Economic recap

The NZ economy managed to dodge a formal recession (2 consecutive drops in GDP) in the 2nd quarter of 2022 with a lift in GDP following negative GDP in the 1st quarter. While the economy may not be in a formal recession there remain a number of challenges affecting NZ businesses from issues sourcing product to increasing inflation, interest rates and decreasing domestic spending as New Zealanders look to travel for the first time in 2 years. Businesses continue to have trouble to find the necessary staff with low unemployment levels continuing.

Of note is the speedily decreasing value of the NZD when compared with other currencies. This will make importing goods and services more expensive for businesses and squeeze margins.

The Xero SME index saw a drop back by 8 points in August 2022, however the index remains above the long term average. Businesses found that their days to be paid increased by.4 days to 23.9 days.

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

Company Insolvency figures have remained elevated in August 2022 and slightly exceeded the July figures (from 174 to 177 total appointments). Shareholder appointments made up 119 of the appointments with 20 of the 119 being solvent liquidations.

Court appointments remained high but were slightly down from July 2022 (45 to 42) but still well above earlier months in 2022. Other appointments were made up largely of receiverships however total receiverships for the year remain low at 41 compared to 2021 with 88 total receiverships.

As shown below in the Winding Up Applications graphs the current pressure from IRD increasing collections will likely result in continued increasing court and shareholder appointments in the months leading up to Christmas.

Appointments by Industry

“Construction & Property Development” holds onto the top spot as #1 industry for total appointments in August 2022 with “Accommodation and Food Services” making up the 2nd spot, between the 2 sectors making up close to 50% of total appointments.

“Accommodation and Food Services” is largely made up of food service businesses no doubt struggling through the quieter winter and higher inflation putting a squeeze on people spending.

Winding Up Applications

Winding up applications have continued to remain above the first half of 2022’s monthly levels but we have seen a slight drop from July. IRD made up 56 of the 70 total appointments continuing to lead the way from the uplift seen in July 2022 where IRD made up 70 of the total 94 applications.

Other non IRD creditor applications have tailed off in August down from 24 to 14 applications for the month.

With the uptick in winding up applications in July and August 22 we have seen a slight decrease in the percentage of total winding up application that have gone into liquidation from 60%+ in the first 6 months of the year we are now sitting round 57% of the total applications ending up in liquidation.

Personal Insolvencies – Bankruptcy, No Asset Procedure and Debt Repayment Orders.

Bankruptcy stats remain at a consistently low level seen throughout 2022, the make up of personal insolvency options remains consistent with 50% Bankruptcy, 40% No Asset Procedures and 10% Debt Repayment Orders.

If you want to have a chat about any points raised or an issue you may have you can call on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

In normal circumstances there is no need for a party to go to Court to seek the liquidation of an apparently solvent company – but it is not “normal circumstances” when the relationship of the shareholders and directors of a company has broken down to the point that they cannot all agree on anything.

This puts the individuals involved under a lot of stress and puts the viability of the company at risk.

Section 246 of the Companies Act 1993 provides for an interim liquidator to be appointed by the Court, if it is satisfied, on an application being made, that it is necessary and expedient for the purposes of maintaining the value of assets owned or managed by the company, to take control of and preserve those at-risk assets.

The rights and powers of an interim liquidator can be limited by the Court in the manner that it thinks fit.

CASE STUDY:

Licensed Insolvency Practitioners (LIPs) from McDonald Vague were recently appointed by the Court as interim liquidators of two related companies involved in the construction industry. The companies each have the same 2 director / shareholders and 2 shareholders with each shareholder having 25% of the company shares.

Two of the shareholders are a husband and wife. The other two were a couple but are no longer together.

One company is a trading company, the other is a holding company, owning a property.

The business of the trading company is profitable and there was a good amount of work coming in, but issues arose, primarily between the two directors.

There were claims and counterclaims made by the two, against each other, of mismanagement of the business, and dishonest or unauthorised actions relating to the handling of individual clients, such as incorrect ordering of stock and transferring of clients from the company to other entities individually owned by the parties.

There were also claims of the unauthorised taking of funds from the company bank accounts, leading to one director blocking the access of the other director to the accounts.

One of the directors made application to the Court for the appointment of interim liquidators. They were supported (or, at least, not opposed) by one of the shareholders. The other director and shareholder opposed the application.

The Court, in its judgment, appointed the interim liquidators for the following reasons –

• The total breakdown in the relationship of trust and confidence between the shareholders leaving the companies unable to operate.

• The remote chance that there could be a commercial settlement between the parties.

• The financial position and ongoing solvency of the companies was uncertain and therefore it was unclear whether creditors were being safeguarded or were at risk because of the continued operation of the trading company.

