Business failure is a term used to describe businesses – sole traders, partnerships and companies – that cease trading because of unfavourable market conditions, losses, inability to pay creditors, or – in rare cases – fraud.
Bankruptcy is a legal proceeding that allows people who cannot pay their debts to get a fresh financial start. An official assignee takes over the bankrupt’s property and assets for distribution to the creditors. Without permission, a bankrupt cannot:
When a person is discharged from bankruptcy (normally after three years) they are discharged from the debts.
In New Zealand, only individuals can file for bankruptcy – unlike in some other countries, where businesses can also be declared bankrupt and prohibited from trading.
Since the 1960s many individuals have got into financial difficulty through excessive spending and use of credit, rather than through a personal business failure. By the 1980s over half of bankrupts were wage workers or unemployed, rather than employers or self-employed.
In the 1990s and 2000s there were 2,000 to 3,000 bankruptcies each year.
Under the Insolvency Act 2006 there are two alternatives to bankruptcy for individuals who have become insolvent and owe less than $40,000:
Companies are separate legal entities from the people who control or own them. Historically there has been a very high level of failure among small traders. In the early 1990s there were over 1,000 companies liquidated each year, although from 2002 to 2008 the number dropped to less than 200 annually.
In New Zealand under the Companies Act 1993 there are legal processes for winding up companies, distinct from the bankruptcy of individuals.
When a company gets into financial trouble, there are several possible courses of action.
Sometimes failure stems from fraudulent behaviour. New Zealanders have long believed that the country is relatively free from ‘white collar’ or ‘corporate’ crime, but there have been some striking examples in the nation’s history.
There were two main sources of business failure – reckless immigration schemes and property speculation – in the first 25 years after the Treaty of Waitangi was signed in 1840.
Immigration promoters sold land, sight unseen and without clear right to title, to investors and intending settlers in Britain. The largest of these schemes was the New Zealand Company, a colonising agency and joint-stock company. But the lack of legal basis to its land claims, conflict with Māori (especially on the Wairau plains in 1843), the fall-off in migration and the inability to establish grain-based agriculture brought severe financial problems, which were only alleviated by government support.
There were also other failed schemes, such as the Cornwallis settlement on the Manukau Harbour. Promised a town section, 100 rural acres and a year’s wages, the Scottish settlers found on their arrival in 1841 that the land was in dispute. They never received their wages.
Such failures caused hardship for settlers and hurt British investors. They made it harder for New Zealand businesses to borrow in overseas financial markets.
Many buyers at the first Crown land sales in Auckland in 1841 were speculators who bought on deposit, some of only 10%. When the economy fell into recession in 1842, many were unable to keep up payments. The flow-on effect led to almost all of Auckland’s merchants going under.
The 13 government officials who bought property in the 1841 Auckland land sales were dubbed ‘the Auckland official land-jobbing association’. Jobbery meant using public position for private gain. The jobbers knew the best sites, and probably the reserve prices, but were meant to be banned from speculation. Some were eventually forced to give up the land they had bought.
Among those who bought land in the 1841 auctions was George Cooper, the treasurer and collector of customs. Later he was forced to resign and convicted of malversation (misuse) of customs money – apparently to fund land purchases and a lavish lifestyle.
19th-century Auckland was a city of booms and busts. The city was tagged ‘the grave of enterprise’ because ‘the cards of commerce are constantly shuffled [there] so as to cause rapid rises and disastrous declines among business houses large and small’.1 In 1863–64 army contracts for the Waikato wars pushed up prices and created fortunes. Then in 1865 the boom collapsed, Wellington became the capital and commercial panic set in. The discovery of gold in Thames in 1867 lifted fortunes again.
Auckland’s business community was dominated by a small group who were commercially and socially related, led by Thomas Russell and his law partner Frederick Whitaker. The group founded the Bank of New Zealand in 1861, and borrowed from it to speculate in confiscated Māori land. The failure in 1878 of the City of Glasgow Bank led to a withdrawal of British funds, and some Auckland businesses failed.
In 1886 there was a serious economic collapse in Auckland, and within two years there were major crashes. The Bank of New Zealand was in acute difficulties and withdrew loans. The very respectable Union Sash and Door Company collapsed, and many small business people like carpenters, hotelkeepers and petty shopkeepers went to the wall.
