This book is only available in PDF format

Published: 13 June, 2013
Pages: 158

Introduction

At their most basic, creditors’ remedies are all about getting paid. If a company, other entity or person owes you money, you are a creditor. And as a creditor, you want to make sure that you get paid.

The company, other entity or person owing you money (the debtor) often has other ideas. They may not have any money to pay you. Or they may have the money, but not the willingness to pay.

Over the past few years, we have seen an increase in the number of companies and individuals failing to pay their debts. At least in part, this reflects the difficult economic climate following the Global Financial Crisis, as well as the high-profile failure of finance, construction and other companies.

This booklet gives an overview of the various legal remedies available to a creditor if a debtor cannot or will not pay a debt. It also discusses some of the practical considerations that a creditor should take into account before deciding which remedy or remedies to pursue.

The booklet is divided into two parts.

1.1 Remedies available to all creditors

In the first part of the booklet (chapters 2-9), we discuss the remedies that are available to all creditors.

In considering these remedies, the starting point is always the nature of the debt. Is the amount owing liquidated or unliquidated? Is it currently due? Is it disputed? And what is the current position of the debtor? We discuss these issues in chapter 2.

One remedy if the debt remains unpaid is to seek judgment against the debtor. We explain the different ways to obtain judgment in chapter 5. Before obtaining judgment, however, there are a limited number of remedies that a creditor can exercise. Some of these can be exercised without the assistance of the Court – these are the “self-help” remedies, such as statutory demands, discussed in chapter 3. Other remedies can only be exercised by Court order or legal process – pre-judgment remedies, set out in chapter 4.

Once judgment has been obtained, any distinction between a liquidated or unliquidated amount owing falls away. A creditor now has a judgment debt. One option is for the creditor to enforce the judgment by enforcement process (formerly known as levying execution) – that is, to exercise specific remedies that are only available in relation to a judgment debt. We discuss these remedies in chapter 6.

When it comes to enforcement, priority goes to the first in time. The first creditor to enforce a judgment over a debtor’s asset gets the benefit of that asset in priority to remaining creditors (although subject to some security interests). If there are no assets left for a subsequent creditor to enforce over, that’s just tough luck.

This all changes once a receiver, liquidator or administrator is appointed to a debtor company or an individual becomes bankrupt. If a creditor has a security interest in the debtor’s property, or is one of the limited number of preferred creditors, the creditor may have a priority over other creditors. But for general unsecured creditors, the pari passu principle means that in a liquidation or bankruptcy, the creditors each share in the assets of the debtor in proportion to the amounts owed by the debtor to each creditor.

Sometimes an application to liquidate a company or bankrupt a person may be the only option left for a creditor. But given the priority of secured and preferred creditors, and the principle of pari passu, this is typically the option of last resort for unsecured creditors.

One consequence of a liquidation or bankruptcy is that the liquidator or Official Assignee has powers to recover assets that individual creditors do not have. These powers cut both ways, of course. If the assets are coming from another creditor or third party, that will be to the benefit of the creditor. But there may be a risk that the liquidator or Official Assignee may seek to reclaim assets from the creditor itself, leaving it in a worse position. We discuss liquidations in chapter 7, and bankruptcies in chapter 8.

There may be other options short of liquidation or bankruptcy. For companies, these include creditors’ compromises, voluntary administration, and statutory management. For individuals, these include debtors’ proposals, the no asset procedure and summary installment orders. We discuss these in chapter 9.

1.2 Remedies available to secured creditors

The second part of the booklet (chapters 10-13) deals with the remedies that are only available to secured creditors. There are a number of potential issues to consider, including whether a creditor has a security interest, what the trigger is for taking enforcement action, the notice requirements before action can be taken, and the extent to which a debtor has any defences.

If a creditor has a mortgage or other security interest in the debtor’s land, the Land Transfer Act 1952 (LTA) and Property Law Act 2007 (PLA) apply. If a creditor has a security interest in the debtor’s personal property, the Personal Property Securities Act 1999 (PPSA) and PLA apply. However, there may be cases where the old common law and equitable rules concerning proprietary interests also apply. The first question for a secured creditor is whether it has a security interest in the debtor’s property, and if so, whether it has priority over other secured creditors and other parties. We discuss this in chapter 10.

The remedies and rules differ depending on whether the property is land or personal property. If a creditor has a mortgage over the debtor’s land, the creditor is a mortgagee. A mortgagee in relation to land generally has a number of remedies, including accelerating payment of the entire debt due, entering into possession of the land, selling the land, and appointing a receiver to manage and recover income from the land. We address these in chapter 11.

If a creditor has a security interest over personal property under the PPSA, the creditor is a secured party. A secured party can seek to appoint a receiver over the property, sell the goods, or permanently take the goods in satisfaction of the obligation owed. There is an unfortunate amalgam of law that applies, much of it overlapping. In addition to the PPSA and PLA, the Receiverships Act 1993 (RA) and the Credit (Repossession) Act 1997 (CRA) also potentially apply. We discuss receiverships in chapter 12, and creditors’ rights to take possession, sell or permanently retain personal property in chapter 13.

Finally, this booklet focuses on the remedies that a creditor has against a debtor. Of course, a creditor may also have a remedy against other parties, such as a guarantor of the debt. These remedies are outside the scope of this seminar. For a good discussion, see M Lenihan and B Stewart, Guarantees NZLS Seminar Booklet, 2010.

There is also a webinar package avaiable on this topic.