IRD pressure on the Construction Industry

It is important to keep proper books and records and ensure you meet your tax obligations. IRD say “declare it all or risk everything” in a recent announcement.

Late payments and bad debts are the main triggers of insolvency in construction companies. The payment of taxes however contributes to cash flow problems.

IRD’s recent release is heavily focussed on enforcement. Winding up applications by the Revenue are also on the rise generally.

For more information on the Revenue’s latest release relating to “cashies” read here.

 
Dealing with IRD

We recommend communicating early and negotiating a time payment arrangement if your company falls into arrears but generally your business is viable. The IRD will likely require you to complete an IR591 (12 month cashflow forecast) to support any plan.  The IRD provide the following advice for managing tax and for gaining financial relief for companies, partnerships and trusts <read here>

If the financial position of the company is dire then contact a Licensed Insolvency Practitioner to discuss the options. The IRD may consider financial relief or an instalment plan.

There is a high risk of financial penalties for failing to take action. By making a full voluntary disclosure, IRD say you may have your penalties reduced by up to 100%, you may avoid prosecution and you may retain your good business reputation. By communicating early on, your business has more chance of survival. By taking action early as a director you are less likely to be breaching your duties under the Companies Act 1993 and to be held personally liable.

Typically, March is a busy month – it is the end of the financial year for most New Zealand companies and income tax returns for the previous financial year (for clients of tax agents) are due, which means many business owners decide to commit or quit in March.

As a result of an alert level increase on 28 February 2021, Auckland spent the first week of March 2021 at Alert Level 3, while the rest of the country stepped up to Alert Level 2. In order to soften the blow, the Government activated two rounds of resurgence support payments plus a two-week wage subsidy payment for eligible businesses. There were also signals from the Government in around mid-March that the (now open) Trans-Tasman bubble would be in place by the end of April 2021. These developments likely gave some businesses on the brink a bit more time, whether for better or for worse.

Over the last 12 months, many businesses have been planning for the short term but few have been making longer term decisions, due in large part to the uncertainty that has prevailed over the last 12 months.

As at 31 March 2021, there were 679,617 companies registered on the Companies Register.

The start of a new financial year will bring many opportunities as well as many challenges. As the IRD’s activity continues to increase and the Reserve Bank’s mortgage deferral scheme expires (it ended 31 March 2021), the effects of the last financial year will likely start to be felt by many businesses.

If you want to have a free chat about any issues your business is experiencing or about any other insolvency matter, contact us on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

We saw another upswing in the insolvency figures in March 2021 when compared to February 2021. There were 170 insolvency appointments in March 2021, which was only four fewer than March 2020. The composition of the appointments, however, is quite different:

The decrease in receiverships is not unexpected, given the concessions made by New Zealand’s banks in response to Covid-19. As the deferral periods and other support measures come to an end, we expect that there will be more activity from secured creditors.

The increase in the top personal tax rate from 1 April 2021 likely contributed to the increase in solvent liquidations in March 2021, which allowed for distributions to be made before the higher tax rate took effect.

While company insolvency appointments are still down compared to the first quarter of 2019 and 2020, the gap between 2021 and previous years is continuing to narrow.

Personal Insolvencies - Bankruptcy

Personal insolvencies continue to be lower than in the pre-Covid-19 period. March 2021 personal insolvencies were down 32.5% on March 2020 and the March 2021 quarter were down 34.5%. Of the total personal insolvencies, the percentage entering into debt repayment orders (formerly summary instalment orders) in 2021 has increased when compared to 2020.

Voluntary liquidation allows a company to terminate its operations and sell off assets and for any shortfall to be dealt with.

Some companies are liquidated because they serve no further purpose. Some are liquidated as they have unfeasible operations or poor operating conditions or technology has moved on. Others are liquidated because the founder has retired or passed and the business cannot operate without that expertise. Some have been affected by the failure of a large customer, the loss of a major contract or an extraordinary event, like Covid-19. 