Even the very rich suffered. The entrepreneur J. C. Firth became bankrupt, and the merchant John Logan Campbell was forced to pay off his gardeners. Thomas Russell survived only by questionable methods which included setting up land companies. He succeeded in avoiding both legal prosecution and bankruptcy.
Bankruptcy in the 1880s depression was often the making, not the end, of a person’s career. George Stead had co-founded a grain company in Canterbury, but became bankrupt in 1884. Stead repaid the £72,000 owed to farmers and shareholders although he had no legal obligation to do so. He re-established his reputation and became the leading figure in Canterbury’s business community.
Further south the hard times had hit earlier. The late 1870s and 1880s were particularly hard on many small businesses that had been established in the previous decade. In 1879 there were 1,836 bankruptcies, the highest annual number for the next 100 years. On a per capita basis it was more than seven times the bankruptcy rate of any year in the 20th century.
In Otago there were two booms in gold dredging (in 1888–90 and 1899–1900), each of which was followed by a bust and the liquidation of companies. In July 1900 there were 300 dredging companies, but by January 1902, 104 had collapsed. Another 72 failed over the next year.
The crisis facing the Bank of New Zealand in the early 1890s led the government to take a greater role in regulating business to protect investors and creditors. It began a pattern of government response following notorious failures.
As a result of its reckless lending on over-valued property without proper security, the Bank of New Zealand was facing collapse by 1894. A bill was rushed through Parliament providing a state guarantee.
While Joseph Ward survived the collapse of the Colonial Bank, another heavy investor in the bank, William Larnach, was not so lucky. Laden with debt and personal problems, he died by suicide in a committee room at Parliament in 1898. Larnach’s castle on Otago Peninsula is his lasting legacy.
The following year the bank acquired the Dunedin-based Colonial Bank which was also on the verge of collapse. Treasurer Joseph Ward drew up the legislation for this. He did not disclose that he and his stock and station agency in Bluff were heavily in debt to the Colonial Bank and had contributed to its fall. Ward became bankrupt in 1897 and was required to quit Parliament. However he recovered, repaid his creditors and returned to the House.
From the 1890s the state showed a greater interest in both defending the rights of creditors and protecting small businesses and farmers from difficulties in obtaining credit. The Joint-Stock Companies Act 1860, modelled on earlier English legislation, was updated with a new Companies Act 1901, inspired by the collapse of the dredging companies. The act tightened regulations on the appointment of directors, auditing, and the writing of prospectuses.
Deteriorating business conditions in the 1920s led to a rise in business failures, which was exacerbated by the onset of the economic depression in 1929. In 1920 there had been 145 bankruptcies. By the late 1920s the figure hovered at around 800 each year. Some professional groups, notably lawyers, set up fidelity guarantee funds to give clients limited protection in the event of business failure (although lawyers had also offered trust accounts since 1892).
In the early 1930s the coalition government passed special legislation to wind up the businesses of John McArthur. This was the most direct intervention in company affairs by the government since the 1894 Bank of New Zealand bailout.
Canadian-born McArthur had formed Redwood Forests in 1925, funding the company by the sale of debentures or ‘junk bonds’ – each representing an acre (0.4 hectares) of exotic forest which the company promised to plant.
From 1929 investment trusts had been set up in New Zealand. These pooled the funds of small investors and invested them collectively. When McArthur’s ventures began failing in 1930, he established his own Investment Executive Trust. This sent out door-to-door salesmen to persuade people to buy debentures. Subsidiary companies were also set up, all with minimum governance and disclosure. The largest debenture-holders were directors who moved money from company to company at great personal profit. McArthur even established his own stock exchange.
The report of the commission inquiring into trusts was presented to Parliament on the evening of 8 August 1934. As a result of its findings, the Companies (Special Investigations) Act was passed through both houses and became law before midnight.
In 1933 the government set up a commission to inquire into trusts. It also passed a new Companies Act to protect small investors, and made door-to-door hawking of shares illegal. The next year it passed the Companies (Special Investigations) Act to investigate McArthur’s businesses, and in 1935 passed an act to wind them up. McArthur himself was fined £500.
It was not until 1958 that the state again intervened in company affairs with special legislation. Intercity Distributors were a group of 29 interlocking companies, some of which were in liquidation. Walter Nash’s Labour government, suspecting fraud, passed the Companies Special Investigations Act to stop the destruction of evidence.
