Items filtered by date: November 2019 - McDonald Vague Insolvency
Friday, 29 November 2019 09:17

Insolvency - Causes And Symptoms

SMEs make up a large part of the insolvency work that we at McDonald Vague handle and the reasons for those insolvencies range from events beyond the control of the company officers to a complete lack of knowledge and understanding by the company officers of what is required of them.

• What led to those companies failing?
• What were some of the red flags that might have been seen along the way?

CAUSES OF FAILURE:

The causes of company failures, as reported to us by the directors, are many and varied and the real reason is not always identified correctly by the directors.

There are, however, common themes that come through in the reasons for company failures.

All the Eggs in one Basket:

It is not uncommon in insolvencies to find that the failure of the company has come about because they have all, or at least most, of their eggs in one basket. The sudden failure of their major client or the decision by that client to go elsewhere leaves a yawning gap in their cash flow.

In tight economic times there is not always the ability to find new business in a short period of time to enable the business to continue to operate. They can also be left holding stock that is particular to that client and have no ability to move it on.

Company directors don’t always have the marketing skills to get out and promote their business nor the financial understanding to see ways to restructure their business to take account of the sudden loss of a major client.

The unexpected loss of a vital staff member can have the same effect, leaving the business unable to operate to its potential while another suitable employee is hired or trained up.

The Economic Climate:

Often directors will point to a particular period and claim that this was when orders dried up.

A sudden down turn can sometimes lead to the company cutting its prices in an endeavour to obtain work but without giving enough thought to what it actually costs them to do that work. So they continue to operate but have no margin or insufficient margin to enable them to meet their costs and catch up on old debt.

Lack of Knowledge:

A number of the small companies that we manage the liquidation of are companies incorporated by a tradesman to charge out their services. Many of these are tradesmen who have moved from employee status to company director and employer because they have been advised that they will be better off working for themselves through a company structure.

While they may all be very capable plumbers, builders, electricians etc many know next to nothing about the requirements of running a company and managing the finances.

They often start with a few tools and a vehicle, no operating capital and no administration systems in place.

They fall behind in filing their PAYE and GST returns, they fall behind in invoicing out the work that they have done. They fail to differentiate between what is the company’s and what are their own personal assets and the company bank account is used for everything, including buying the groceries.

They do not keep accurate records of the income and expenses and fail to carry out even basic functions like checking off bank statements. They have no prepared budgets or cash flow forecasts and, essentially, exist day to day. If there is money in the bank account they can spend it without giving any thought to things like GST & PAYE that may be falling due in the next month.

The cumulative effect of these failings is the downward spiral of the business until a creditor, generally the Inland Revenue Department, puts the brakes on them by threatening to wind them up unless payment is made.

Related Party Loans:

This can include loans to shareholders, family and friends, as well as related companies. The temptation is there, if one company is flush with cash at any stage, to lend the funds to related parties.

Problems arise when there is no clear documentation of the loans and no specific requirement on the related party to make repayments.

While the related entities are still in existence and the loan sits on the company’s statement of financial position as an asset – giving a semblance of solvency – the truth of the matter is that there is no substance to the asset with no likelihood of the loan being repaid.

Allied to this is the giving by the company of guarantees for related entities leading to claims made on the company in the event of default by the related party.

RED FLAGS:

What are the red flags, or danger signs, that the company’s directors or professional advisors might note along the way that indicate all is not well with the business?

• Notifications that PAYE or GST returns haven’t been filed

• GST refunds for 2 or 3 periods in a row. If the company is consistently spending more than it earns, what are the reasons.

• Failure to pay PAYE and GST. PAYE, in particular, is “trust” money deducted from employees’ wages. It should not be available for operational purposes.

• A steady increase in the outstanding creditors and increased age of the debt.

• A constant need for the shareholders to support the company with funds without any light at the end of the tunnel. How long can the shareholders continue to fund the company?

• A sudden change by creditors to expecting COD for supplies rather than place the amount on credit.

CONCLUSION:

The vast majority of company directors and shareholders don’t deliberately set up their company to fail but sometimes, through a combination of matters beyond their control and a lack of skills and understanding of the requirements, that is what happens.

Good advice at the outset and continued support and assistance during the operation of the business from accounting and legal professionals could go a long way to reducing the likelihood of failure.

If you would like more information about the causes and symptoms of company insolvency, please contact one of the team at McDonald Vague.

MANAGER 

Jacinda Nisbet

LIQUIDATOR 1

Peri Finnigan

LIQUIDATOR 2

Iain McLennan

DATE APPOINTED

Monday, 25 November 2019

DATE CEASED

-
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MANAGER 

Dalwyn Whisken

LIQUIDATOR 1

Boris van Delden

LIQUIDATOR 2

Peri Finnigan

DATE APPOINTED

Friday, 21 November 2019

DATE CEASED

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Monday, 25 November 2019 09:42

Fenton Projects Limited (In Liquidation)

MANAGER 

Colin Sanderson

LIQUIDATOR 1

Peri Finnigan

LIQUIDATOR 2

Iain McLennan

DATE APPOINTED

Friday, 15 November 2019

DATE CEASED

-
F

MANAGER 

Colin Sanderson

LIQUIDATOR 1

Peri Finnigan

LIQUIDATOR 2

Boris van Delden

DATE APPOINTED

Friday, 15 November 2019

DATE CEASED

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New Zealand's construction sector, has a string of serious issues that bedevil the industry.

These problems are not just confined to the major construction companies themselves. They are having a seriously detrimental impact on the fabric of trade suppliers and sub-contractors that bind the industry together.

Underpinned by Auckland and Canterbury’s buoyant growth builders should be comfortable. So, why are increasing numbers of construction companies collapsing and going into receivership, declaring insolvency or being faced with the prospect of liquidation?

A Grim Roll Call

While some firms continue to struggle dealing with leaky building and council compliance regimes, much of this problem can also be sheeted home to New Zealand construction firm’s apparent willingness to take on too much risk despite operating on wafer-thin profit margins. This often places their very survival in the balance.

Just look at the unenviable roll call of deceased construction firms from last year, when over 100 construction-related firms have failed in Christchurch since the February 2011 quakes. Collectively, these failures have squandered $35 million.

Ebert Construction went into receivership, Mainzeal collapsed, Orange-H Group entered receivership, Tribeca, and Valiant homes are no more, while Fletchers suffered $800m in losses on 16 large construction projects.

Auckland liquidation notices make for grim reading these days.

Much of this turbulence comes from the industry’s desperate desire to outsource the risk associated with major construction projects, leaving New Zealand’s commercial construction firms balancing large amounts of risk.

This is a game of pass the parcel, where no one wants to be left holding the parcel when the music stops.

Risky Business

A significant amount of this commercial carnage stems from the companies own shortsighted behaviour. Some firms tender in the hope they will get away with screwing their price down to win the work. They submit a bid and simply cross their fingers they will be able to progress the project without incurring any cost escalations either in materials or labour or timing.

At its heart, the New Zealand construction industry as a whole needs a fundamental change in its approach to bidding and operating. If the head contractor incurs a price rise, they simply pass it down the chain, amplifying the impact across a network of subcontractors and trade suppliers.

The industry trend has been toward a growing number of parties and levels in the construction chain and often each of the parties in the chain working on a fixed price. The lead contractor is often not building, but is relying on subbies and outsiders to do the work. In that structure the higher you up the chain the more likely you are to be managing/administering and not building.

And for each level or party in the chain there are additional costs to be covered and also a margin that they charge, (which those further up the chain sometimes also charge a margin on), and that ultimately means a total build cost that is higher than it would be if, for example, a lead contractor was also the single builder achieving its margin.

Plus while that provides some cost certainty for those further up the chain it leaves everyone exposed to the impact and costs of time delays, and unbudgeted events, such as consenting events and finance constraints.

Many of these subcontractors are insufficiently capitalised to cope with cost blowouts. The ripple effect is enormous. Trade suppliers and labourers bear a huge risk.

How risk is allocated on a project is creating a very real a problem not just for a project team but for the wider construction industry as a whole. It’s an industry-wide issue that is yet to be successfully dealt with.

Busy Work Syndrome

Construction firms often find winning work straightforward. What is substantially trickier is to make project work for them financially.

Winning is simple. You cut your (or others) margin to the bone. But once they have a project they have to make it pay. Some construction companies are believed to run certain projects on 0 per cent projected profit margins.

Four to five per cent is a prevailing industry norm when 7 or 8 per cent is the target margin for firms to enjoy long-term viability.

This strategy is designed to maintain each firm’s internal capacity. They understandably want to ensure they have a continual flow of work flowing through their pipeline so they can keep their staff employed.

However, they aren’t sure when these projects are going to come on-stream. If a firm wins too much work then human and financial resources become critically stretched. When work comes on stream site managers become overloaded, more administratively focused and less functional.

We have seen instances where key staff like project managers have had 10 to 15 sites to manage when in the past they may have one or two. Quality, efficiency and cost control suffers. Losses arise.

The passing of risk and responsibility down to sub-contractors and below means that site managers have less control, are less effective as the subcontractor possibly takes short cuts, quality suffers, and where these acts are picked up everyone faces rework delays which are uneconomic and unproductive.

This puts tremendous strain on everyone. That can’t be good for the industry.

Short-Term Cost Focus

Studies identified the top three issues confronting construction companies during the current procurement phase were:

1. Clients focus on lowest price (81 per cent)
2. Cut-price bidding by contractors (76 per cent), and
3. Lack of visibility around the potential pipeline of future work (75 per cent).

With a recent Government Policy Statement on Land Transport promising record levels of proposed infrastructure public investment, a greater focus on whole-of-life value for projects is required to deliver a sustainable construction industry and overcome its cultural malaise.

A fragmented multi-layer structure, stretched administrative and project management, declining quality and thin margins result in substantially greater risk for both the public and the construction sector. Obsessively cutting costs inevitably leads to poorer-quality infrastructure.

Moreover, if contractors are continually subjected to a series of bidding wars centred on cost rather than quality outcomes, this will destabilise the broader New Zealand construction industry, which is already operating on chronically scant margins.

Government infrastructure programs are conceived to deliver value for successive generations of New Zealanders. Adopting a lowest-cost provider strategy for these projects simply leads to higher maintenance and remediation costs downstream.

Greater Government Transparency Required

With the construction industry generating 7 per cent of New Zealand’s GDP in 2017, it is little wonder Prime Minister Jacinda Ardern’s government is looking to mitigate some of the issues plaguing the industry.

The current problems affecting the construction industry are not unique to New Zealand. A lack of transparency around the scale and timing of central and local government development plans, a chronic skills shortage, poor-quality builds and an epidemic of construction company collapses are all concerning.

The Prime Minister Jacinda Ardern, together with Peter Reidy, Fletcher's Construction chief executive ,and other notable industry players unveiled their Construction Sector Accord a new joint strategy designed to combat these structural issues.

According to Ardern the Construction Sector Accord will improve the construction sector's culture and reputation, bolster its workforce and deliver safer, more durable and affordable infrastructure buildings and homes.

The Construction Sector Accord acknowledges that past construction industry clients and Government decision-making behaviours have spawned systemic problems that negatively impacted the New Zealand economy and the wellbeing of New Zealanders.

Final Observation

Construction company failures do nothing to enhance the industry or the economy. In a construction boom, it's hard to recruit subcontractors and taking on too much work can produce a flow-on effect, which can quickly snowball.

Taking on risk is fine provided it is priced into your final bid. Failing to price risks correctly is foolish and exposes the firm and the wider industry to greater volatility and that is bad news for the industry as a whole, for employees, subcontractors and ultimately clients and the broader public. Everyone loses.

Stage 1 of the The Construction Sector Accord is a welcome development as it recognises much of the above. Stage 2 is tasked with how those goals will be delivered. In the meantime we have observed that sometimes it is better to be less busy but be paid, rather than be very busy and not end up paid. So we encourage all participants to do their due diligence on the human and financial capabilities of the people and organisations they are considering doing business with, so they are making informed decisions based on where the risks lie.

