What's the difference between bankruptcy and liquidation? This is one of the most common questions that we field from directors and individuals we don’t fully understand how the different types of insolvency may apply to their current situation and how it will affect them.

Given the current climate we are in with company insolvencies on the rise it pays to understand the difference.

While there are a number of detailed differences in simple terms bankruptcy is personal, and liquidation is for commercial entities (companies, trusts, incorporated societies etc.) The confusion often arises because of the use of the bankruptcy term in relation to companies in the USA which we often see in the media and on TV shows -XYZ company has entered Chapter 11 (or another number) Bankruptcy under the Bankruptcy Code.

Bankruptcy:

For an individual bankruptcy is not the end of the road, it just draws a line in the sand for their financial position at a certain date, their adjudication date. From this date their affairs are handed over to the Official Assignee (a government entity) to sell assets and pay creditors. A bankrupt is able to retain limited personal assets such as a vehicle up to a certain amount and some tools of trade.
During the term of their bankruptcy it are also a number of rules and restrictions in place that the bankrupt individual will have to abide by or apply for permission from the Official Assignee if they wish to work outside these rules (travel restrictions, self employment etc.). The bankruptcy term is around 3 years, provided the bankrupt completes their statement off affairs and does not breach restrictions that are placed upon them. The individual is then discharged at the end of the term to hopefully have a fresh start and continue contributing to the economy.

https://www.insolvency.govt.nz/personal-debt/personal-insolvency-options/bankruptcy

The above link is from the Insolvency and Trustee Service who administer all bankruptcies in NZ and details the basics on bankruptcy, for additional reading and more detailed informaiton.

Liquidation:

While a liquidation on the other hand will bring an end to a company. A liquidator will be appointed to deal with the affairs of the company and wind it up. Liquidators are generally Licensed Insolvency Practitioners who work for commercial entities, though the Official Assignee does take appointments if no one else is appointed by the court or the shareholders are bankrupt.

The liquidator is able to trade the business as a going concern to realise the assets, if a sale occurs it is to a new entity, otherwise the liquidator will close down the business and realise its assets, through auction or otherwise, and distribute the proceeds to creditors. The liquidators will also investigate the affairs of the company and review its books and records. Once the assets are realised and the investigation complete the company is then struck off the Companies Register.

For directors the rules and regulations placed on bankrupts do not apply during a liquidation, this is where people often get confused. While directors have duties to assist the liquidator they are still able to go out and start new companies, incur debt, travel and their personal assets are not on the line to satisfy creditor claims (unless there are personal guarantees, breaches of directors' duties or a debt to the company etc.)

https://www.mvp.co.nz/mcdonald-vague/liquidations

The above link is from our website and goes into further detail on liquidations, you are also able to request the guide to liquidation from it for further reading.

Essentially in NZ bankruptcy is for individuals and liquidation for commercial entities.

Be sure to contact our excellent team if you have further questions, we are here to help 0800 30 30 34.

In our 42^nd Insolvency by the Numbers, we look at our data set for May 2024. We review how the month has tracked compared to prior months and years.

In the last month the Reserve Bank has continued with no change to the OCR and indicated not to expect any reductions until 2025.

We are now beginning to see a further tightening being covered in certain sectors particularly construction where new work has become scarce and those that are not busy finishing off existing projects are beginning to look to the renovation space.

 The government has released their latest budget showing cuts to a number of ministry’s and projects that are not deemed essential, there has also been some tax relief in the moving of the personal income tax brackets. How these budget changes will affect our stubborn non-tradable inflation is yet to be seen.

 Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

 May 2024 appears to have fallen back into the traditional corporate insolvency patterns we have seen in prior years just at slightly elevated levels over past years. On this basis we would normally see a drop in June but the appointment levels remain consistently higher than the last 6+ years.

Overall total insolvencies for the year remain high, almost double the appointments seen as recently as 2022. Month on month May had 238 total appointments 83 above the long term average of 150 and well above past Mays (2023: 158, 2022: 138, 2021: 151, 2020: 158). We expect that these higher insolvency appointment levels will continue into 2025 given the back log of debts currently sitting with the IRD and other creditors.

For May shareholder appointments increased and there was a decrease in court appointments as a comparative percentage. There was also a spike in Voluntary Administrations and Receiverships due to group appointments. As mentioned in prior months we have also seen a rise in personal receiverships by 3^rd and 4^th tier lenders in attempts to recover their debts (not recorded in the above corporate appointment figures)

We expect increases across all types of appointments to continue throughout 2024 and into 2025.

 Winding Up Applications

 We have now seen 3 months in a row of consistent applications just under the 100 marks being made driven largely by IRD and their recovery efforts. While the winding up applications are normally driven by those made in the Auckland High Court making up 2/3^rds of the total applications, May saw other courts around the country take up a larger share for the month making up around 50% of the applications, a sign that the regions outside of Auckland are also beginning to get their share of insolvency pressures.

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

 We can see a slight increase in April personal insolvency figures driven largely by bankruptcy applications but not a huge change over all. As outlined in the past I would expect that numbers will continue to increase slowly as job losses, increasing interest rates and cost of living continues to pressure people over 2024 and 2025.

 Where to from here?

Much like last month the signs continue to point to the NZ economy being in for continued pain for the foreseeable future with it likely to get worse before it gets better, we foresee continued rising appointments when compared to prior years. The OCR is unlikely to be dropped in the next 6 months potentially 1 year and inflation continues to be above the target of 2% and may be for some years with non-tradable inflation refusing to come under control.

 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..

Economic recap

The OCR continues its march on an upwards trajectory, with the latest Reserve Bank rise of 75 basis points to 4.25 and a supporting narrative outlining future raises in 2023 of up to 125 basis points to bring the OCR to 5.0 and over.

From an economic perspective there continue to be a number of factors affecting businesses. The labour crunch remains with immigration not making up for the continued brain drain as people leave on OE’s or delayed travel plans. Shipping and product delays continue with China’s lockdowns as they struggle to grapple with a continued covid outbreak. On the construction front while councils continue to catch up on the backlog of buildings consents keeping the monthly consent numbers at elevated levels. The vibe from people on the ground however is that 2023 is looking like a slower year moving forward, no doubt a number of the issued consents may lapse incomplete.

ANZ business confidence can be detailed quite simply with their own blurb from their website “Business confidence fell 14 points in November to -57, while expected own activity fell 11 points to -14, only 8 points shy of 2009 lows. Activity indicators fell. Residential construction intentions tanked. Employment intentions were negative for the first time since Oct 2020. Inflation pressures remain intense, though pricing intentions eased.” So generally, the feeling is 2023 is looking rough for businesses.

Of note from our own purely unscientific observations we have seen an increase in the level of enquiries coming into the office over the last few months and an uplift in both solvent and insolvent jobs. What this has been driven by is difficult to say but likely the above factors affecting businesses along with a recent increase in IRD collections action and the cut back in government businesses subsidies seen over the last two years since the commencement of Covid lockdowns.

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations