Employees’ Employment on Liquidation

When a company goes into liquidation, all of the company’s employment agreements are automatically terminated.  If the company is still trading when it is put into liquidation, the liquidators will usually visit the business and inform the employees of the liquidation.  Otherwise, employees who have outstanding entitlements will be notified of the liquidation in writing, which is normally sent to the employee’s last known email or postal address.

 If the liquidators continue to trade the business or they require the expertise of certain employees after the company’s liquidation, the company in liquidation will re-employ the employees they require for the period they are required, which could be anywhere from a few days to months.  Employees who work for the company after its liquidation are paid as part of the company’s trading on expenses.  If the liquidators are able to sell the company’s business, the purchaser may be able to offer at least some of the company’s employees new employment.

Employees’ Claims in a Liquidation

 The Companies Act 1993 provides that employees have preferential claims for any:

  • Unpaid salary or wages and any commissions earned in the four months before the company’s liquidation; plus
  • Untransferred payroll donations made by an employee in the four months before the company’s liquidation; plus
  • Unpaid holiday pay payable to the employee as at the date that the company is put into liquidation, regardless of when the holiday pay accrued; plus
  • Untransferred KiwiSaver contributions, child support payments, and/or student loan payments deducted from the employee’s salary or wages; plus
  • Redundancy compensation, if provided for in the employment agreement.

These claims all rank equally amongst themselves.

Employee’s preferential claims are currently capped at $23,960 (as from 30 September 2018).  This figure is reviewed and adjusted every three years.  The next review will be in 2021.

Most employees have both preferential and unsecured claims in a liquidation.  Claims for payment in lieu of notice of termination and any preferential amounts that exceed the cap of $23,960 are both unsecured.  Any claims by employees for compensation under section 123(1)(c)(i) of the Employment Relationships Act 2000 are also unsecured. 

Personal Grievance Claims

From the time a company is placed into liquidation, all proceedings against it are automatically stayed.  If an employee or former employee has filed a claim in the Employment Relations Authority (or any other Court or Tribunal), that claim cannot continue without the liquidators’ consent.

Having an order from the Employment Relations Authority or the Employment Court requiring the company to pay wages or salary, holiday pay, compensation, and/or costs does not affect whether any part of an employee’s claim is preferential or unsecured.  Generally, liquidators will not consent to the proceeding continuing unless the outcome is likely to affect the employee’s claim in the liquidation and the liquidators consider that they are not in a position to accept the employee’s claim as submitted, which the liquidators have the power to accept in part or in full.

Timing of Employees’ Preferential Payments

Companies do not usually go into liquidation with the funds to pay employee entitlements sitting in their bank accounts – in most cases, the company’s bank accounts are in overdraft – so there is likely to be some delay in collecting funds so that payments can be made to employees. 

Even if a company has lots of assets, if any of the company’s assets are secured by a specific security, the secured creditor is entitled to the net proceeds of sale of that asset in priority to the company’s preferential creditors.  If the company has late model vehicles or recently purchased new equipment, the value realised rarely covers the amount owed to the secured creditor.  If there is any surplus from realising these secured assets, those funds are paid to the liquidators for distribution. 

Payment of employees’ preferential claims rank behind the cost of the company’s liquidation, which includes any trading on costs, the cost of realising the company’s assets, the liquidators’ fees and expenses, and the petitioning creditor’s costs (if the company was put into liquidation by the High Court).   

If there are funds available to pay employee preferential claims, those funds are likely to come from selling the company’s business and assets and collecting any payments owing to the company, all of which can take time.  If there are some funds available to pay employee claims, it is not uncommon for partial distributions to be made as and when those funds become available.    

If the company does not have enough assets of value and easily recoverable accounts receivable to pay the employees’ preferential claims in full shortly after liquidation, there is likely to be a reasonable delay before employees receive any further payments, if at all.  Those further payments will be dependent on the company and/or the liquidators having claims against third parties that, if pursued, are likely to result in creditors receiving a distribution. 

Once all avenues of recovery have been exhausted and all funds have been distributed, the liquidation comes to an end.

