Is your business struggling under a mountain of accumulating debts? Are you constantly juggling money between accounts in order to pay creditors? Are you days away from defaulting on a debt?
Accumulating too much debt has been the downfall of many businesses, but it does not have to be the case. If your business is struggling with bad debt and poor cash flow, there are several options open to you before you have to consider insolvency.
You may be able to reach an understanding with your creditors and negotiate better terms for your debt. If you show your creditors that you are taking steps to settle the debt – such as enlisting the help of a professional advisor – you’ll be more likely to reach an amicable compromise. For example, you may be able to negotiate extended payment dates without incurring additional penalties. If you continue to meet your debt obligations, this could see you on your way to being out of business debt.
Trying for a compromise with creditors should always be your first step.
Debt factoring (also known as invoice factoring or invoice financing) is when a business sells their invoices on to a third party, who processes those invoices. The usual reason to do this is to receive a loan based on the expected revenue from the invoices. If you need cash in hand fast in order to meet your debtor obligations, debt factoring can be a good short term solution.
Caution is advised if you’re pursuing debt factoring. In the short term it can solve cash flow problems, especially for young firms who might not be able to borrow from a bank. But as an ongoing tactic, there are risks involved. Factoring is usually a more expensive option than a bank overdraft. The best idea is to seek professional, impartial advice before signing over your invoices to debt factoring.
You may also be able to consolidate business debt from a series of smaller loans to one large loan with a more competitive interest rate. This is a common practice in the consumer debt market, that may be beneficial to help you manage debt in your business.
If you’re strapped for cash, you may be able to raise capital to meet debt obligations through investors. In most cases you’ll be giving away equity in your company, instead of borrowing money you have to pay back. Investors may be reluctant to invest capital if they sense the business is experiencing cash flow issues or is otherwise in trouble.
Asset divestment is where you sell off business assets – such as property, contracts, plant and machinery – in order to raise funds to service debt. In some cases it can be a valuable strategy to inject new funds into a company – especially if you had assets on your books you were looking to divest for strategic reasons anyway – but is usually a drastic measure that should be carefully considered. Once sold, an asset can no longer perform for you.
Conduct a critical review of your expenditures, and benchmark these against industry standards. Are you spending significantly more than other, similar businesses? You can use this information to help you reduce outgoing expenses by targeting the biggest areas of overspend and support the areas of business critical to your success. Telecommunications costs, vacant office space, expensive premises, printing/copying, motor vehicle costs – these could all be contributing to overspend.
If you’re stuck for ideas on how to reduce costs, speak with your staff. They often have a different perspective and clever ideas.
Are you struggling to figure out how to get out of business debt? Before making any drastic decisions, you should talk to a qualified professional advisor. Contact us to find out more.
On your business card, it says you’re the director of your company. But what does that actually mean?
Not all business owners understand that being a director comes with specific duties under the law. It’s important you understand these duties and expectations, because if your company gets into trouble, your personal finances could be put at risk.
In this article we look at the director duties and responsibilities in NZ, and how you might be have some personal liability if your company becomes insolvent.
The Companies Act 1993 lays out the responsibilities of directors, which are called “Director’s Duties.” We wrote an extensive article about director’s duties, which you can look to for more information. But the main responsibilities of the director are to:
If your company is declared insolvent or you do not fulfil your duties under the Companies Act 1993, you as the director can be held personally liable under the following circumstances:
If you sign a solvency certificate knowing it is misleading or false, you are committing an offence, and are liable for a fine of up to $20,000, or you could go to prison for up to five years. Likewise, directors who vote for a distribution, but then don’t sign the certificate, are liable on conviction for a $5,000 fine. The directors can also be required to reimburse the company for the distribution paid if the transaction occurs within a specific period preceding liquidation.
The risk of personal liability are too great to take lightly. That’s why it’s important you understand all your duties as a director under the law, and if you’re worried about the solvency process, talk to the professional team at McDonald Vague. We can give you the best plan for managing your company through tough times.
Your business accountant is more than just the person who crunches the numbers in your business, he or she can be a valuable asset in helping you achieve your goals.
With modern cloud accounting tools like Xero and MYOB at your fingertips, keeping track of your finances is easier than ever, but the specialist advice, compliance, and reporting an accountant provides are still invaluable.
Your accountant should be providing you with regular reports on different aspects of your finances. This isespecially important if your business is in trouble. Your accountant can alert you to the early signs that you might be struggling, and suggest what can be done to turn things around, before it’s too late. The important thing is to ask your accountant for these reports or their opinion.
You may be able to free up cash by reducing supplies or redundant stocks, selling underutilized assets, or arranging time with your creditors through a creditor compromise. You may also be able to reduce your overheads. There are lots of options to mitigate financial trouble, if you get advice early on.
What are some of the financial aspects your accountant should be reporting on or alerting you to?