 

Employees’ Employment on Liquidation

When a company goes into liquidation, all of the company’s employment agreements may be terminated.  If the company has employees when it is put into liquidation, the liquidators will usually visit the business and inform the employees of the liquidation.  And, employees who have outstanding entitlements will be notified of the liquidation in writing, which is normally sent to the employee’s last known email or postal address.

 If the liquidators continue to trade the business or they require the expertise of certain employees after the company’s liquidation, the company in liquidation will re-employ the employees they require for the period they are required, which could be anywhere from a few days to months.  Employees who work for the company after its liquidation are paid as part of the company’s trading on expenses.  If the liquidators are able to sell the company’s business, the purchaser may be able to offer at least some of the company’s employees new employment.

Employees’ Claims in a Liquidation

 The Companies Act 1993 provides that employees have preferential claims for any:

  • Unpaid salary or wages and any commissions earned in the four months before the company’s liquidation; plus
  • Untransferred payroll deductions and donations made for an employee in the four months before the company’s liquidation; plus
  • Unpaid holiday pay payable to the employee as at the date that the company is put into liquidation, regardless of when the holiday pay accrued; plus
  • Untransferred KiwiSaver contributions, child support payments, and/or student loan payments deducted from the employee’s salary or wages; plus
  • Redundancy compensation, if provided for in the employment agreement.

These claims all rank equally amongst themselves.

Employee’s preferential claims are currently capped at $23,960 before tax (as from 30 September 2018).  This figure is reviewed and adjusted every three years.  The next review will be in 2021.

Some employees have both preferential and unsecured claims in a liquidation.  Claims for payment in lieu of notice of termination are currently unsecured, although this will change soon, and any preferential amounts that exceed the cap of $23,960 are both unsecured.  Any claims by employees for compensation under section 123(1)(c)(i) of the Employment Relationships Act 2000 are also unsecured. 

Draft legislation proposes employee claims for long service leave and payment in lieu of notice should be preferential claims.  These amendments are expected to be introduced in 2020.

Personal Grievance Claims

From the time a company is placed into liquidation, all proceedings against it are automatically stayed.  If an employee or former employee has filed a claim in the Employment Relations Authority (or any other Court or Tribunal), that claim cannot continue without the liquidators’ consent.

Having an order from the Employment Relations Authority or the Employment Court requiring the company to pay wages or salary, holiday pay, compensation, and/or costs does not affect whether any part of an employee’s claim is preferential or unsecured.  Generally, liquidators will not consent to the proceeding continuing unless the outcome is likely to affect the employee’s claim in the liquidation and the liquidators consider that they are not in a position to accept the employee’s claim as submitted, which the liquidators have the power to accept in part or in full.

Timing of Employees’ Preferential Payments

Companies do not usually go into liquidation with the funds to pay employee entitlements sitting in their bank accounts – in most cases, the company’s bank accounts are in overdraft – so there is likely to be some delay in collecting funds and payments to employees. 

Even if a company has lots of assets, if any of the company’s assets are secured by a specific security, the secured creditor is entitled to that asset in priority to the company’s preferential creditors until that debt is repaid.  Even if the company has late model vehicles or recently purchased new equipment, the value realised rarely covers the amount owed to the secured creditor.  If there is any surplus from realising these secured assets, those funds are paid to the liquidators for distribution. 

Payment of employees’ preferential claims rank behind the cost of the company’s liquidation, which includes any trading on costs, the cost of realising the company’s assets, the liquidators’ fees and expenses, and the petitioning creditor’s costs (if the company was put into liquidation by the High Court).   

If there are funds available to pay employee preferential claims, those funds are likely to come from selling the company’s business and assets and collecting any debts owing to the company, all of which can take time.  If there are some funds available to pay employee claims, it is not uncommon for partial distributions to be made as and when those funds become available.    

If the company does not have enough assets of value and easily recoverable accounts receivable to pay the employees’ preferential claims in full shortly after liquidation, there is likely to be a reasonable delay before employees receive any further payments, if at all.  Those further payments will be dependent on the company and/or the liquidators having claims against third parties that, if pursued, are likely to result in creditors receiving a distribution. 