Most companies advance an insolvent liquidation because:

• The business cannot pay its debts as and when they fall due.
• Liabilities exceed total assets.
• The business is making losses and there are minimal prospects to turn it around.
• The directors are finding it hard to cope with the stress and pressure of trading.
• Trading is in decline and there is concern of personal liability for trading insolvently
• The directors would like someone else to deal with the creditors and all their claims.

Struggling companies juggle the payment of debts, are often in receipt of formal demands or statutory demands and commonly are on instalment plans with Inland Revenue or certain suppliers that they are having difficulty honouring.

When a company is facing financial distress and having trouble paying its creditors including GST and PAYE, there is a high chance that the business is already insolvent. Company directors who operate an insolvent business must act in the best interests of creditors and cease trading immediately if there is no realistic prospect of recovering from the financial difficulties being experienced.

When a company is in too much in debt to recover from a turnaround strategy or restructuring procedures such as company compromises or voluntary administration, liquidation is often the only viable course of action.

Liquidating leads to dissolving the failed company structure and bringing all activity of that company to a close. It is a way for a company that has run out of funds to deal with the shortfall to creditors.

What is the role of the liquidator?

The role of the liquidator in an insolvent liquidation is essentially to realise the company's assets, and, where possible, to make a distribution to the creditors.

The liquidator also conducts investigations into the failure of the company, the conduct of its directors and, sometimes the conduct of third parties, like creditors.

What steps do you take if your limited liability company has no future?

An insolvent company is generally wound up voluntarily by the shareholders or on a Court application by a creditor. A licensed insolvency practitioner (IP) is appointed to oversee the liquidation process.

The liquidators take steps to realise the company assets and pay outstanding creditors according to a designated hierarchy set out in the Companies Act 1993. If there is a shortfall the creditors receive their entitlement and the balance is written off or possibly pursued under a personal guarantee if one has been granted.

If the company has sufficient funds to pay all creditors, it is solvent and surplus funds are distributed among shareholders according to their percentage shareholding.

If the company is solvent, the company can be wound up following a S218(1)(d) strike off process or by way of a solvent liquidation process. The latter can provide more certainty for companies with larger capital gains.

Why would you initiate liquidation voluntarily?

The process of voluntary liquidation is less stressful than facing a winding up proceeding following a creditors application to the Court. The voluntary appointment can be planned in advance to minimise disruption and the shareholders have the opportunity to select the licensed insolvency practitioner who will manage the entire process. The appointment process is fairly straightforward.

Liquidation may not necessarily mean the end of the business. It may be that the business assets are sold at market value as a going concern and a new company takes over. The IP decides on the best way to maximise value for the creditors and whether that involves closing or trading whilst the business is marketed for sale. With a voluntary process the plan can be discussed prior to the appointment including how staff are managed and assets realised. Often directors can have an involvement or a say in the process because it is in their interests to maximise the recovery and minimise the exposure to creditors who hold personal guarantees.

What are the risks of trading an insolvent company?

Although a company structure provides limited liability, this does not mean directors can ignore matters if financial problems arise. Directors have legal obligations to adhere to certain standards. Acting earlier reduces the risk of personal liability.
Continuing to trade with knowledge of insolvency is a risk, where you could find yourself as a director being held personally liable for trading.

Once a director or shareholder knows their company to be insolvent, they must not engage in any activity which could worsen the position of creditors or increase their losses any further. Directors should not increase debt, incur further credit, dispose of assets below market value, or increase their overdrawn current account.

If you do not have sufficient funds to pay everyone you owe, you place your creditors at risk of receiving a voidable transaction if they have knowledge of the demise of your company.

What steps do you take if your limited liability company is in financial difficulty but you have a viable business?

If your limited liability company is facing financial distress but the business is viable, gain advice from a professional. A licensed insolvency practitioner will be able to talk you through the options for rescuing the company (restructuring), giving you the best chance of a successful turnaround, while also ensuring you are adhering to your duties as a director.

There are options such as a hive down process (new company structure), creditor compromises (current company structure with a repayment plan for creditors), voluntary administration (current company with a Deed of Company Arrangement).  

For advice, contact the MVP team.