Debt collection actions are gaining momentum. Winding up proceedings are on the rise. There is a climb in IRD initiated winding up proceedings.

Many NZ companies have been impacted by Covid-19 and are facing insolvency. To be insolvent means one of two things:

• Debts can’t be paid when they’re due.
• Total debt is more than the value of all assets.

The Commissioner of Inland Revenue has increased debt recovery actions. The CIR is able to issue a statutory demand as a step necessary to advance a proceeding against a company.

Ignorance Isn't Bliss

It is recommended for any business struggling to meet tax arrears that negotiations are entered into promptly to avoid a potential winding up proceeding.

Taxpayers are required to pay their tax in full and on time. Failure to do so leads to late payment penalties and interest. These charges compensate the Commissioner for the loss of use of the money and act as a deterrent to encourage taxpayers to pay the correct amount of tax on time.

If your company receives an IRD formal demand, doing nothing really isn’t an option. Inaction will limit your options and virtually guarantees insolvency. You can also be held personally liable for failing to pay PAYE.

In certain situations the Commissioner may be able to provide assistance to taxpayers if they are not able to pay on time, or if the imposition of penalties and/or interest is not appropriate. Depending on the circumstances the Commissioner may also agree to write off or remit amounts owing (so they do not need to be paid), or agree that the taxpayer enters into an instalment arrangement (so the amount is paid over time rather than immediately).

The IRD seek open communication and are more willing to consider instalment arrangements when directors have been upfront from the start. Company directors that bury their heads in the sand and have no plans in place may face less leniency and liquidation proceedings.

The IRD can find directors liable for their company’s tax under general insolvency law. The law also says if a company agreement purposefully leaves it unable to pay a foreseeable tax liability, a director can be personally liable.

In the first instance the IRD will try for a settlement. This is your chance to negotiate terms and arrive at a compromise that allows you to stay in business while the IRD claims their tax. If you can reach a repayment agreement, the IRD won’t take the matter further.

If you’re unable to reach a compromise, the IRD will issue a formal demand, followed by a statutory demand and then issue an application for putting the company into liquidation (winding up proceeding) if you don’t settle the demand. If you do nothing the company will be placed into liquidation by the High Court.

Relief Options

The IRD offer relief options for companies with viable businesses and have been supportive of businesses that have shown clear impacts of Covid-19 on their business.

Financial relief can be granted when a taxpayer cannot meet their payment obligations. The process to apply for financial relief or an instalment option is here.

The Commissioner is open to instalment arrangements towards tax arrears. Splitting up what you owe over weekly or fortnightly payments can make it easier to repay your tax debt.

The CIR may agree to collect the amounts owing over a period of time through an instalment arrangement, or to not collect the amount owing (that is, write off the amount), or a combination of the two options (that is, write off some of the debt and enter into an instalment arrangement for the remainder). An amount may be written off if collecting it would place the taxpayer in “serious hardship”.

Where an amount is considered irrecoverable, the Commissioner has the discretion to write it off. The Commissioner may write off amounts if collecting the amounts owing is considered to be an inefficient use of Inland Revenue’s resources.

Certain penalties may be remitted when an event or circumstance has occurred which is beyond the taxpayer’s control.

Interest or certain penalties may be remitted if to do so is consistent with the Commissioner’s duty to collect the highest net revenue over time.

Voluntary Liquidation

One possibility for meeting the IRD formal demand is voluntary liquidation. This gives the director and shareholders a small element of control over liquidation proceedings. If liquidation is inevitable then the opportunity to voluntarily appoint a liquidator is usually required within 10 working days of the winding up proceeding being served so acting promptly following the statutory demand (or earlier) is advised.

If you do nothing or you can’t reach a settlement, the IRD can apply for their preferred liquidator or Official Assignee and manage your affairs and liquidate your company. In this instance the Court will appoint the IRD’s liquidator. As company director you have less control over the process and must cooperate with the Court appointed liquidator or Official Assignee at all times.

Deciding between involuntary and voluntary liquidation may not seem like much of a choice. Appointing a licensed insolvency practitioner that you believe understands you, your business and your industry, and who can consider your interests while satisfying the IRD’s demands provides more certainty of the likely outcomes. Your liquidator can apply specialist skills to remove some of the sting from this traumatic process.

Statutory and formal IRD demands are outside threats to your business. There are just as many risks that can come from within, so how do you protect your business from those?

If your company is experiencing financial difficulty, download our free guide for NZ Companies to discover your different options.