Once all avenues of recovery have been exhausted and all funds have been distributed, the liquidation comes to an end.

If the company has outstanding PAYE at the end of the liquidation, as between the IRD and the employee, the IRD treats the amounts declared by the company as PAYE as paid.

Wednesday, 13 November 2019 13:57

Picking An Insolvency Practitioner

You wouldn’t pick a tradie on price alone so why would you pick an insolvency practitioner solely on this basis?

You expect your tradie to work to industry standards when working on your house or car so why wouldn’t you take the same care before you hand over control of a business to an insolvency practitioner, who will be dealing with your company, its assets, its creditors, and its stakeholders?

Not all insolvency practitioners are created equal. They have different levels of experience and qualifications, work in different size firms, and may or may not be accredited. If you appoint the wrong insolvency practitioners, it can be difficult to remove them. If it’s shortly after appointment, the company’s creditors may be able to appoint replacement insolvency practitioners at the initial creditors’ meeting. If not, it will likely involve a trip to the High Court. If the insolvency practitioner is not accredited, they will not have to answer to a disciplinary board.

You should expect your insolvency practitioner be law abiding and to deal with the company’s directors, shareholders, and creditors fairly and ethically. We have put together a handy list of what to look for, what to ask, and what to consider before engaging an insolvency practitioner.

WHAT SKILLS DO I NEED TO LOOK FOR IN AN INSOLVENCY PRACTITIONER?

Your insolvency practitioner should:

1. Have experience in the industry the business operates in

2. Have relevant insolvency experience, including in relation to the type of appointment you are considering and any steps you expect them to take after their appointment

3. Be an Accredited Insolvency Practitioner, either through RITANZ or CAANZ

4. Have sufficient resources behind them to properly carry out the appointment

5. Have a history of making distributions to creditors

HOW DO I CHOOSE THE RIGHT INSOLVENCY PRACTITIONER?

Ask questions, and lots of them. The more information you are able to get up front the better position you will be in when it comes time to make the decision on who you should go with.

WHAT QUESTIONS SHOULD I ASK AN INSOLVENCY PRACTITIONER?

(a) Are they members of RITANZ and Accredited Insolvency Practitioners (AIPs)? Until regulation come into force in June 2020, we recommend that you only use AIPs. AIPs are required to comply with a code of conduct that dictates the professional and ethical standards they are expected to meet. The code is enforced by Chartered Accountants Australia and New Zealand. There is a public register of AIPs on both the CAANZ and RITANZ website.

(b) What previous relevant experience do they have? There are different types of insolvency appointments (advisory, compromises, voluntary administrations, receiverships, and liquidations). If you are looking at appointing voluntary administrators, you probably do not want to appoint someone who has never done one before.

(c) What kind of qualifications and experience do they have within the firm? Depending on the type of post-appointment work that will be required, you may want to appoint AIPs that are chartered accounts, have legal knowledge, or are experienced in forensic accounting.

(d) Are they Chartered Accountants, do they have a legal background, or forensic accounting skills? The appointment may determine what kind of background you should be looking for.

(e) Do they have the resources necessary to deal with the appointment? If the business operates multiple stores across the city or the country, does the AIPs’ firm have enough staff to take on the appointment?

(f) Do they have a history of making distributions to creditors? What level of overall fees would the AIP expect to charge on the job?

FINDING THE BEST INSOLVENCY PRACTITIONER FOR YOU

It is important that the AIPs you appoint understand your personal situation and your business’ needs so they can help achieve the best result for all parties. It is important that you take your time with this decision because you will be trusting them with the business.

McDonald Vague’s directors are AIPS and Chartered Accountants. We also have three non-director AIPs and our professional staff are members of RITANZ. McDonald Vague is also a Chartered Accounting Practice and is subject to practice review.

MANAGER 

Yvonne Wei

LIQUIDATOR 1

Peri Finnigan

LIQUIDATOR 2

Iain McLennan

DATE APPOINTED

Thursday, 7 November 2019

DATE CEASED

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I