The Court gave the Interim Liquidators the power to interview directors and shareholders, undertake an accounting of all trading and financial activity to determine solvency and to dispose of property if not profitable to maintain.

It also placed a requirement on the interim liquidators to report back to the Court within 21 days of appointment as to progress.

The Interim liquidation is on-going with the matter not back before the Court until early November 2022. They are continuing with certain existing projects, where that is justified and able to be funded by the clients involved.

They are also working on preparation of a settlement proposal to put before the shareholders, which if agreed to by all parties, would lead to the termination of the interim liquidation.

CONCLUSION:

In circumstances where a dispute between parties involved in a company has reached the stage where there is no common ground between them and the dispute is putting the viability of company at risk, having a licensed insolvency practitioner appointed is an option.

This allows for an independent person to review the position whilst ensuring that the assets of the company are not put at risk.

If you would like more information on the appointment of interim liquidators, or on any other insolvency issues, please contact one of the team at McDonald Vague.

Colin Sanderson

When it comes to due dates and business tax debt, the IRD don’t mess around. Business owners who shirk their tax obligations can quickly find themselves in trouble.  

If you know your tax bill is going to be bigger than you can handle, it’s important to deal with that as soon as possible – ideally long before it’s due. If you can’t pay your tax bill, you should look at the following steps:

CONTACT THE IRD AS SOON AS POSSIBLE

The IRD want to help you meet your tax obligations, so if you contact them as soon as you know there’s a problem, they can help you find a solution. It’s best to contact the IRD before the due date, if at all possible, as it increases your chances of being able to get favourable terms.

You should also file your tax returns on time, even if you’re unable to pay the tax owing. If you’re tax compliant or seeking to be, the IRD will most likely be happy to negotiate a payment arrangement for you to pay your debt off in instalments over time. This can help you with cash flow management while you try to turnaround the business.

If you are suffering from serious ill health then you may qualify for relief under the hardship provisions.

If your business has been adversely affected by Covid-19 then IRD will consider financial relief and instalment arrangements.  IRD can remit penalties and UOMI in these circumstances.   You may be asked to provide a 12 month cash flow forecast (IR591) in support, bank statements, credit card statements and accounting information including debtors and creditors.  To apply for financial relief you will be asked to complete an application.  You will need to provide the current value of the company's assets, liabilities and the position of your shareholder current account.  The current account will record your net drawings from the company.

Call the IRD on 0800 377 771, fill out an instalment arrangement form online, or see their website page on instalment arrangements for more details.

IF YOU'RE EXPERIENCING SERIOUS FINANCIAL HARDSHIP

In some circumstances, the IRD will write off an agreed amount of your debt if they determine – based on their criteria – you are in serious financial hardship. They will take into account your payment history, your current situation, and your ability to meet future obligations. You’ll need to fill in the Disclosure of financial position IR590 form and a 12 month cash flow forecast IR591 form.

Bear in mind the IRD will look carefully into your company expenditure and your shareholder current account and the viability of the business.  If it is determined the company is not viable, it may be recommended that the company is placed into liquidation or the IRD may initiate steps for that to occur.

WILL YOU BE PERSONALLY LIABLE FOR BUSINESS TAX DEBT?

In theory, your company structure is designed to protect your personal assets in the event of company insolvency or other financial difficulties. However, there are legal means to ensure you’re held liable.

Under a HD 15 of the Income Tax Act 2007, the Commissioner is able to go after personally-held assets of company directors and shareholders in order to recover tax debt. However, this only applies when director and stakeholders have entered into an agreement to purposefully deplete a company of its assets (an asset-stripping arrangement). Such an arrangement is also a breach of Director’s Duties. This clause is rarely utilised to recover debts.

Another Act, the Tax Administration Act 1994, makes provisions for non-compliance with tax laws. Under this Act penalties for a company’s non-compliance can be placed upon an officer of the company. A conviction under this Act could see a company director facing both a significant fine and time in prison. This same Act allows the commissioner to pursue a director personally for unpaid PAYE. The IRD has successfully brought many of these cases against company directors – in these cases the directors have been complicit in breaching their tax obligations.

Usually when a licensed insolvency practitioner is appointed to liquidate the company and following the liquidation process and payment of the realisations to creditors, any shortfalls including to IRD are written off.  Directors may face pursuit from company creditors who held personal guarantees and on the occasion by IRD for unpaid PAYE.   

ARE YOU IN TROUBLE WITH THE IRD?

If you’re having problems meeting your company tax obligations, or you are trying to make arrangements with the IRD to pay arrears, it's best to be proactive, before you find yourself in even deeper trouble.

If you think your business is in financial trouble contact us to see how we can help.  If you have received a statutory demand from IRD, do not delay or next your company will be served with a winding up proceeding to place your company into liquidation.  If you want to understand your options you need to make enquiry promptly.

