust constitutes a security interest under the PPSA raises difficult issues. The courts have generally held that a trust can be a security interest where it was specifically designed to have the effect of a security interest, but not otherwise.
The concept of a security trustee is well known and commonly used, and the PPSA specifically provides for the registration of a financing statement where a security trustee holds a security interest on the lenders' behalf. While it is impermissible to note that a registered proprietor holds his interest as a trustee in the LINZ land register, a security trustee can exercise standard enforcement rights in the courts of New Zealand.
There is no requirement for different types of security to be documented separately. A GSA is the most common form of security taken from a company borrower. This creates a security over all of the borrower's assets.
A secured creditor's ability to enforce its security is normally regulated by the terms of the security agreement and the relevant loan contract. There is usually a list of events of default, the occurrence of which enables the lender to accelerate the outstanding payment, cancel the underlying facility and exercise its enforcement rights, including the appointment of a receiver (under a GSA).
In addition, the PPSA:
Allows a secured party to apply collateral in satisfaction of the secured obligations by taking possession of and selling it.
Imposes a duty on a security holder selling collateral to obtain the best price reasonably obtainable for that collateral.
The loan and security documents constitute credit contracts within the meaning of the Credit Contracts and Consumer Finance Act 2003. Therefore, they may not be enforceable in accordance with their terms if either:
A court holds those terms (or the exercise of the creditor's rights and powers under them) to be oppressive.
The borrower has been induced to agree to them by oppressive means.
The term oppressive means "oppressive, harsh, unjustly burdensome, unconscionable, or in contravention of reasonable standards of commercial practice" (Credit Contracts and Consumer Finance Act 2003).
A GSA is typically enforced by the appointment of a receiver over the entity that granted the GSA (entity). Receivers are regulated by the Receiverships Act 1993. A receiver:
Is generally the entity's agent and can sell the assets covered by the GSA.
Must act in the interests of the person who appointed him but also with reasonable regard for the interests of the entity, its creditors and any guarantors.
Must secure the best reasonably obtainable price for the property at the time of the sale (section 19, Receiverships Act).
All security agreements normally allow the secured lender to sell the property directly, without the need to appoint a receiver. In exercising this power, the secured lender is generally under an obligation to obtain the best price reasonably obtainable for the collateral at the time of the sale.
Enforcement of a mortgage over land, including selling the property, is subject to one month's notice of the default being given by the mortgagee to the mortgagor and all guarantors (section 119, PLA). This requirement applies to receivers as well. The notice is not required before accelerating a loan where the lender has a GSA as well as a mortgage.
When land is sold by the Registrar of the High Court, the mortgagee cannot be blamed for failing to obtain the best price. Therefore, this method is helpful if the mortgagee wants to buy the property. Where the mortgagee conducts the sale, the mortgagee normally fulfils its duty to obtain the best price by either:
Organising an auction sale.
Obtaining independent valuations of the property prior to the sale.
New Zealand's insolvency laws are relatively creditor-friendly (that is, they favour the creditor rather than the debtor). New Zealand has no law similar to the Chapter 11 procedure in the USA. However, the following rescue procedures are available:
Voluntary administration. A new voluntary administration regime was introduced in 2007. It is intended to be a rescue procedure, as opposed to receivership and liquidation. Voluntary administration aims to allow a company, which is or may become insolvent, to administer its assets in a way that:
maximises the chances of some or all of the company's business continuing;
if continuation of business is impossible, results in a better return for the company's creditors and shareholders than liquidation would.
The appointment of an administrator (by the company, its liquidator, a secured creditor or the High Court) has the following consequences:
the imposition of a moratorium, during which creditors cannot start or continue formal liquidation proceedings;
the administrator can investigate the company's financial and business condition;
the administrator prepares and submits a Deed of Company Arrangement (DOCA) to the company's creditors, setting out how the company intends to operate in the future. A DOCA must be approved by a majority in number, representing 75% in value of the creditors or class of creditors voting. If the DOCA is approved, the company continues to operate on the terms set out in the DOCA.
Once an administrator is appointed, creditors are generally prevented from taking enforcement action. However, a creditor holding security over all or substantially all of the company's assets may enforce its security within ten working days of receiving notice of the appointment of an administrator.
