The country is in the process of working its way back from the economic standstill that most industries experienced as a result of the Level 4 lockdown. For those that traded at Level 3 and Level 2, they had to shift their business models to meet the COVID-19 trading requirements. Many of those requirements squeezed margins.
In the coming months, many business owners will need to look at their businesses and decide whether to continue to trade going forward. While the Government has provided some support, recovering from lockdown is just one more hurdle for businesses that have been experiencing year on year increases in operating expenses and the minimum wage, both of which have made tight margins even tighter.
How lockdown and decreases to many people’s take home pay has affected consumer spending is not yet known.
As business owners look to the future, what can they do if they find themselves in a spot of financial hardship and what options do they have available to continue to operate while the economy recovers?
If a business addresses the stumbling blocks that it is facing at an early stage, many are able to work through those obstacles though decision making and implementing change.
A business restructuring or turnaround can be done by the business owners, usually with the assistance of third parties. The fact that a business is going through a restructuring or turnaround is usually only known to the company’s directors, its lenders, and its key stakeholders.
The process includes:
- assessing/reviewing the business
- identifying areas of strength and weakness within the business
- determining what areas of the business need to be changed
- assessing what changes are best suited to the business and its stakeholders
- making an action plan and implementing the decided upon changes
By undertaking a financial and strategic analysis of the company, you have the tools you need to create an action plan that maximises the return on investment in the business and improves the business’ performance.
It is important to have stakeholder buy in around the timeframes for the turnaround, the KPIs being measured, and the responsibilities of those involved in the turnaround. It is also important that the key stakeholders monitor the plan to ensure that the objectives and milestones are met and that corrective action is taken to get back on track, if targets are not met.
If a business was doing well before COVID-19 hit and now needs some breathing space to get itself back on track, entering into a BDH scheme may be the right option. While BDH does not compromise any of the business’ debts, it gives the business extra time to pay those debts off.
If a business needs the support of its creditors as well as its lenders and key stakeholders to continue and it is not in a position to pay its creditors in full, the business’ creditors may agree to a creditor compromise. The key ingredient to a successful compromise is for the business to have a credible and achievable plan that, when implemented, is likely to result in a better return to creditors than they would receive if the company was put into liquidation.
Compromises can propose that specified unencumbered assets be sold and the net proceeds of sale be paid to creditors and/or for a third party to inject funds into the business so that creditors can receive an agreed payment in satisfaction of their debts.
The aim of entering into a VA is for the business to enlist outside assistance to provide the business with an opportunity to restructure its debt and ultimately trade out of difficulty. VA gives a business a way to maximise the chances of the business recovering or, if that is not possible, for it to be administered for a time so that creditors receive a better return than they would from immediately liquidating the company.
A voluntary administrator may be appointed to a company by the directors, a liquidator or interim liquidator, a creditor holding security over the whole or substantially the whole of the company's property, or the Court.
Receivers can be appointed by a creditor that holds security over the whole or substantially the whole of the company's property, which means that receivers are usually appointed by banks or private lenders. The aim of the receivers is always the same - to protect the interests of the secured creditor and ensure that the secured creditor’s debt is repaid as quickly as possible.
Both solvent and insolvent companies can be put into liquidation.
A company can be placed into liquidation by its shareholders (by shareholders’ resolution) or by the High Court (usually at the request of a creditor but can also be at the request of a shareholder or director of the company).
A solvent company might be placed into liquidation by its shareholders after the business has been sold, closed down, and/or reorganised for tax and/or management purposes.
An insolvent company can be put into liquidation by its shareholders by resolution, usually after the directors and/or shareholders have identified that the company is insolvent and that it is in all stakeholders’ best interests for there to be an orderly winding-down of the business’ affairs.
If a company owes an undisputed debt, the creditor can issue a statutory demand for that debt. If the debt is not paid within 15 workings days, the creditor can apply to the High Court for the company’s liquidation. If the High Court puts the company into liquidation, the liquidators nominated by the applicant are usually appointed.