Company strike off or dissolution is the process where a Limited Company is removed from the Companies Office register. Following removal, the company ceases to exist.

There are essentially three options to end a New Zealand company. These are:
• A short-form removal from the companies register (solvent companies)
• long-form removal – a solvent liquidation or insolvent liquidation, or
• doing nothing, failing to file an annual return with the Companies Office (“the short cut method”).

The third option is not recommended. The short and long form methods minimise risk. Failure to file an annual return does not put an end to debt in an insolvent company. It also does not provide any certainty that the company is at an end.

Many directors and shareholders of companies facing financial difficulties are tempted to simply abandon the company and fail to file an annual return and following the expiry of one year, the company is struck off. Failing to file an annual return is actually an offence under the Companies Act 1993. The shortcut approach comes with risks and the prospect of company restoration. The effect of strike off on a company that has not dealt with all assets and liabilities in the proper process can include:

• for a solvent company, share capital and capital gains are not distributed tax free, shareholders could be liable for tax on distribution and this can create overdrawn current account issues.
(To distribute capital gains tax free, they must be distributed after the liquidation process has started. The process is started by completing a resolution to liquidate a company)

• the forfeiture of tax credits held at IRD – which can only be refunded if the company is restored;

• the loss of losses carried forward and imputation credits (unless company restored);

• assets not distributed prior to strike off become crown property unless the company is restored;

• land and property held in the company name cannot be transferred;

• A strike off is not a means to avoid a contingent liability claim;

• A strike off is also not a means to avoid a s 385 prohibition notice;

• reinstatement by the Registrar is straightforward if the company is a party to legal proceedings and those proceedings commenced prior to removal;

• reinstatement by the Registrar is able to be advanced if the company was in liquidation or receivership or both at the time

• The court has a wide general discretion to restore a company to the register if it is satisfied for any other reason, it is just and equitable that the company be restored to the register (s 329(1)(b));

• there is no statutory time limit for restoration to occur;

• there exists the potential review by the Registrar that proper books and records have been kept under Sections 189 and 194 of the Act, records to include documents, minutes of meetings, resolutions of shareholders and directors, copies of written communications to shareholders, copies of financial statements and accounting records. (Failure to keep accounting documents at the Company’s registered office is an offence punishable by a fine of up to $10,000 for both the company and directors).

A company that has been restored to the register is deemed to have continued in existence as if had never been removed from the register: s 330(2). This means any interest/penalties that have been incurred in the period from strike off to reinstatement are due. It also means company records must be brought up to date.

The short form liquidation or formal liquidation process may be a more costly exercise but avoids the headache that can be faced with the consequences of a company restoration. The short-form removal process is best suited to a company that has little trading history and/or has held minimal assets, is subject to low commercial risk, and no contingent liabilities.  A solvent liquidation costs more than a short-form removal but minimises the risk of the company being reinstated through a creditor application.

An insolvent liquidation involves an independent licensed insolvency practitioner managing the winding down of the company and the appropriate dealing of assets and distributions.

For advice on the options and the best way to wind up a solvent or insolvent company contact our team at This email address is being protected from spambots. You need JavaScript enabled to view it. 

Economic recap

Businesses continue to be affected by overseas economic factors, from supply line shortages to rising costs. Rather than focus on factors covered in earlier articles we will look at what’s coming up in this month’s article.

Discussions without GRIP partners in Australia and the UK suggest that NZ may be 1 year away from seeing a notable shift in insolvency appointments. As a comparison we appear to be six months behind Australia who have seen the Inland Revenue ramp up collections and pressure and have begun to see insolvency workflow. Australia confirm they are roughly 6 months behind the UK who have seen themselves get a lot busier in recent months.

The NZ borders are set to fully open from 31 July 2022, this will be something the ski fields, tourist operators and Queenstown are looking forward to. How this will affect business is to be seen if the hoped-for inflow of tourists eventuates. At present net migration for the year is negligible as New Zealanders take long delayed OE’s and trips out of the country in our long winter months. The brain continues, putting further squeeze on businesses trying to find the right employees.

The 25 May 2022 OCR announcement saw the Official Cash Rate bumped up 50 basis points to battle inflation, it was made clear that the intention is to raise it further between now and this time next year to try rein in inflation. Most of this has already been priced into mortgage and lending rates, however.

On the other hand, recently released GDP figures for the March Quarter show a drop of 0.2. We will require a further drop in the June quarter to be in a “recession”. This will have a negative effect on business confidence. Why does it take so long to work out a quarter's GDP figures in this digital age? The stats were released on 16 June 2022, a full 77 days after the quarter had ended. Timely information is useful information.

The NZ media has a new focus on insolvency especially the construction appointments and writing a story around it. Leading to uncertainty in various sectors.

Looking at the Xero SME index graph, May 2022 comes back down 6 points after Aprils jump up. The other factors measured in the Xero SME insights show sales tracking down, time to be paid tracking up and wages tracking upwards. All these factors will be making business harder.

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

Solvent liquidations are beginning to return to normal levels in the month of May making up 34 of the 138 appointments. Court appointments however continue to remain low with only 25 appointments for the month, while shareholder-appointed insolvent liquidations make up 71 of the total appointments.

Comparatively with past year May’s this sets a new low, but this is typically the spot where appointments level off for the year and slowly decline into the Christmas months. As mentioned in numerous past articles on insolvency stats IRD still has a lot of work to do in taking enforcement steps against delinquent debtors, to emphasise the point only 7 of the 25 court appointments were the result of IRD applications to wind up in the month of May.

Notable Mentions:

The Tasting Shed Covid 19 and associated lockdowns brought an end to the TV chef Ganesh Raj’s West Auckland establishment.  DDL Homes Ormiston Receivers were appointed, and the company entered Voluntary Administration by the developments financer when concerns were raised about the construction progress
Jonesy Construction Another casualty in the construction sector of increased cost of goods and locked in pricing.  NZ Medical Association Budget and cashflow projection show that the financial situation was dire, and received an urgent liquidation recommendation from its board.

Insolvency by Industry

“Construction & Property Development” once again run away with the largest chunk of the pie. This is unsurprising for anyone with an eye one the media and constraints that have been affecting the sector in the last year and a half. “Accommodation & Food Services” help make up just under 60% between the two industry sectors, but this is to be expected given the continued closed borders and slowdown due to winter trading.

Winding Up Applications

May winding up numbers have managed to match 2021 levels. The difference in applicant creditors is quite noticeable, however. May 2021 saw IRD making up 77% of the applications while May 2022 sees IRD only making up 44% of the total applications. This remains the highest it has been as a percentage since October 2021 so shows IRD is beginning to pursue its extensive debtors list but still well below the level it should be at.

Notable Applications:

Property investment firm Propellor Property Investments and related entities have had winding up applications filed against them by IRD for unpaid taxes. The director has advised the applications have been dealt with and are strong arm tactics from IRD.

Personal Insolvencies – Bankruptcy, No Asset Procedure and Debt Repayment Orders.

Personal insolvency figures remain below past years May levels. While the numbers have ticked up since April 2022 the lift saw a doubling in bankruptcy figures from 28 to 60 while No Asset Procedures were up 33% to 40 for the month. Debt repayment order figures dropped to single digits for the month.

Of note, court application bankruptcy proceedings have finally begun to catch up to debtor applications and were just under 50% of the total bankruptcy appointments. Previous months had seen court appointments making up only 1/3rd of the bankruptcies.

Notable Appointments:

Ex-All Black Rodney So'oialo and his wife Marilyn So'oialo (bankrupt) continue to be chased by debt collectors in relation to debts incurred in 2019 that remain unpaid. Debt collectors have had difficulty serving documents on Rodney So'oialo due to him working as a rugby coach in Sri Lanka and Malaysia.

If you want to have a chat about any points raised or an issue you may have you can call on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

Debt collection actions are gaining momentum. Winding up proceedings are on the rise. There is a climb in IRD initiated winding up proceedings.

Many NZ companies have been impacted by Covid-19 and are facing insolvency. To be insolvent means one of two things:

• Debts can’t be paid when they’re due.
• Total debt is more than the value of all assets.

The Commissioner of Inland Revenue has increased debt recovery actions. The CIR is able to issue a statutory demand as a step necessary to advance a proceeding against a company.

Ignorance Isn't Bliss

It is recommended for any business struggling to meet tax arrears that negotiations are entered into promptly to avoid a potential winding up proceeding.

Taxpayers are required to pay their tax in full and on time. Failure to do so leads to late payment penalties and interest. These charges compensate the Commissioner for the loss of use of the money and act as a deterrent to encourage taxpayers to pay the correct amount of tax on time.

If your company receives an IRD formal demand, doing nothing really isn’t an option. Inaction will limit your options and virtually guarantees insolvency. You can also be held personally liable for failing to pay PAYE.

In certain situations the Commissioner may be able to provide assistance to taxpayers if they are not able to pay on time, or if the imposition of penalties and/or interest is not appropriate. Depending on the circumstances the Commissioner may also agree to write off or remit amounts owing (so they do not need to be paid), or agree that the taxpayer enters into an instalment arrangement (so the amount is paid over time rather than immediately).

The IRD seek open communication and are more willing to consider instalment arrangements when directors have been upfront from the start. Company directors that bury their heads in the sand and have no plans in place may face less leniency and liquidation proceedings.

The IRD can find directors liable for their company’s tax under general insolvency law. The law also says if a company agreement purposefully leaves it unable to pay a foreseeable tax liability, a director can be personally liable.