The New Zealand experience of voluntary administration has been mixed. The regime differs significantly from the Australian regime. In particular, there are certain tax laws in Australia that trigger directors' personal liability, which do not exist in New Zealand. This represents an incentive for an Australian board to appoint an administrator. There are also certain tax implications that make voluntary administration less viable in New Zealand.
Compromise or arrangement. A company in financial difficulty can also enter into a compromise or arrangement with its creditors. These are regulated by the Companies Act. The company can propose to its creditors a compromise whereby the company's assets are realised for the creditors' benefit in accordance with the terms of the compromise. A compromise:
can have specific provisions regarding different classes of creditors;
must be approved by a majority in number, representing 75% in value of each class of creditors.
A company can also enter into an arrangement involving a wide-ranging reorganisation of the company's relationship with its shareholders and creditors. Such an arrangement requires court approval.
Statutory management. A company or group of companies can be placed under statutory management under the Corporations (Investigation and Management) Act 1989. This effectively enables the government to intervene in the activities of the company (or a group of companies) activities to prevent fraudulent or reckless trading.
Statutory management imposes a moratorium on enforcement action and certain set-off rights. It is rarely used and its application has been controversial in the past.
On the commencement of liquidation, the liquidator takes control of the company's assets. The company's directors remain in office but no longer have the power to run the company. Unless the liquidator agrees or the court orders otherwise, legal proceedings or other enforcement measures against the company or its assets cannot be commenced or continued. However, a secured creditor can generally enforce its security over the company's assets, including taking possession of the property or otherwise dealing with it.
The following transactions granting security by a company that later becomes insolvent can be invalidated:
Voidable transactions. A transaction is voidable by a liquidator if it (section 292, Companies Act):
is entered into at a time when the company is unable to pay its due debts;
enables a person to receive more towards satisfaction of a debt than the person would have received on the company's liquidation in the absence of the transaction; and
is entered into within a certain period, generally two years, before the date of commencement of the company's liquidation.
Voidable security. A security over a company's property is voidable by the liquidator if (section 293, Companies Act):
it was granted within a certain period, generally two years before the date of commencement of the company's liquidation; and
immediately after the granting of security, the company was unable to pay its due debts.
There are certain concessions in respect of payments made at the time of, or after, the granting of security, or where security replaces security granted before the specified period.
Transactions at an undervalue. A liquidator can recover from a person dealing with the company at an undervalue any difference in value, provided that (section 297, Companies Act):
the transaction was entered into within a certain period, generally two years before the date of commencement of the company's liquidation; and
the company was either unable to pay its due debts when it entered into the transaction or became unable as a result of entering into the transaction.
Dispositions prejudicing creditors. A court can order to set aside certain dispositions of property by a debtor which were made with the intent to prejudice a creditor, or without receiving reasonably equivalent value in exchange (Part 6, PLA). This applies to a debtor which (section 346, PLA):
was either unable to pay its due debts at the time of the disposition or became unable as a result of the disposition;
was engaged, or was about to engage, in a business or transaction for which the remaining assets of the debtor were, given the nature of the business or transaction, unreasonably small; or
intended to incur, or believed, or reasonably should have believed, that the debtor would incur, debts beyond the debtor's ability to pay.
Considering the potential problems with the validity and, therefore, enforcement of security, it is common in domestic transactions for the borrowing company's director(s) to certify that after making due enquiry and taking into account all relevant factors, the board is of the view that the company:
Is able to pay its due debts and is not insolvent.
Is not involved, or about to get involved, in a business or transaction for which its assets are, considering the nature of the business or transaction, unreasonably small.
Will be able to meet its due obligations under the proposed transaction.
Will not become unable to pay its due debts or become insolvent as a result of the transaction.
Does not intend to incur, nor reasonably believes that it is incurring, debts beyond its ability to pay them.
Has no intention of prejudicing any of its creditors by entering into the transaction.
The secured creditors considered in Questions 2 to 6 (please set out any order of priority applying between the security interests).
Statutory claims (such as tax or other government claims, expenses of the insolvency proceedings and employee claims).
On a company's insolvency, the general priority of creditors is as follows:
Costs of a receiver, administrator or liquidator.