In 1961 there was a far more serious business failure – that of the Standard Insurance Company, a blue-chip Dunedin-based general insurer established in 1874. Its crash was the result of losses arising from the mismanagement of its Sydney operation. Fortunately, the Dunedin-based National Insurance Company of New Zealand took over Standard’s policies (other than the finance and performance bonds that had brought the company down), acquired its goodwill, and re-employed its staff.
Standard’s demise weakened confidence in the New Zealand share market – partly because the company’s shareholders had to pay a 10-shilling call on each £1 share to help meet the deficit.
The JBL collapse hurt investors and creditors and damaged the reputation of New Zealand’s small entrepreneurial community. It had all the ingredients of a soap opera – family rivalry, greed, negligence and malfeasance. The only people to emerge looking good were the government and Doug Hazard, the receiver it appointed in place of the one appointed by the major creditor, the ANZ Bank.
In 1956, Jeffs Brothers Ltd was set up in Ruawai on the Kaipara Harbour. It was a contracting and manufacturing company owned by Jim, Kevin and Vaughan Jeffs.
By 1965 JBL was based in Auckland, where it put up commercial buildings, tenanted them and then sold the tenanted building. In 1967 it pioneered real estate syndication – forming syndicates for commercial property investment, with less than 25 members so as not to be liable for company tax. Small investors flocked.
At its height JBL had 52 companies, including fishing, cosmetics and mineral exploration, and had offices in Australia and Japan. It was about to move the corporate headquarters to London in 1972 when it collapsed due to a shortage of working capital, poor investments and failed partnerships, problems partly hidden by its lax accounting systems.
Doug Hazard, the receiver appointed by the government in the JBL collapse, spent 25 years unravelling the mess. He restructured several units of the group and sold them off. Almost $19.6 million was paid to secured creditors, who were paid in full, and $2.5 million paid to unsecured creditors, who were paid in part.
About 3,500 investors and 2,500 creditors were affected. Jim Jeffs was sentenced to jail (serving six months) and his brother Vaughan was fined, along with four other executives – though the Court of Appeal quashed all convictions except those of the brothers.
The failure of JBL was seen as an aberration. But it was followed by a decade of corporate failures including Cornish Lamphouse in 1974 and the finance company Securitibank in 1976. The Public Service Investment Society nearly collapsed in 1979.
Securitibank was not a listed company and many investors lost all their money. Its collapse led the National government to pass the Securities Act 1978 to ensure that people who invested had a registered prospectus with full and proper disclosure. It led to further securities legislation, including the policing of insider trading (where friends or associates of a company profit from inside information).
The international stockmarket crash of 1987 affected New Zealand more severely than other western countries. Between 1988 and 1991 many New Zealand-listed companies fell over, wiping away shareholders’ funds. Bankruptcies, which had risen gradually from under 100 annually in the immediate post-war years to about 800 in the early 1980s, increased to almost 2,000 in 1989. That year there were almost 3,000 company insolvencies – almost a quarter of new company registrations.
In 1990 the National government spent $620 million recapitalising the Bank of New Zealand. This appeared to favour the minority shareholder, Fay, Richwhite & Company, and hardened public attitudes towards the behaviour of big business.
Three years later Allan Hawkins, the founder of the investment company Equiticorp, was jailed for fraud along with other directors after the company’s collapse.
The founder of Bridgecorp Finance, which collapsed in 2007, was Rod Petricevic. He had worked for Securitibank, which crashed in 1976, and was a casualty of the failed investment bank, Euro-National Corporation, which was taken over in 1992. Petricevic was declared bankrupt in 2008.
Rising interest rates and weakening used-car and property markets impacted heavily on the finance company sector from 2006. In May that year, car financier National Finance 2000 failed.
It was followed by a string of other finance company failures, including property financier Bridgecorp Finance (New Zealand), part of the large Bridgecorp financial services group. It collapsed in 2007, owing 18,000 investors half a billion dollars.
In 2012 Treasury paid depositors and stockholders in South Canterbury Finance $1.6 billion, acquiring assets that were later sold for a fraction of this sum. This action was triggered by the inclusion of SCF investors in the deposit guarantee scheme introduced by the National government following the global financial crisis.
Grant, David. Bulls, bears and elephants: a history of the New Zealand Stock Exchange. Wellington: Victoria University Press, 1997.
Hunt, Graeme. Hustlers, rogues & bubble boys: white collar mischief in New Zealand. Auckland: Reed, 2001.
Stone, R. C. J. Makers of fortune: a colonial business community and its fall. Auckland: Auckland University Press, 1973.