In the first instance the IRD will try for a settlement. This is your chance to negotiate terms and arrive at a compromise that allows you to stay in business while the IRD claims their tax. If you can reach a repayment agreement, the IRD won’t take the matter further.

If you’re unable to reach a compromise, the IRD will issue a formal demand, followed by a statutory demand and then issue an application for putting the company into liquidation (winding up proceeding) if you don’t settle the demand. If you do nothing the company will be placed into liquidation by the High Court.

Relief Options

The IRD offer relief options for companies with viable businesses and have been supportive of businesses that have shown clear impacts of Covid-19 on their business.

Financial relief can be granted when a taxpayer cannot meet their payment obligations. The process to apply for financial relief or an instalment option is here.

The Commissioner is open to instalment arrangements towards tax arrears. Splitting up what you owe over weekly or fortnightly payments can make it easier to repay your tax debt.

The CIR may agree to collect the amounts owing over a period of time through an instalment arrangement, or to not collect the amount owing (that is, write off the amount), or a combination of the two options (that is, write off some of the debt and enter into an instalment arrangement for the remainder). An amount may be written off if collecting it would place the taxpayer in “serious hardship”.

Where an amount is considered irrecoverable, the Commissioner has the discretion to write it off. The Commissioner may write off amounts if collecting the amounts owing is considered to be an inefficient use of Inland Revenue’s resources.

Certain penalties may be remitted when an event or circumstance has occurred which is beyond the taxpayer’s control.

Interest or certain penalties may be remitted if to do so is consistent with the Commissioner’s duty to collect the highest net revenue over time.

Voluntary Liquidation

One possibility for meeting the IRD formal demand is voluntary liquidation. This gives the director and shareholders a small element of control over liquidation proceedings. If liquidation is inevitable then the opportunity to voluntarily appoint a liquidator is usually required within 10 working days of the winding up proceeding being served so acting promptly following the statutory demand (or earlier) is advised.

If you do nothing or you can’t reach a settlement, the IRD can apply for their preferred liquidator or Official Assignee and manage your affairs and liquidate your company. In this instance the Court will appoint the IRD’s liquidator. As company director you have less control over the process and must cooperate with the Court appointed liquidator or Official Assignee at all times.

Deciding between involuntary and voluntary liquidation may not seem like much of a choice. Appointing a licensed insolvency practitioner that you believe understands you, your business and your industry, and who can consider your interests while satisfying the IRD’s demands provides more certainty of the likely outcomes. Your liquidator can apply specialist skills to remove some of the sting from this traumatic process.

Statutory and formal IRD demands are outside threats to your business. There are just as many risks that can come from within, so how do you protect your business from those?

If your company is experiencing financial difficulty, download our free guide for NZ Companies to discover your different options.

WHAT SHOULD YOU BE CONSIDERING NOW?

1. Consider the risks of trading insolvently and how directors can be held personally liable.
2. Negotiate an instalment plan with IRD for historic arrears and have a plan in place. The Inland Revenue have pressure to maximise the recovery for the Commissioner under the Tax Administration Act. They are willing to work with companies that communicate early on and this can save further interest/penalties.
3. Assess the viability of the business and its future. Prepare a cashflow forecast.
4. Where cashflow is an issue, consider compromises with creditors leading to some debt forgiveness and time payment arrangements or voluntary administration.

If the company has lost too much from the impact of Covid19 and the prospects are that the company has minimal ability to repay creditors nor has a financial source to fall back on to offer a better position than what liquidation holds, then liquidation sooner may be the better option. Continuing to trade with knowledge of insolvency is a risk for the directors.

WE ARE HERE TO HELP
Our team are happy to discuss the options available for struggling companies and how to manage personal guarantees and personal exposure. Contact This email address is being protected from spambots. You need JavaScript enabled to view it.

If your company needs some advice on the restructuring options or is likely facing the prospect of liquidation, we are happy to advise on the process and consequences.

Problems in a business generally arise slowly. Problems can become disasters if not recognised and managed. Directors have some latitude in choosing to trade out of a temporary liquidity problem or to advance an insolvency procedure. Directors must carefully consider the responsibility they have to creditors and their duties under the Companies Act 1993 and if they can turn the business around.

Steps towards Solvency for a Viable Business

Insolvency is the inability to pay debts when they become due. Steps can be taken to avoid insolvency. The following are steps that can be considered for a viable business:

• Start with a review of overheads. When considering cutting expenditure take steps to analyse the costs involved. The restructure and reduction of staffing for example can be expensive.
• Dispose of surplus assets to improve cashflow. Often plant and machinery can be surplus to a company’s requirements.
• Reduce stocks and work in progress in order to improve cashflow. Sell surplus stocks.
• Re examine the company’s purchase order position and tighten overall management control.
• Seek additional sources of new funds, such as an overdraft/loan, injection of capital, increasing the equity base or taking on a new investor. Investors will want to see the company has forecasts to profitability, that the product/service is right for market and that management is capable.
• Good management and financial resources are essential.
• If the company has deteriorated to the point a rescue option is a requirement, advice should be gained to avoid collapse and to ensure a planned process is in place to avoid insolvency. 