Secured creditors. The priority of secured creditors can depend on a number of things:
any existing priority arrangements between them;
the nature of the collateral. Certain types of collateral are given preferred status under the PPSA. In particular, PMSIs have a super priority over other security interests (see Question 8, Retention of title);
the doctrine of marshalling, which still applies in New Zealand and can affect a first-ranking secured creditor's ability to enforce his security.
Preferential creditors. The classes of preferential creditors are listed in the Seventh Schedule to the Companies Act and principally include employee claims and claims by the Inland Revenue and Customs Departments. Preferential creditors rank above secured creditors whose security is over accounts receivable and inventory.
Shareholders of an insolvent company.
However, this order of priority can be affected by:
The rights of lien holders over certain goods.
Statutory claims, for example for rates and charges on certain insurance proceeds.
The priority order of these categories of claims is a complex issue and depends on the type of insolvency.
The Insolvency (Cross-border) Act 2006, which is designed to promote international co-operation where a debtor has assets in more than one jurisdiction, came into force in 2008. It follows the UNCITRAL Model Law on cross-border insolvency.
Subject to any contrary agreement between the holders of security over the same asset, the general priority rules are as follows (section 66, PPSA):
A perfected security interest ranks above an unperfected security interest in the same collateral.
Priority between perfected security interests in the same collateral is determined by the order of perfection (this is normally by the registration of a financing statement). The first in time prevails.
Priority between unperfected security interests in the same collateral is determined by the order of attachment of those security interests.
In relation to mortgages that secure further, or continuing or fluctuating advances, it is possible to specify an amount up to which the mortgage will rank above any subsequent mortgage over the same property (section 92, PLA).
A perfected security interest will have priority over an unperfected security interest in the same collateral (see Question 21). An unperfected interest ranks higher than an unsecured creditor on insolvency.
At present, there are no restrictions on granting security to foreign lenders. However, the Financial Service Providers (Registration and Dispute Resolution) Act 2008 may require offshore-based lenders to be registered when it comes into force (see Question 28).
There are no exchange controls that restrict payments to a foreign lender under a loan or security documents.
A foreign choice of law in a security document should be recognised and applied by the courts of New Zealand, subject to the following:
A New Zealand court will not enforce a provision in the security document, which is or may become illegal under the laws of the jurisdiction in which it is to be performed.
A New Zealand court may not award a judgment in a foreign currency (although it may do so if under the relevant contract that currency most properly expresses the claimant's loss).
A New Zealand court cannot enforce a document if this would contradict New Zealand public policy.
The parties cannot contract out of the operation of New Zealand statute law.
Documentary taxes (for example, stamp duty).
There are no taxes or fees payable on the granting or enforcement of security in New Zealand. In particular, there is no stamp duty payable. However, non-resident withholding tax is imposed on payments of interest to non-residents.
Nominal fees are payable to register instruments at LINZ. Search and registration fees under the PPSR are also payable but they are also nominal.
There are no notaries' fees in relation to secured lending transaction.
Cost-minimising strategies are not required (see Question 26).
The following two Acts, passed in response to the problems experienced by lenders as a result of the financial crisis of September 2008, are likely to come into force during 2010:
The Financial Advisers Act 2008. This aims to restore public confidence in the financial advice industry and to facilitate investment growth by subjecting financial advisers to higher standards of competency, accountability, and supervision by the Securities Commission.
The Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSP Act). The FSP Act requires all financial service providers to be registered on a public register and to be members of a dispute resolution scheme.
The Minister of Commerce addressed the issue of regulation of insolvency practitioners during his recent speech on legislative developments in corporate insolvency. He specifically referred to the Insolvency Practitioners Amendment Bill that will hopefully be introduced to the New Zealand Parliament in early 2010.
The Bill is designed to establish new requirements for any person who wants to act under an insolvency appointment (such as a receiver). The Bill, if enacted, will:
Enable the courts (or the Registrar of Companies in some cases) to ban incompetent or delinquent practitioners from acting as a liquidator, receiver or voluntary administrator.
Enable the courts to replace practitioners where there may be a conflict of interest in relation to an appointment.
Finally, the efforts to harmonise New Zealand's and Australia's banking and insolvency laws are generally expected to continue.