If a company is facing liquidation by a creditor, the shareholders can put the company into liquidation themselves as long as they do so within 10 working days of being served with the liquidation proceedings. Some shareholders choose this option because they consider that liquidation is inevitable and liquidation by shareholder resolution allows them to appoint liquidators of their choosing.
Early Intervention: The earlier issues are acknowledged and addressed, the more options a business has to tackle those issues and the easier they are to deal with. If you need outside assistance, seek it. In our experience, issues left unaddressed for too long can become insurmountable.
Personal Guarantees: While directors are not automatically liable to pay company debts, most directors will have some exposure to a company’s creditors because they have given personal guarantees. As a director, it is important to know what your personal exposure could be, if the company fails.
Have Up to Date Business Records: If your company’s financial information is not up to date, it is harder for you to make accurate financial decisions. If the information is up to date, you will be able to see where your money is going and where you might be able to make savings.
Review Your Business Model: Now is a good time to look at where your revenue comes from, who your ideal customer is, and whether you are catering to that customer’s wants/needs. If there is a mismatch, what changes can you implement to reach that market?
Landlords and Leases: For many businesses, rent is a large portion of their fixed outgoings. In response to COVID-19, the Government has made some amendments to the Property Law Act that affects landlords and tenants’ rights, including in relation to timeframes for terminating leases for non-payment of rent and introducing a fair reduction in rent term for some small businesses (this amendment has not yet been enacted). If you are concerned about steps being taken by your landlord, seek professional advice.
In May 2020, non-essential services reopened for trading. New Zealand moved from Level 4 to Level 3 on 27 April 2020 and the drop down to Level 2 happened on 13 May 2020. The “new normal” at Level 1 started on 9 June 2020.
Because of the Government assistance that has been provided to businesses, we anticipate that the economic effects of the Lockdown will be seen over a longer period of time than in previous economic slowdowns. Many businesses experienced a surge in trading activity when they reopened at Level 3 and another spike in revenue at the start of Level 2 but few businesses have seen consistent revenue week on week since reopening.
The budget announcement was made on 14 May 2020 and further support measures for businesses were also announced in May 2020. Some economists are now predicting that the coming recession will be deeper, and the economic recovery will be longer, than Treasury’s current forecasts. Many SMEs that have been taking a “wait and see” approach are hoping that further Government financial support will continue to be made available and that that support will be enough to allow their revenue to return so that their businesses can survive in the medium term.
So how have New Zealand’s May 2020 company insolvency figures shaped up as the country moved down the alert levels?
There were 158 company insolvency appointments in May 2020, which is roughly 22% lower than the appointments in May 2019 (193) and May 2018 (204).
Insolvency appointments to May 2020 total 673, which is 17% fewer than 2019 (806) and 28% fewer than in 2018 (923).
The personal insolvency figures for May 2020 have not yet been released by the Government. In both May 2019 and May 2018, there was an increase in the number of personal insolvencies when compared to April and June of the same years.
Since the beginning of 2018, month on month, the proportion of people entering into the No Asset Procedure (for those with up to $50,000 in debt, no assets, and no ability to repay their debts) and those being made bankrupt has been fairly evenly split. If the corporate insolvency figures increase as predicted, we expect that bankruptcies will make up a larger proportion of the personal insolvencies going forward. We anticipate that corporate insolvency rates will increase before personal insolvency rates do, as many creditors do not call upon personal guarantees until after a company has failed.
The Government assistance for businesses announced to date has contributed to the low number of insolvencies in the year to date. Once that financial assistance has been depleted, most will feel the recession start to bite. In preparation, businesses should be evaluating their revenue forecasts and looking at reducing their overheads and streamlining their businesses so that they are in the best position they can be moving forward.
There will be opportunities ahead for those in a position to take advantage of them. Those that are not currently taking active steps to prepare for the future risk waiting too long.
In the last few weeks, we have seen an increase in the number of clients who are moving away from the “wait and see” approach and have decided to actively prepare for the months ahead. We are currently assisting clients in a number of different industries to address the vulnerabilities they are seeing in their businesses. The earlier these concerns are acknowledged and addressed, the more options businesses have to deal with these issues.