Director Considerations

In embarking on any of the steps to avoid insolvency, it is important to consider factors that can go against you as director:

• Avoid preferring certain creditors ahead of others. A liquidator can clawback transactions from creditors who have gained a preference from an established date of insolvency (if knowledge is held of the company’s insolvency).
• Any asset sales need to be at market value. A liquidator can challenge transactions at under value or to related parties and transactions for excessive consideration.
• A sale of a going concern can be difficult to advance when losses have been incurred or the trading position has deteriorated. Due diligence by interested parties can take time and creates delay when at a time when a company is running out of cash. Continuing to trade whilst insolvent can lead to director liability

Rescue Plans

The purpose of a rescue operation is to ensure a business becomes profitable. This requires a plan and a somewhat ruthless approach.

An option for a company that is struggling is to offer an informal compromise to creditors seeking 100% support to instalment arrangements and usually some debt relief. This is advanced where the company is viable and has suffered a setback. These arrangements requiring 100% support however are difficult and all parties can become disillusioned and failure can lead to liquidation by application to the High Court by a disgruntled creditor. The informal process if managed well can buy a moratorium if full support is gained.

Companies Facing Financial Distress – formal turnaround options

If the company's position has deteriorated to a point where a rescue option is required, advice should be gained early. Continuing to trade an insolvent company and increasing the exposure to creditors can find a director personally liable.

An option for a company in financial difficulty is to offer a formal company compromise under Part XIV of the Companies Act 1993, where creditors by class vote on a proposal for payment usually over a time period and often agreeing to a lesser amount. The proposal needs to show it will provide a better outcome than an immediate liquidation. The company compromise requires a majority in number and 75% in value of creditors voting by class on the matter to support it. The non-voters and non-supporters can be bound by those voting in favour if the requisite majorities are gained.

A voluntary administration (“VA”) is a more structured form of company compromise with an independent administrator engaged to review, manage and rearrange the business and financial affairs to generate the best outcome for a business owner and for creditors. The administrator's focus is to provide creditors and shareholders with a better financial return than might have been achieved were the company put straight into liquidation.

Business Failure in NZ

If the company has failed and has minimal prospects of recovery then liquidation is advanced. A liquidation can advance voluntarily by 75% in number/value of shareholders appointing a liquidator or by the application of a creditor to the High Court (by way of a winding up proceeding) or less common by the board of directors should the company constitution allow.

A secured creditor also has options where concern arises. They can appoint a Receiver and Manager subject to the terms of their Security documentation. The Receiver can seek to sell the business as a going concern and clear the secured creditor’s debt.

For advice on insolvency options contact our team on 0800 30 30 34.  We are here to help.

Related Article:

https://www.mvp.co.nz/articles/business-recovery/creating-a-business-strategy-to-survive-and-thrive 

COVID-19’s impact on the business world is unprecedented, presenting a challenge to all companies and businesses. Some companies have evolved quickly and some have or are falling behind.

Managing a business is a delicate balance anyway. The deadlines, the finances, cashflow, controlling costs, the need to generate income and improve margins, the human emotions, staff needs, skill shortages and with Covid-19 in the mix, it is simply hard to navigate.  Many businesses will rise to the challenge and get through it. Some businesses are no longer viable. Many have closed the doors or considering it.

Struggling NZ Business in First Quarter 2022 – the Why

NZ business owners have struggled in the last while with lockdowns, inflation, increased oil prices, increased freight, global impacts on the NZ dollar, increased interest rates and now we are facing the rapid spread of Omicron, self isolation, more working from home, the impact of protests/mandates and more uncertainty offshore.

Many NZ businesses are suffering and the latest support payments in March 2022 will barely put a dent in the fixed overheads let alone any variable costs. Cashflow is tight for many and the outlook uncertain.  Much of the downturn in business profitability being faced now is out of a business owners control. The statisticians for example say in Wellington foot traffic is down 47% on prior years. Auckland is down 38% of this time last year and 56% compared to two years ago. The prediction is 58% of hospitality businesses will close in the next month – some not indefinitely. 

The impact of Covid on business has been sombre. The company strike offs are on the rise. Debt collection activity is on the rise. The media are saying the probability of recession is rising from the emergence of Covid and the negative impact of high interest rates and inflation.  