Many small business owners draw out funds from their business to cover their personal expenses. If borrowing money from the business is done in an ad-hoc fashion, it can cause huge problems and harm the business.
Your business accountant should be making you aware if too much is being withdrawn. They should also be ensuring that as director you are keeping proper accounting records and that directors remuneration is properly authorized by the company board and recorded in an interests register. Any payments need to be fair at the time they are made.
If you borrow more than you invested and the sum is considered excessive, you could be forced to reimburse these funds if your business later faces liquidation. You can be found in breach of director's’ duties and have claims made against you if you do not act in the best interests of creditors and in good faith.
It is bad practice to borrow funds from the business personally to the detriment of business tax and creditor obligations.
One of the main purposes of having an accountant work on your business’ balance sheet is to measure your solvency. Your company has to be able to pay its debts as they become due, and the value of its assets must be greater than its liabilities. As a company governed by the Companies Act 1993, you have specific responsibilities to ensure your business remains solvent. However, this is often something that creeps up on a business owner without noticing. Your accountant should be able to draw your attention to any potential issues impacting solvency. It is important to factor in contingent liabilities.
If you’re using practices that could get you in trouble with the IRD, your accountant should be alerting you so you can amend your behaviour. Getting on the bad side of the IRD can be extremely stressful, and may result in you being investigated and facing penalties. Your accountant should be able to advise you on how to engage with the IRD.
If you have upcoming tax or debt payments coming due, then your accountant should be able to keep track of these and assist to remind you to meet these obligations.
If your accountant says your company is insolvent, then you either need to introduce capital to keep it afloat (but get some advice on that first) or seek advice on the options for insolvent companies. Courts have also criticised accountants who fail to give this type of advice to their clients. It is unwise to take distributions as a shareholder when the company is facing difficulty or to incur obligations you cannot meet – in both cases you will likely be held personally liable.
Your accountant is a valuable member of your team, as they understand your books and how to interpret results. It’s important to choose an accountant you trust, and one who will inform you not just when business is going well, but when it and possibly you could be heading for trouble.
If you think your business in financial trouble contact us now.
When financial difficulties strike it can seem like everyone needs answers all at once.
If you have a company in financial trouble and need to buy some critical decision-making time to deal with your creditors, shareholders, and the IRD, you can place your company into voluntary administration.
The aim of voluntary administration is a short-term freeze on your company’s financial position while an administrator and your creditors determine the future of your business. It’s a relatively new corporate rescue measure introduced through changes to the Companies Act (1993) in 2007.
To start voluntary administration proceedings, an administrator can be appointed by the board of directors, a liquidator, or by applying to the High Court. The administrator is then given full control of the business, and acting independently of the company and creditors tries to work out a way to either save the company, or get a better return for creditors than they would have received from liquidation proceedings.
After the short voluntary administration period, control of your company is either returned to the directors, is placed in liquidation, or enters into a company arrangement to prevent liquidation proceedings.
While your company is under voluntary administration, it cannot be placed into liquidation and creditors cannot take action against you to recover debts. Your business premises or company property also cannot be seized or reclaimed. Essentially, voluntary administration grants time to find a way forward for your business.
Since 2007, very few businesses have opted for voluntary administration as it does come with some downsides. It’s an expensive process, and while the business may survive, shareholders have almost certainly lost their investment while the IRD gains preferential creditor status.
After voluntary administration is declared, the first creditors’ meeting must be called within eight working days, followed by a watershed meeting usually within 20 working days.
At the first meeting the administrator will declare any conflicts of interest, and their relationship, if any, with the company in administration. At this stage the creditors can vote to replace the administrator. The directors’ must hand over all relevant financial information, and cooperate with the administrator as they investigate the company’s activities. Depending on the number of creditors, they can choose whether to appoint a creditor’s committee to consult with the administrator in an effort to simplify the reporting process.
The administrator can make recommendations, restructure the company or make changes as they see fit if they believe it will make the business more profitable and give a better return to creditors.
The watershed meeting is for creditors to decide the future of the company. Depending on the administrator’s findings and feedback creditors can vote to:
If your company is struggling and creditors are demanding answers, your best option is to seek independent advice and learn about all your options. At McDonald Vague we can advise whether voluntary administration is right for your situation, or whether another course of action is better for you.
For more information about options if you have a company in financial trouble, download our FREE Guide for NZ Companies in Financial Difficulty.
You need to wear a lot of hats to be in business. As a business owner you start out wearing many ‘hats’ as you take on all the work yourself.
When your business starts to grow, reaching the next stage will involve handing one of these hats to someone else. But which hat? What should you look for in a future business partner or shareholder, and how can you avoid managing disputes between shareholders?
What’s the end goal for your business? Is it to build lifestyle, or generate revenue before selling? Make sure you’re on the same page with your potential business partner for the end game before you start out.
Yin and yang, light and shade, Superman and Batman. Find a business partner with skills that supplement and compliment yours. Someone whose strengths and weaknesses are an opposing match to you.