If the company has outstanding PAYE at the end of the liquidation, as between the IRD and the employee, the IRD treats the amounts declared by the company as PAYE as paid.

It is, unfortunately, an all too common result of a company failure – customers who have paid a deposit for an item or service only to have the provider placed into liquidation before the goods or service are delivered, are left as unsecured creditors in the liquidation or receivership, with little likelihood of any recovery.

Why are Prepayments Made?

Prepayments by customers help give certainty to a business that the customer is genuine in their intention to complete the transaction proposed and will not leave the business holding unwanted stock or with preparation costs incurred that will not be met.

Paying a deposit to a property developer when buying off the plans secures one of the planned properties in the development for the customer and gives the developer certainty of sale to ensure on-going support from financiers.

What happens in an insolvency?

If the company to which you made the prepayment goes into receivership or liquidation, before the goods or services have been delivered, you will most likely lose the amount you have paid and rank as an unsecured creditor in the insolvency. The same would apply to amounts paid for gift cards issued by the company as generally they will not be honoured by the insolvent company.

In most insolvencies, there are little or no funds available for unsecured creditors.

If the receivers or liquidators decide that it is economically viable to trade the business on to try and complete some contracts, it is possible that your transaction may be able to be completed with the goods or services being provided on payment of the full price.

How can you protect prepayments?

Do as much due diligence as you can on the business you are dealing with. Have there been any adverse reports in the media or are there on-line comments or reviews that suggest the business has financial issues?

If you are purchasing from a retailer and enter into a layby agreement, you will be a preferential creditor in the insolvency, ranking behind other preferential creditors such as employees and the Inland Revenue Department but ahead of the unsecured creditors. This does not guarantee you will receive payment, but it does improve your chances.

The Fair Trading Act 1986 describes a layby sale agreement as any agreement, whether or not described as a layby sale agreement, that provides that –
• The consumer will not take possession of the goods until all, or a specified amount, has been paid and either -
o the price of the goods will be paid by 3 or more instalments: or
o if the agreement specifies that it is a layby agreement, 2 or more instalments

A layby sales agreement does not apply if the purchase price of the goods is more than $15,000.

If prepayment is included in a contract, such as for building or renovating a property, get independent legal advice on the contract. Can you require the deposit be paid into a solicitor’s trust account or an escrow account? Can you register a security interest in the assets of the company for the funds you have paid?

What are your remedies?

In normal circumstances, if a contractor fails to complete the project in accordance with the terms of the contract, consideration could be given to taking legal proceedings to have it completed or to recover any deposit paid or extra costs incurred.

However, if the party that breaches the contract is a company in liquidation, there is limited ability to do this as the liquidator can, and usually does, refuse to agree to legal proceedings commencing or continuing against a company in liquidation.

Application to the High Court can be made to allow the proceedings but any financial orders made against the company would rank as an unsecured claim in the liquidation.

Liquidators will investigate the affairs of the company and, if breaches of director’s duties are identified, may initiate legal proceedings against the directors personally, seeking orders from the Court that the directors make a contribution towards settling the losses incurred by creditors.

If there are grounds to show that the company’s directors were dishonest in their dealings with clients and by doing so obtained funds when they knew that they were not going to be able to complete their end of the agreement, consideration could be given to reporting the matter to the Police.

If sufficient evidence is available, the Police could prosecute and seek reimbursement of losses caused to the complainant. The standard of proof in criminal trial is “beyond reasonable doubt” much higher than is required in civil matters. The mere fact that the person didn’t do what they said they would is not generally evidence of fraud. There is also no guarantee that a Judge will order an offender to make payment to the victim.

Conclusion:

Other than if the funds are paid into a trust account, it is difficult to safeguard prepayments totally in the case of a company going into liquidation or receivership. Doing some background enquiries or gaining professional advice before committing yourself may help avoid the issue but, if you have to make the payment, pay as little as possible before gaining access to the goods to limit the damage if things go wrong.

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.

Tuesday, 18 September 2018 14:53

Winding Up A New Zealand Company

The winding up of a company in New Zealand can occur in three ways –

• A voluntary liquidation initiated by the shareholders of the company (solvent or insolvent companies); or
• A Court ordered winding up initiated by a creditor of the company; or
• A short form removal also known as Section 318(1)(d) process (solvent companies)

The purpose of this article is to set out the different processes involved with these options.

Voluntary Winding Up:

The process to be followed by the directors and shareholders of a company to wind the company up depends on the financial position of the company, that is whether it is solvent or insolvent.

Solvent Companies:

When the decision has been made that a solvent company is no longer required, it can be placed into liquidation by shareholder resolution after the directors have provided a Certificate as to Solvency pursuant to Section 243 (9) of the Companies Act 1993 (“the Act”).

The process to place a solvent company into liquidation is as follows:

• The liquidators’ consent to their appointment in writing.
• Directors pass a resolution as to the solvency of company on liquidation.
• Directors sign a certificate stating the grounds on which they are relying for their opinion as to solvency.
• A copy of the directors’ resolution is filed at the Companies Office within 20 working days before the appointment of liquidators.
• A special resolution of shareholders is signed appointing liquidators.
• The liquidators give notice of their appointment to the Companies Office.
• A notice of appointment and notice to creditors to claim is published in the New Zealand Gazette and a newspaper for the region in which the company operated.
• The liquidators’ first statutory report is filed at the Companies Office with copies to the shareholders and any creditors.

The shareholder special resolution cannot be passed until after the resolution of solvency has been signed and filed at the Companies Office (but no later than 20 days thereafter).

There is also a second procedure for having a solvent company removed from the Register of Companies known as the short form removal process.

This short form process can be administered by the company’s directors / shareholders or by its external accountants and it is quicker and easier, without the requirement for public notice to be given or the filing of reports.

The down side to this process is that it does not confirm the solvency of the company and does not provide the level of certainty to 3rd parties that a formal liquidation, conducted by an independent accredited insolvency practitioner, does, leaving the possibility of someone making application to the Registrar to have the company reinstated to the Register. In liquidation, the process to reinstate a struck off company involves a High Court application and is costly.

Insolvent Companies:

When the directors of a company conclude that the company is insolvent and should stop trading they have the option to commence the voluntary winding up of the company by having the shareholders appoint a liquidator.

The process to place an insolvent company into voluntary liquidation is as follows:

• The liquidators’ consent to their appointment in writing.
• A special resolution of shareholders is signed appointing liquidators. This requires 75% or more of shareholders by number and by value of shareholding to sign to make the appointment valid.
• The liquidators give notice of their appointment to the Companies Office.
• A notice of appointment and notice to creditors to claim is published in the New Zealand Gazette and a newspaper for the region in which the company operated.
• The liquidators’ first statutory report is filed at the Companies Office with copies to the shareholders and any creditors.

The voluntary process is only available if the company acts within 10 working days of a winding up proceeding being served.

Court Ordered Winding Up:

As the creditor of a company that is failing to make payment of amounts owed, you may reach the stage where the only option left to you is to have the debtor company wound up, or liquidated, by order of the High Court.

The process to have an insolvent company wound up by order of the High Court, on the application of a creditor, is as follows:

• Make sure that you have the correct legal name of the debtor company – not just a trading name.
• Have a statutory demand served on the company. This gives the debtor company 15 working days to make payment or enter into an arrangement to settle.
• If the statutory demand is not satisfied, an application must be filed in the High Court to have the company placed into liquidation.
• Have copies of the documents filed at Court formally served on the debtor company.
• Public notice of the application has to be given in the local newspaper.
• Have the liquidators provide their written consent to being appointed.
• The matter will be heard at the next Court day set for hearing insolvency matters and the liquidation will commence once the Associate Judge of the High Court makes the order.

It is advisable to have your lawyers involved from the beginning of the process to ensure that the statutory demand is properly prepared and served. They will have to be involved in the preparation and filing of the Court proceedings. The creditor making application can nominate an insolvency practitioner to act.

Conclusion:

The processes set out above are the basic steps that can be taken to wind a company up in New Zealand. The processes described may not always be appropriate because of the particular circumstances of the case.