It is not however all doom. There is some upside and some have had strong balance sheets with NZers spending in NZ. The dairy industry is doing well. As the borders open, tourism will change dramatically. Travel agents are seeing strong interest in bookings offshore for holidays and to visit family/friends. Some businesses will see an upturn in the near future. There is light at the end of the tunnel.

Options for Struggling NZ businesses – the How

If your business is at the point of spiralling out of control, speak to your professional advisors who may be able to help your business. The pressures now on business are high and it is difficult. There are options for struggling businesses to consider whether that be to restructure or to bring the business to its end.

There are three rescue procedures in NZ, the compromise (Part 14), the Court approved scheme of arrangement (Part 15) – an option seldom used, and Voluntary Administration (Part 15A).

Liquidation is not a rescue procedure. It is usually a terminal procedure. Liquidators typically trade only for a short term for the purposes of the liquidation. The purpose of liquidation is to realise and distribute assets, not business survival.  Some companies however advance liquidation for the purpose of restructuring and to purchase back part of the business from the liquidator (at market value). Some companies advance liquidation with a known purchaser lined up to purchase the business in a clean structure. The consideration attributed is often pre approved by the secured creditors in these cases.

Receivership can be a rescue procedure. It can result in the rescue of viable parts/businesses but the primary duty of a Receiver is to get the best return for the secured creditor (usually the bank). Business survival may be an outcome. Banks may agree to a VA proceeding to avoid the negative publicity from appointing a Receiver or to protect the value of the business goodwill achieved from the stay in an Administration.

A company compromise under Part 14 of the Companies Act 1993 is a useful method without (in theory) having to go to Court. There is however no automatic moratorium (like with a VA) so sometimes you go to Court anyway. A compromise requires the identification of classes of creditors and 75% approval by class. There is often no outside independent manager involved. The compromise is the likely least expensive option but it requires approval to essentially be assured in advance. It works well for smaller companies with lesser creditors involved.

A Voluntary Administration is advanced where the company is cash flow insolvent or likely to become insolvent. No Court application is required. The Board of directors can appoint an Administrator. If there is a winding up application (by a creditor) on foot, the Court will likely adjourn the winding up application if the Court is satisfied that it is in the interests of the creditors (Section 239ABV, Companies Act 1993).  A business must be truly viable to be successfully rehabilitated. The appointment of an administrator for any other reason apart from rehabilitation is unlikely to gain the requisite support.

Liquidation versus Administration
A liquidator can only trade on for limited purpose of winding up. An administrator on the other hand has wide powers including the power to borrow. Some contracts will have termination clauses on liquidation but not on Administration. Both options have their advantages.
The best option is best discussed and well considered before advancing. Contact our team for advice on the options available if your business is in need of rescue, restructure or an orderly termination.

If any of these options may help you bring an end to a messy situation or to survive and thrive, contact one of our Licensed Insolvency Practitioners or email us at This email address is being protected from spambots. You need JavaScript enabled to view it. for some advice.

Economic recap

With inflation figures for the final quarter of 2021 coming in at 6%, it was of no surprise that the OCR would be getting a lift from the Reserve Bank, the question was how much? Last month we mentioned the possibility of a 50-basis point lift with a few commentators backing this size lift. We ended up seeing a 25-point lift with the Reserve Bank using strong language that the next OCR review would likely see the rate lift 50 basis points.

The consensus seems to be that with the invasion of Ukraine, we will see inflation continue its upward trend for the year. Adding to the trend are the food cost increases and the possibility petrol prices will tip $3 per litre before too long. Depending on how high it goes is yet to be seen, there has been mention of inflation at 10% by the end of the year and petrol at $5per litre. While this may seem a long way to go from our current levels, we still have many months to go in 2022. No doubt our council rates review due out in March 2022 will show a lift in rates prices for all homeowners causing more inflation pressure.

Recent house sale volumes to date show a fall in sales for the January period, as pressures continue to mount on borrowers making financing more difficult to obtain. For SME’s business lending continues to remain difficult unless secured over a property but even that will come under pressure with the expectation of falling property values.

Cashflow should in our opinion be the business owners primary focus alongside a focus on the quality of any expenditure. For example review whether your cash outflows are paying core debts/trading obligations or being applied to payment default costs/interest. Is your business getting ahead or likely to. Are you favouring one party over others? You should not be without advice.

With increasing Omicron cases day by day, the peak is expected by the end of March; the government has introduced further business support. The comparison period is for the 6 weeks prior to 15 February which includes the Christmas period, a traditionally quieter period for businesses, meaning that this will be a difficult support payment for businesses to qualify for. At present Hospitality and Retail continue to struggle, as people treat the rising cases as reason to maintain a self-imposed lockdown and everyone now seems to know someone who has Omicron.

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

Corporate appointments for January 2022 are similar to figures from previous years. As expected, court appointments over this period are non-existent given the Christmas closedown for Solicitors and Courts.

66% of the liquidation appointments are made up by insolvent shareholder appointments, the remaining appointments are solvent shareholder appointments.

To date it looks like the February appointments will follow past year trends but whether they will reach the 2020 and earlier year levels, we will only know at the end February.

Insolvency by Industry

“Construction & Property” industry company appointments continue to make up the largest sector. These figures include both solvent and insolvent appointments. “Accommodation and Foods Services” have risen to 3rd following Financial and Insurance Services. These three sectors total over 50% of the total appointments for January 2022.

Personal Insolvencies – Bankruptcy, No Asset Procedure and Debt Repayment Orders.

Personal insolvency levels are at their lowest all-time levels since all 3 personal insolvency options became available to the public.

Of the of personal insolvencies figures, No Asset Procedures made up just under 50% of all insolvency procedures.

Winding Up Applications

Based off the numbers that were seen in December 2021, it is hard to not go up from here. As with any build back up, this will take time, in addition to the bulk of solicitors and professional services firms taking at least half of January off as happens every year with the Christmas closedown.

If you want to have a chat about any points raised or an issue you may have you can call on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

Liquidations advanced through the High Court require Court fee approval in most cases.

Shareholder appointments also subject to some form of review and oversight. In some liquidations a committee is appointed.

Every insolvency practitioner now needs to be licensed and is subject to a complaints and disciplinary process.

A reasonable and competent liquidator should take into account the amount owed to creditors, the prospects of recovery and consider the cost versus benefit of advancing claims and legal actions. It is a liquidator's obligation to maximise the return to creditors and to act in a reasonable and efficient manner.

There have been a number of cases now where liquidators have been scrutinised for charging excessive fees.

Liquidators facing criticism

It was recently published that creditors of a hydroponics company were entitled to be paid more than $56,000 from the reimbursement by the liquidators of fees taken after the High Court deemed the fees were "not reasonably incurred" and hard to justify.

In 2020, another Liquidator faced the Court reducing their fees by 25% in one case and 67% in another. The Judge said "If this liquidation had gone to smaller insolvency practice, I am satisfied the liquidation could have been completed in a shorter time."

The most recent case highlights that Liquidators seeking to discharge their duties should do so with costs and benefits clearly in mind; the benefits ordinarily being those to the creditors. The costs of litigation have to be reasonably incurred and proportionate.

The High Court has the ability to fix a global sum as remuneration if a liquidator has supplied too little information to enable a clear view to be formed on whether the amount claimed was reasonable.

The liquidator bears the onus of establishing that the claimed remuneration is “reasonable” and that the benefit of any doubt, based on the inadequacy of information provided by a liquidator, should be resolved in favour of the creditors.

Case Authority

The Court in Medforce found there must be enough information to enable an assessment of whether the total costs charged are reasonable.

As a minimum a statement of the work undertaken during the course of the liquidation, together with an expenditure account sufficiently itemised to enable the charges made to be related to the work done is required. The Court said “The detail would have to be sufficient to enable the judicial officer to determine whether the personnel involved in the liquidation and their respective charge-out rates were appropriate to the nature of the work undertaken. This information may in some cases raise concerns as to whether there has been overservicing and overcharging. If there are suggestions of this in the information provided, the Court can request further information. “

The leading case, Re Roslea Path Ltd (in liq), deals extensively with the principles and practice on applications to fix liquidators’ remuneration. The Court held that “in fixing a liquidator’s remuneration, it is determining the fairness and reasonableness of what has been charged when measured against the work undertaken and the result achieved. Fair and reasonable remuneration is the value of the services to the creditors and shareholders. Value is an elusive concept which goes beyond mathematical application of hourly rates to hours spent in administrating the company’s affairs.”

The New Zealand Courts support an Australian decision, Conlan v Adams that focussed on where time had not been used reasonably:

(a) work beyond the power of the liquidator;
(b) work done negligently;
(c) unnecessary work (covering decisions to carry out the work and over-servicing);
(d) work by people with inappropriate seniority; and
(e) work at inappropriate rates.

Summary

The recent judgment encourages liquidators to disclose relevant information as to remuneration to creditors during the liquidation.

If liquidators take a course of action which is not required in the liquidation, the court may disallow both their expenses and their remuneration for that course of action.

The legal basis is that regardless the court’s power of review of remuneration under ss 276 and 284, liquidators have no right to claim for expenses not required for a liquidation. Under Schedule 7(1) of the Companies Act, liquidators may be paid only “the fees and expenses properly incurred”.

At McDonald Vague our objective is to maximise the return for creditors. We do not always achieve a return for unsecured creditors but have a good reputation for taking a firm and fair approach and getting returns. Cost/benefit is always a consideration.

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