Spend time learning the other’s style and way of working so you know how to motivate and support each other. Business can be stressful, so being able to count on your partner is vital.
Are they financially stable, or are they likely to add more risk? A credit or background check plus an upfront chat about finances is important to avoid surprises down the track.
Even after due diligence, shareholders and business partners can still come to loggerheads. Disagreements can be stressful, seriously harming staff morale and business earnings.
How can you go about managing disputes between shareholders so they don't damage your company? Here are our tips.
Party A issues notice to Party B requiring them to either buy all of A’s shares, or sell their shares at a specified price. B then has the option of buying or selling at the offered prices. Ultimately Party A doesn’t know if they will be bought out or not, unless one side is unable to buy the shares, so has no option but to sell.
Party A notifies Party B they want to buy their shares. If B decides to purchase A’s shares instead, both parties bid for the shares in an auction. This only works if both parties are matched financially.
If Party A can prove Party B’s non-performance under a shareholder agreement, they can acquire the ‘right’ to buy B’s shares.
Unless one party has acted unlawfully, breached their contract or director duties, you don’t have grounds to go to court to settle your dispute. Liquidation may be an option with both parties sharing the costs, but only in extreme cases.
To save trouble and prevent dragged-out disputes, the best solution is a crafted shareholder agreement. Most standard agreements lack teeth and don’t facilitate proper mediation or negotiation. A tailored shareholder agreement will properly address the framework and structure of your company, and put in place a clear dispute resolution process.
For more information on shareholders and companies, download our free Guide for NZ Companies in Financial Difficulty to discover your different options.
A statutory demand can threaten your company’s very existence. Used to collect debt, they’re the most common form of evidence used in the High Court to support liquidating a company. Given how serious receiving a statutory demand is, it’s important to act fast and seek professional advice. If you do nothing, liquidation proceedings are virtually guaranteed.
A statutory demand requires payment of debts owing more than $1000 within 15 days. Time is not your friend. If you can settle the debt within that time period then you should be fine. It may still be worth seeking professional advice to see whether your creditor is abusing the statutory demand process, as there could be legal repercussions for them.
If there is an issue with the debt or invoice, then statutory demands cannot be served. If you have a genuine dispute over payment you can apply to the High Court to have your statutory demand set aside, but it must be done within 10 working days!
The Court can take into account any counter-claim, cross-demand or other relevant issues and set aside the statutory demand.
There are a number of formal and informal compromises available to help you reach a settlement with the creditor who served you notice. Any offer needs to show your creditor that for you to continue trading is in their best interests. You can offer assets as a form of security while you negotiate a payment arrangement.
In a real life example, a debtor company was late paying an invoice but paid the total amount in full. While the payment was being processed, the creditor company passed the debt over to their debt collection agency. The debt collectors contacted the debtor for the full amount of the invoice plus their debt collection fee which was over $1000.
At this point, lawyers for the debtor company disputed the collection fee and advised the debt collectors the original invoice had been paid in full. The debt collectors issued a statutory demand to recover their fee, but lawyers for the debtor company successfully argued in court to have the demand set aside.
The court felt the debt collectors had abused the statutory demand process, so they failed to recover their $1000 fee and were ordered to pay costs of over $4000.
Statutory demands are complex proceedings involving the High Court and the Companies Act (1993). Your best course of action is to always seek professional legal advice, and from there figure out how to proceed. Ignoring a statutory demand or acting too late will almost certainly mean liquidating a company, so get professional advice before it's too late.
For more information, download our free Guide for NZ Companies in Financial Difficulty.
It is apparent from Court decisions in recent years that there are risks involved for directors who become involved in a company whose business is outside their areas of expertise or knowledge and who rely on the advice of others.
Directors will be held to account if they breach their duties irrespective of whether they are a director involved in the day to day operation of the company or a passive non-executive director.
The case of FXHT Fund Managers Limited (In Liquidation) and Anor v Dirk Oberholster was heard in the High Court in December 2008 and involved Peri Finnigan and Boris van Delden of McDonald Vague as the liquidators of FXHT.
The proceedings, taken by the liquidators, alleged breaches of director’s duties by Mr Oberholster, one of two directors of the company, and the Court had to decide, if it found there were breaches, whether or not Mr Oberholster was entitled to the defence which is set out in section 138 of the Companies Act 1993 (“the Act”).
In this case it was found that Mr Oberholster could not rely on the defence for two reasons.
The first issues was that the person whose advice he relied on, the 2nd director of the company who ran the day to day operations, was the very person he was supposed to monitor the actions of.
The second issue was the general nature of the advice provided and the informal undocumented manner in which it was provided.
This case highlights the need for ALL directors to ensure that they know what is happening within their company -
They must also ensure that what they receive is relevant, sufficiently detailed and properly documented.
If you would like more information about the requirements on directors and the types of advice you should be seeking please contact our offices.