It is probably stating the obvious – but if you don’t ask your customers for payment for the goods or services you provide, there is a good chance they won’t pay you.

A lack of cashflow causes issues for any business and particularly so for small businesses that operate on modest turnover and small margins of profit. It leads to the slow payment of creditors and can, if left unchecked, lead to the winding up of the business.

The problem usually comes about, primarily in small businesses, when the owner is working in the business providing the goods and services etc during the week and the paperwork is done later if there is time.

I am aware of one occasion when a small business was liquidated by an unpaid creditor. On appointment by the High Court, the liquidator identified that some customers had not been invoiced for several months. Once the invoicing was brought up to date, and payment was received, the company was able to pay all creditors and there were surplus funds distributed to the shareholders.

The whole liquidation process, and the costs incurred in that process, would have been avoided if the director had made the time to send out the invoices.

Doing the paperwork should not be seen as something that you do when you get round to it because no matter how good you are at the services you provide, if you don’t get paid for what you do your business won’t survive.

If you want to do the invoicing yourself, set aside a specific time each week to get that task performed. It’s more important for the wellbeing of your business than squeezing in another job.

If you don’t have the time or the skills to do the invoicing, be prepared to pay someone who can. Yes, it will cost you some money, but it will be a small price to pay for having the invoices issued in a timely manner, leaving you free to carry on the work that earns the money in the first place.

Companies cease trading for many reasons including technological change, competition, ill health, directors’ retirement, ongoing financial problems, or simply because the company has sold its business or assets and serves no further purpose.

When a business is profitable, a business can cease to trade following sale of its business or sale of its business assets and can resolve to wind up via a section 318(1)(d) procedure (known as the “short form removal”) or follow a formal solvent liquidation. In current New Zealand law, solvent liquidations are advanced to distribute capital gains and capital reserves tax free and to provide more certainty of finality.

In insolvency, directors have a legal obligation to cease trading in accordance with insolvency laws and to ensure they do not breach directors’ duties. Failing to do so, can have significant consequences for the directors personally.

What happens when a company ceases to trade?

When a company ceases to trade, business stops, trading accounts are closed, employees are terminated and assets are realised and distributed. There can be a surplus or a deficit arising.

Solvent Companies

If trading has ceased voluntarily in a solvent company, directors and shareholders resolve to wind up the company. Surplus funds from the sale of assets are distributed among shareholders after all creditors have been repaid. A final tax return is filed and then following tax clearance, an application can be filed with the Registrar of Companies for company strike off. This is a short form removal. In larger companies or where large capital gains have been realised, a solvent liquidation is advanced.

Insolvent Companies

If a deficit is anticipated on windup and where the directors/shareholders do not plan to top up the shortfall, an insolvent voluntary liquidation should be advanced so that an independent practitioner appropriately deals with the distribution of assets taking into account priorities established by legislation. This adds some independence and avoids directors inadvertently preferring certain creditors who then face claw back later when liquidation is advanced by a creditor.

What should happen to a company that is risking trading insolvently?

The Shareholders should look to appoint a liquidator, or the board to appoint an Administrator (if the company is worth rescuing). The practitioner appointed then deals with the company’s affairs and assesses whether it can be rescued or sold as a going concern or wound up. Under a rescue/restructure some staff may be maintained and the business may continue often under a new structure. Sometimes a director or manager has the opportunity to buy back the assets from the liquidator or administrator or receiver in a new entity. This is often called a “hive down”.

If business rescue isn’t an option, assets are sold to repay the company’s creditors as far as possible, following a strict order of priority set out in the Companies Act 1993.

Creditors’ claims when a business has ceased trading or faces liquidation

If you are a creditor of a company that has ceased trading, you need to find out the circumstances in which the business has ceased to trade. If it’s solvent and being wound up, you should be contacted by the director(s) and you should make a claim by providing evidence of your debt to be paid. If trading has ceased due to insolvency and an insolvency practitioner has been appointed, you should contact the liquidator or Administrator to register as a creditor and file a formal claim (if the practitioner has not contacted you). The liquidator will assess your claim and arrange to pay creditors from available funds in the order of priority set by the seventh schedule of the Act.

Creditors of a Company facing strike off from the Companies Register

If you are owed funds, and the company that owes you is facing strike off by the Registrar (often for failing to file an annual return), you can object to the strike off by objecting on the Companies Office website:

https://companies-register.companiesoffice.govt.nz/help-centre/closing-a-company/objecting-to-the-removal-of-a-company/

If you suspect the company has or had assets, or there has been some untoward dealings, as a creditor you can apply to the Court for the appointment of a liquidator after following a proper process. The liquidator can investigate and take recovery action. As the applicant creditor, your applicant Court costs are preferential and rank in priority to the distributions to unsecured creditors.

Creditors of Companies struck off the Companies Office Register

To take action to recover against a struck off company, you must apply for the company to be restored to the Register first. This involves a formal application to the Registrar of Companies and you will need to provide evidence of the debt due. Once reinstated follow a formal demand process.
The two most common ways of restoring a company are as follows:
1. An application made to the Registrar under section 328 of the Companies Act 1993 by a:
o shareholder/director,
o liquidator/receiver, or
o creditor of the company.
Note | This process can take up to six to eight weeks to complete.

2. An application made to the High Court under section 329 of the Act. This option could be considered if there is some urgency to your application such as a property settlement. This is also the only option available if the Registrar received an objection to your section 328 application.

For more information on the implications of a company ceasing to trade, call one of the team at McDonald Vague Limited. We offer no obligation up to one hour free same-day consultations and can quickly assess your best options.

The Tax Working Group at recommendation 61 have said for closely held companies, that IRD should be granted the ability to require shareholders to provide security to IRD if debt is owed by the shareholders to the company and the company owes debt to IRD. This enhances the position of IRD in insolvency and essentially breaks the corporate veil.

Accountants need to monitor the current account positions of their clients and ensure that dividends and salaries are being declared to ensure current accounts are not overdrawn.

Recommendation 61 provides:
61. that, for closely held companies, Inland Revenue have the ability to require a shareholder to provide security to Inland Revenue if:
(a) the company owes a debt to Inland Revenue.
(b) the company is owed a debt by the shareholder.
(c) there is doubt as to the ability/and or the intention of the shareholder to repay the debt.

The impact on companies will vary. For many it will make no difference – for example, public companies, those whose directors/shareholders only receive tax paid salaries, those who annually declare a return and pay tax and where salaries equate to the amount of drawings taken, and those who pay tax and make distributions to shareholders fully imputed.

For closely held companies that routinely have a low taxable profit and material non cash tax deductible expenses resulting in cash surpluses that are paid to shareholders without the shareholders declaring income, issues will arise.

Accountants need to be more proactive for their clients and ensure current accounts are managed.

For more information refer to the following links:

https://www.simpsongrierson.com/articles/2019/tax-working-group-offer-security-to-inland-revenue

Tax Working Group Interim Report

https://taxworkinggroup.govt.nz/sites/default/files/2018-09/twg-interim-report-sep18.pdf pg. 111.

The Government’s response to the recommendations of the Tax Working Group – 17 April 2019

https://www.beehive.govt.nz/sites/default/files/2019-04/TWG%20Government%20response%20table.pdf

https://taxworkinggroup.govt.nz/sites/default/files/2018-09/twg-bg-3987029-minutes-19-july-2018.pdf (page 6)