WHAT SHOULD YOU BE CONSIDERING NOW?

1. Consider the risks of trading insolvently and how directors can be held personally liable.
2. Negotiate an instalment plan with IRD for historic arrears and have a plan in place. The Inland Revenue have pressure to maximise the recovery for the Commissioner under the Tax Administration Act. They are willing to work with companies that communicate early on and this can save further interest/penalties.
3. Assess the viability of the business and its future. Prepare a cashflow forecast.
4. Where cashflow is an issue, consider compromises with creditors leading to some debt forgiveness and time payment arrangements or voluntary administration.

If the company has lost too much from the impact of Covid19 and the prospects are that the company has minimal ability to repay creditors nor has a financial source to fall back on to offer a better position than what liquidation holds, then liquidation sooner may be the better option. Continuing to trade with knowledge of insolvency is a risk for the directors.

WE ARE HERE TO HELP
Our team are happy to discuss the options available for struggling companies and how to manage personal guarantees and personal exposure. Contact This email address is being protected from spambots. You need JavaScript enabled to view it.

If your company needs some advice on the restructuring options or is likely facing the prospect of liquidation, we are happy to advise on the process and consequences.

Problems in a business generally arise slowly. Problems can become disasters if not recognised and managed. Directors have some latitude in choosing to trade out of a temporary liquidity problem or to advance an insolvency procedure. Directors must carefully consider the responsibility they have to creditors and their duties under the Companies Act 1993 and if they can turn the business around.

Steps towards Solvency for a Viable Business

Insolvency is the inability to pay debts when they become due. Steps can be taken to avoid insolvency. The following are steps that can be considered for a viable business:

• Start with a review of overheads. When considering cutting expenditure take steps to analyse the costs involved. The restructure and reduction of staffing for example can be expensive.
• Dispose of surplus assets to improve cashflow. Often plant and machinery can be surplus to a company’s requirements.
• Reduce stocks and work in progress in order to improve cashflow. Sell surplus stocks.
• Re examine the company’s purchase order position and tighten overall management control.
• Seek additional sources of new funds, such as an overdraft/loan, injection of capital, increasing the equity base or taking on a new investor. Investors will want to see the company has forecasts to profitability, that the product/service is right for market and that management is capable.
• Good management and financial resources are essential.
• If the company has deteriorated to the point a rescue option is a requirement, advice should be gained to avoid collapse and to ensure a planned process is in place to avoid insolvency. 

Director Considerations

In embarking on any of the steps to avoid insolvency, it is important to consider factors that can go against you as director:

• Avoid preferring certain creditors ahead of others. A liquidator can clawback transactions from creditors who have gained a preference from an established date of insolvency (if knowledge is held of the company’s insolvency).
• Any asset sales need to be at market value. A liquidator can challenge transactions at under value or to related parties and transactions for excessive consideration.
• A sale of a going concern can be difficult to advance when losses have been incurred or the trading position has deteriorated. Due diligence by interested parties can take time and creates delay when at a time when a company is running out of cash. Continuing to trade whilst insolvent can lead to director liability

Rescue Plans

The purpose of a rescue operation is to ensure a business becomes profitable. This requires a plan and a somewhat ruthless approach.

An option for a company that is struggling is to offer an informal compromise to creditors seeking 100% support to instalment arrangements and usually some debt relief. This is advanced where the company is viable and has suffered a setback. These arrangements requiring 100% support however are difficult and all parties can become disillusioned and failure can lead to liquidation by application to the High Court by a disgruntled creditor. The informal process if managed well can buy a moratorium if full support is gained.

Companies Facing Financial Distress – formal turnaround options

If the company's position has deteriorated to a point where a rescue option is required, advice should be gained early. Continuing to trade an insolvent company and increasing the exposure to creditors can find a director personally liable.

An option for a company in financial difficulty is to offer a formal company compromise under Part XIV of the Companies Act 1993, where creditors by class vote on a proposal for payment usually over a time period and often agreeing to a lesser amount. The proposal needs to show it will provide a better outcome than an immediate liquidation. The company compromise requires a majority in number and 75% in value of creditors voting by class on the matter to support it. The non-voters and non-supporters can be bound by those voting in favour if the requisite majorities are gained.

A voluntary administration (“VA”) is a more structured form of company compromise with an independent administrator engaged to review, manage and rearrange the business and financial affairs to generate the best outcome for a business owner and for creditors. The administrator's focus is to provide creditors and shareholders with a better financial return than might have been achieved were the company put straight into liquidation.

Business Failure in NZ

If the company has failed and has minimal prospects of recovery then liquidation is advanced. A liquidation can advance voluntarily by 75% in number/value of shareholders appointing a liquidator or by the application of a creditor to the High Court (by way of a winding up proceeding) or less common by the board of directors should the company constitution allow.

A secured creditor also has options where concern arises. They can appoint a Receiver and Manager subject to the terms of their Security documentation. The Receiver can seek to sell the business as a going concern and clear the secured creditor’s debt.

For advice on insolvency options contact our team on 0800 30 30 34.  We are here to help.

Related Article:

https://www.mvp.co.nz/articles/business-recovery/creating-a-business-strategy-to-survive-and-thrive 

Economic recap

Recent lockdown measures in China are once again causing delays at their ports, just as the shipping and freight delays looked to be easing. This will continue to keep freight prices high and flow through to the end consumer and businesses.

With a cooling Housing sector delays and cost increases will continue to keep the pressure on developers in the building industry, where building materials for the large number of building consents issued continues to constrain supply. How these shortages and labour shortages are managed by developers and building companies will continue to be of interest; they can do little but watch on as their margins continue to whittle away on their ongoing projects.

If you have been into or used a business in recent weeks since the Omicron outbreak became widespread, you will have noticed that a lot of businesses that require a physical presence are having trouble keeping up with demand. This includes, but is not limited to, hospitality and retail among other industries that have found themselves short staffed with 7-day isolations periods for household contacts as Omicron runs through schools.

Inflation pressures continue to mount from households and businesses with petrol prices jogging past $3 per litre for 91 in very short order prompting government intervention to provide a 25c tax reduction for a 3-month period to relieve some of the pressure.

With the opening of the border in the coming weeks and months we are seeing a number of economists predicting that we will see a further tightening of the labour market in a number of sectors as New Zealanders are drawn overseas to pursue their OE or journey outside of NZ since the borders became locked, whether this will be Australia to fill roles in the building or mining sectors or Europe and wider.

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

Company appointments are in line with the standard February uptick but to date remain below past years February appointments. IRD have been noted applying pressure to the South Island cities and parts of the North Island. Their efforts in enforcement in the Auckland region continue to remain at the lower level for the time being.

Solvent liquidations, as in number of appointments and as a percentage, continues to remain consistent. Directors and shareholders continue to clean up their financial affairs and free up the funds in their solvent companies for other endeavours.

Court liquidations have begun to pick up following the Dec – Jan close down period for courts and solicitors. This will likely peak in March 2022, as in past years March tends to be higher than other months as the end of the financial year and can be seen to set the tone for the year and appointment figures moving forward.

Notable Appointments:

Price Wise (2020) Limited – The liquidation of the new company that had purchased the Price Wise businesses following their insolvency and sale in 2020/2021.

Probuild Construction (Australia) Administration Condev Construction Liquidation – Both are large Australian construction companies that have recently experienced insolvency issues and could be considered precursors for what we may see in the NZ construction sector, no doubt there will be flow on effects from these large company insolvencies.

Insolvency by Industry

“Construction & Property” industry company appointments continue to make up the largest sector up to 35% from 25% in January 2022. These figures include both solvent and insolvent appointments. “Administration and Support Services”, along with “Accommodation and Food Services” each make up 13% and bring the total share of the pie to well over 60% between 3 sectors. While “Retail Trade” appointments for the month have dropped, the remaining industries continue their shuffle each picking up and dropping off a few percentage points for no noticeable changes.

 Winding Up Applications

Winding up notices continue their upwards trend but remain below past years levels.

Of note IRD now make up 40% of appointments in February up from 0% in December but well below levels seen in June & July 2021 appointment levels when they made up 70% of total appointments. There is definitely room to move before they return to their historic levels.

Personal Insolvencies – Bankruptcy, No Asset Procedure and Debt Repayment Orders.

The continued reduction in bankruptcies continues with more focus on the No Asset Procedure and Debt Repayment Order alternatives by budget advisors and other professional service providers so that people are placed into the best insolvency option of their situation, which is always a good thing.

Of note back in 2009 we saw 3000+ bankruptcies in the calendar year while in 2021 we are down to just over 600 appointments. This is a huge drop over that time.

If you want to have a chat about any points raised or an issue you may have you can call on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

Keaton.