If you are considering winding up your own company, or taking steps as a creditor to wind up another company, and would like to discuss the options, please contact the team at McDonald Vague

Colin Sanderson
September 2018

With Auckland’s housing shortage and home renovation activity, you would be excused for thinking building companies should be surfing a building boom and reaping the rewards.
However, many continue to fall over despite promising industry conditions, leaving customers, contractors, suppliers and even the taxman in the red.

Building is a complex task

Building involves multiple parties from designers and architects to surveyors and councils, to suppliers and to customers. There are few companies that have the ability to perform the entire build process.

There are external specialist suppliers. Whether it’s the architect or the excavator and/or foundation company or the window supplier or the plumbers/sparkies and tilers and painters these trades (and many more) are usually separate from the builder. There are a lot of relationships and expectations for a builder to manage and at each stage the plan can go wrong. As margins in the industry are slim, any error or delay is costly, time consuming and potentially business ending. Defective work has a double impact in delay and cost.

Delays mean you are exposed to price increases and often further delays as preferred suppliers have to juggle their production schedules to meet new expectations. The cost of standing still due to delays also mounts up. Staff and the fixed costs (premises, and the inevitable leased ute and the dog) continue even if the project is standing still.

Those slim margins are easily gone especially if your customer controls themselves and does not vary much as the build progresses. A lot of builders make their money from increased margins in the hope for customers variations. So the initial build price is priced at or just above cost to win the work.

What can go wrong? Examples based on real life

Architects and Designers

The architect/designer may have their own view as to what the customer wants. I have heard of one house renovation project where the architect has changed some basic room dimensions a dozen times. Specialist suppliers are sick of the changes. How the builder is supposed to cope with that while managing a project and a business is anyone’s guess.

Assuming that is all under control and agreed at the beginning, the customer is happy and everyone is friends. It’s all going to be great.

Customers

Once the build starts the customers expectations can change to expect the world’s best house at the very lowest price. The customers have become experts in building, (the customer may even have a helpful builder “mate” in the background stirring the pot). They can be unmoving on price increases even when they change things. Maybe there are delays with council issuing consents on the initial build or on the variations. Disputes arise with customers and payments are delayed. Banks, suppliers and staff start to become nervous. How do you manage? You have lots of customers, you are growing. It’s the third day of a new month and you don’t have any money in the bank but you will be alright.

You get grumpy, and decide the customer(s) needs to be ignored for a while. That will show them….WRONG.

The customer relationship is no longer constructive (sorry, another pun). Maybe the customer’s bank is also getting nervous and it is taking more and more of the builder’s time and resources at each project payment milestone for the bank to release funds to allow the customer to pay. Some customers will construct disputes to force the price down/or gain an advantage and a concession or discount.

In the end while this is false economy as it forces corners to be cut later or in the worst cases, the customer has to find a new builder with new delays and often a higher cost. But it happens.

And you still don’t have any money. The contract payment you have missed out on equates to the margins on maybe 4 or 5 normal builds. You are now way behind.

Some customers know that the costs of recovery through any disputes process may mean there is no cost benefit. As a small but growing builder you may not have the time or energy let alone the money to contest a non payment. Have the best contract terms you can get.

If you and/or the customer has any type of construction completion insurance make sure you understand what it means, what and how much it actually covers and on what basis the cover maybe withdrawn. Some associations operate under a relatively complex structure.

Pressure from prior project failures

Increased build activity increases the problems and the cash requirements. Companies thrive and others fail. Many of the failures we see arise from the pressure that has built up from years of below average trading activity because of persistent project failures. There are many that will have been slow payers for years, have maxed out or are well over their credit limits with suppliers, they have changed suppliers a few times, they are generally well behind with their commitments to IRD. Only the ute gets paid for on time every month. Like a gambler, they have no other avenue but to fail eventually. It only takes one creditor or dissatisfied customer to act decisively and the whole façade (sorry, pun) falls down. A bunch of waste and ruin is all that is left.

The people involved in these companies are in my opinion much better off financially and in all other aspects of life working for wages or salary. They may even have a company ute for you!

The impact of our completely risk adverse bureaucracy cannot be ignored. We have seen new parties entering the market with a viable business plan to operate on a larger scale where investors have lost millions of dollars in development and machine costs, but have run out of money (millions budgeted and spent) and folded without much being built due to council, compliance and government decision changes or delays. The bureaucrats keep their jobs, but it can hardly assist our productivity.

The bigger projects are so complex few can appreciate the risks that are being taken by all parties in those projects, and the foresight and work needed even before the build starts. Added to that the very small number of NZ (and possibly Australian) contractors with a balance sheet strong enough to undertake big projects comment those projects would be at best superficial and likely unfair. This article does not focus on those projects or contracting parties.

Why small to medium sized Building Companies Fail

I am pretty certain that very few builders assess what would happen if a project payment is delayed a month/or does not occur at all. Would they be able to survive financially? Some would be able to, no doubt.

Some small to medium building companies do well during a boom because they provide good quality product and attract good customers (realistic to price fluctuations and prepared to pay the price for a quality build). They have industry knowledge and know what is possible for the customer’s price expectations. They do not over commit, and they build some delay into project pricing. They may have relationships with the architect of designers. They know the world is not perfect.

Growth requires cash

You have to pay more people often weekly to operate and manage. Your customers don’t pay weekly, they may pay monthly or even every two months if there are delays. Some suppliers require deposits to be paid? The more work you take on, the harder it becomes to manage and meet those requirements.

Do you have enough to meet the wages bill when customer payments are delayed? Can you pay your suppliers? Can you pay yourself? If you put money into the business is there or has there been a return on that investment?

There are many that allow themselves to take on more business than their capital base can fund at all, or fail to manage expenses properly placing their cash flow under stress and so flirting with disaster.

Inexperienced New Entrants

Boom conditions in the building industry also encourage new operators to enter the market. To them, there is money to be made. Many previously worked as employees or sub-contractors and so lack many of the real life business skills or the resources to run a business.

Similarly, many, while fine tradesmen, struggle with business administration such as filing, PAYE and GST, let alone paying business commitments, invoices on time or managing their cash flow effectively. Often the private commitments are not met by the business income. The private commitments get priority and the business suffers.

These tradesmen often operate their business account as their own personal bank account inviting calamity. They finance their ute or 4WD through a personal loan and put their tools on their personal credit card. {not sure what is wrong with that]

Common reasons for these new entrants failing include:

• Poor contracts
• High fixed overheads and thin margins
• Pricing mistakes
• Under-capitalised balance sheets
• Missed deadlines
• Contract disputes
• Cost overruns
• Overly aggressive tendering trying to increase market share at the expense of profit margins
• Poor estimating and job pricing
• Poor variation analysis with variation sign-offs not completed formally leading to contractor wearing additional costs
• Perhap’s incomplete level of technical building education and overall knowledge in the industry
• Unfamiliar with legal and statutory regimes and compliance costs compounded by poor documentation and record keeping for PAYE, GST and creditors.

High Costs Increasingly Drive Failures

A common issue with building firms is being crunched by labour and materials cost fluctuations while working on fixed price contracts. Labour and materials costs frequently increase during a boom (demand exceeds supply) and only fall when a slowdown hits the industry.

Final Observation

Few new business owners fully appreciate it is every bit as difficult to manage a building business during a boom as it is during a slowdown or recession. High operating costs inflated by sustained demand places cost pressures on many businesses locked into what are effectively fixed-price contracts while capital constraints cause issues when companies look to take advantage of boom conditions by taking on too much work.

Have enough staff that you trust. If you don’t then don’t take on new work. You are likely to fail.

If you have a bad feeling about a customer or how hard they are pushing you on price, then walk away. There are some people who will never be satisfied and these are the ones who will find a reason not to pay you, and there is plenty of other quality work/jobs around.

Once a project has started it’s a complex and harsh environment when things go “wrong” and wrong can start very early on in a building project. There is plenty of pressure on the industry participants as a result of growth that means things go wrong. The typical reaction these days seems to be to ignore the issue or to blame someone else. Neither of those responses solves anything. You feel better for a while and create a delay but it is short lived.

At the first sign of wrong communication is key. The builder needs to have everyone from the designer to the customer and the suppliers understand what the issue is and to we hope arrive at a solution that works for all.

Everyone involved may need to give a bit otherwise the project will fail probably impacting on the builder and any unpaid suppliers the most. Professionals can assist if instructed to.

 

There are a number of reasons for poor business cashflow.

We have highlighted the top seven as follows:

One: Accounts receivable process

A poor accounts receivable process will result in debtor days (the time between billing and banking) being too high. This will stifle your cashflow. There are many strategies to minimise debtor days including tightening your Terms of Trade, offering prompt payment discounts and streamlining your billing process.

Two: Accounts payable process

A review of all suppliers’ terms may identify ways to improve cashflow and potentially achieve better Terms of Trade. Implementing budgets, streamlining your payments process to maximise prompt payment discounts and avoid late payment penalties is just the start.

Three: Inventory process

Carrying stock for too long means full shelves but an empty bank account. This is no different if you’re a service provider with work in progress that is yet to be billed. Reviewing your stock ordering systems and stock control processes (to name a few) will identify strategies to ensure cash hits the bank sooner.

Four: Inappropriate debt/capital structure

Often significant cashflow and interest charge improvements can be achieved with a regular review of existing debt. Maybe your debt / capital structure could be improved, or perhaps your debt should be consolidated and paid off over a longer term. Maybe you need to review and adjust what you’re drawing from the business, or perhaps the business needs a capital injection to fund its growth.

Five: Overheads too high

Every business should do a thorough review of its overheads each year. Reviewing the effectiveness of your marketing spend, going paperless, putting expense budgets in place and changing your technology platform are some simple ways to reduce overheads.

Six: Gross profit margins too low

Our gross profit margin is what is left from sales value after variable costs are deducted. There are a large number of strategies that you can implement to increase your margin, such as focusing on rework and wastage, reducing stock shrinkage and improving team productivity, just to name a few.

Seven: Sales levels too low

If the current sales levels don’t support overheads and other cash demands on the business, then the business is not currently viable. If in high growth mode, a financing plan will be necessary. If not, we need to consider how we will grow sales. To grow sales we need to focus on customer retention, generating leads, improving sales conversion, customer transaction frequency and pricing strategies.

Need help managing your cashflow

Our Cashflow Management Coaching service has been designed to treat the underlying causes of poor cashflow. As part of that service, together we’ll conduct a thorough review of the above key causes, set goals for improvement, and you’ll implement simple strategies to maximise cashflow.

Contact McDonald Vague for more information

An increasing number of building firms "went bust" in 2014 despite the building boom in Christchurch and Auckland, leaving homeowners, contractors, and the taxman out of pocket.  As the construction boom in Auckland gathers pace the situation is going to get worse.

Nearly 100 rebuild-related companies have gone into liquidation or receivership in Christchurch alone since the February 2011 earthquake. We see the same trend occurring in Auckland.

People often ask us why so many building firms are going under as they should be making a fortune.  The simple answer is that the good ones are, but there are many that have been caught out by over trading (transacting more business than the firm's working capital can normally sustain), thus placing serious strain on cashflow and risking collapse or insolvency.  Some of these companies shouldn't be in business in the first place.

This trend could worsen as mismanagement woes continue and big ticket construction projects open new avenues for white collar crime. 

More than half of the failures came in 2014

Construction-related liquidations more than tripled between 2013 and 2014 (mainly in Christchurch). Subcontractors were heavily represented in the liquidation numbers and the Serious Fraud Office ("SFO") received 29 complaints about suspect dealings in the rebuild and has launched six investigations.  As a result, the Government introduced new laws in 2015 to protect consumers, including mandatory written contracts, and builder requirements for residential building work costing $30,000 or more.

With an increasing number of small operators who were previously working as employees deciding to go out there and do it themselves there is increasing concern that many don't have the skills needed to run a business.  Many are good tradesmen, but not good businessmen.  Some don't manage their cashflow well and don't file PAYE returns, GST returns, or get their invoices out on time.  We often see overdrawn current accounts where the tradesman has operated the business account as their own personal bank account.

As the building boom gathers pace, tradespeople with varying levels of skills have poured into the industry as they see it as a cash cow. They often have little or no capital.  Many of them "gear up" with the latest tools and ute all purchased on HP.

New Zealand is an extremely expensive country in which to build houses.  McDonald Vague has recently been appointed over two large building companies (eHome NZ Limited and Shears and Mac Limited), both employing over 100 people and both manufacturing in a factory and then installing onsite.  eHome NZ Limited built houses in a factory and Shears and Mac Limited did commercial and shop fit-outs in New Zealand and Australia.  They operated in different sectors of the building industry but failed for similar reasons including:

  • High overheads and slim margins;
  • Missed deadlines;
  • Contract disputes;
  • Cost overruns;
  • Unhelpful bureaucracy and compliance costs.

High costs driving failures

We provide consultancy and turn-around advice to a number of building firms and often the problems are the same.  Fixed price contracts stay constant but the cost of labour and materials constantly increases in a construction boom.  The costs of labour and materials will continue to increase until there is a slowdown in demand. 

Why so many fail

  • Out of control pricing;
  • Characterised by small businesses (a ute and a dog);
  • Aggressive tendering trying to increase market share at the expense of margin;
  • Poor estimates/pricing - running a project at a loss;
  • Poor variation analysis;
  • Undercapitalised balance sheet;
  • Lack of building knowledge, the level of education in the industry is poor;
  • Leaky buildings (warranties and guarantees) ongoing issue without provision;
  • Desperate to climb the ladder - egos prevail in a testosterone dominated industry;
  • Poor documentation/record keeping leads to failure (PAYE, GST, creditors);
  • Variation sign-offs not formally completed leading to further costs borne by contractor;
  • Low margins;
  • Businesses are easy to establish and easy to close, with no capital requirements.

What can your clients do to protect themselves?

There are a number of things they can do, including:

  • Register on the PPSR;
  • Stop work when they don't get paid;
  • Be familiar with remedies under the CCA;
  • Do due diligence on developers or head contractors before doing work;
  • Take personal guarantees;
  • Enforce credit limits;
  • Look at liquidated companies on the Companies Office;
  • Be aware of phoenix companies;
  • Make credit checks;
  • Do directors' checks for liquidations;
  • Get money held in trust where possible.

We can help

Please contact the team at McDonald Vague Limited if you would like to learn more about how your client can protect/mitigate the risk of a customer going into liquidation.

 

 

 

Creditors of companies that fail are often shocked and angered by the ability of directors of the failed company to start up a new business and carry on as though nothing happened.

They cannot accept that they are suffering because of the losses they are facing whilst the people they see as being responsible for the losses appear to suffer no ill effects.

Who is at fault?

It is important to note that the debt owed to the creditor is owed by the company, not the directors personally.  A limited liability company has its own separate legal identity and it is generally only when the directors have given personal guarantees in favour of particular creditors that they become personally liable for the debts concerned.

Furthermore, company failures are not always attributable to actions of the directors.  Failures come about for a variety of reasons including economic downturn, natural disasters, default in payments from customers and major clients changing supplier.

Starting over

There is no automatic bar to a director of a failed company starting up a new business on the failure of the old one.

There are provisions within the Companies Act 1993 in respect to starting and operating phoenix companies within five years of the commencement of the liquidation of the failed company.

Section 386B(1) of the Companies Act 1993 defines a phoenix company as follows:

A phoenix company means, in relation to a failed company, a company that, at any time before, or within five years after, the commencement of the liquidation of the failed company, is known by a name that is also -

  1. a pre-liquidation name of the failed company; or
  2. a similar name

A pre-liquidation name means any name (including any trading name) of a failed company in the 12 months before the commencement of that company's liquidation.

A similar name means a name that is so similar to a pre-liquidation name of a failed company as to suggest an association with that company.

There are some exceptions to the rules regarding phoenix companies, for instance Court approval can be obtained (Section 386A(1)) or a Successor Company Notice can be issued (Section 386D).

You can see more detail regarding phoenix companies in the article on our website written by Peri Finnigan, Phoenix companies:  what exactly are the rules here?

What can be done to stop them?

Directors don't always just walk away unscathed by the failure of their company.

There is a personal toll in the stress that they have been under leading up to the failure, the personal loss they may have suffered through funds they had put into the company or through personal guarantees provided to financiers or suppliers, and the sense of failure that most feel when their company is liquidated.

Their actions will also be subject to scrutiny by the liquidator of their company.

Liquidators will investigate, among other things, the activities of the directors to establish if the directors have breached their duties.  This can lead to legal proceedings being taken against the directors if they are considered to have acted in breach of those duties and caused loss to creditors by doing so.

If found to have been in breach of their duties or reckless in their actions the Court can impose monetary penalties on the directors to the level it thinks is appropriate to the circumstances.

One of the statutory duties imposed on liquidators is to report to the Registrar of Companies where they suspect the company or any director of the company has committed an offence that is material to the liquidation against the Companies Act 1993, the Crimes Act 1961, the Financial Markets Conduct Act 2013, the Takeovers Act 1993 and the Insurance (Prudential Supervision) Act 2010.

The liquidators will also report to the Registrar of Companies on any director who they believe should be banned from being director because of the belief that their actions were wholly or partly responsible for the failure of the company or because they have had two or more failed companies in the previous five years.

Breaches of the banning orders and operating a phoenix company can, on conviction, lead to penalties of up to five years' imprisonment or a $200,000 fine.

In conclusion, whilst it may seem unfair that the directors of a failed company can just carry on with business as usual after the failure, there are provisions available to have them brought to task and penalised where appropriate.

 

 

Tuesday, 11 November 2014 13:00

When friends fall out - shareholder agreements

It seems like a typically Kiwi thing to do - a couple of mates decide to go into business together and start up a company to operate the business.  Everything is split down the middle - each director owning 50% of the shares and all agreed on a handshake.

What could go wrong?

The recent liquidation of a small business shows just what can happen.  Things went well for the first couple of years.  Business was going okay and making a small profit but then things started to go wrong.

The relationship broke down between the shareholders and got to the stage where they couldn't agree on anything to do with the business including staff management and business direction.

Legal advisors became involved and an attempt was made to resolve the issues by one of the shareholders buying out the other's interest.  Unfortunately, they couldn't agree on the value of the business.

As a result, the decision was made and agreed to by both shareholders to liquidate the company.  The liquidation process was made more protracted and costly by the sniping between the shareholders leading to higher liquidation fees and therefore a reduced payment to creditors.

There are no guarantees of course but this situation may have been avoided, or at least the damage mitigated to a certain extent, if there had been a shareholders' agreement put in place at the time the company was incorporated.

Shareholder agreements usually include

A shareholder agreement is like a business pre-nuptial agreement.  It sets out the basis of the relationship between the shareholders and can include matters such as:

  • Defining the type of business the company will engage in;
  • How the business will be managed and who will be responsible for particular areas of management such as staff employment etc;
  • What types of decisions can be made by individuals alone and what types need majority or unanimous agreement;
  • How any of the parties leaving the business will be handled - what happens to their shares etc;
  • How any disagreements or disputes that arise will be handled.

It can contain confidential information as, unlike a company's constitution, it does not have to be filed with the Registrar of Companies and be available for public viewing.

Shareholder agreements may also include

They may also cover:

  • Non-competition restrictions;
  • Appointment and retirement of directors;
  • Professional indemnity insurance;
  • Transfer of shares and pre-emptive rights;
  • Disability and insurance - what happens in the case of a trauma or death to insurance proceeds - does it pay company debts or does it go to the estate?  Who is the policy owner?
  • Shareholder approvals, consent and voting.

The complexity and size of the shareholders' agreement will depend to a certain extent on the size of the business, the number of shareholders involved and the areas to be covered.

It will be different for every company and shareholders should seek proper legal advice when putting together any such agreement and before signing one.

How McDonald Vague can help

We regularly see the result of fallouts between company directors and shareholders.  We would advise all company directors and shareholders to put together a Shareholder Agreement at the time the company is incorporated to avoid prolonged and unnecessary expense to shareholders and their creditors.

If your relationship with fellow director(s) and/or shareholder(s) is breaking down contact us for free and confidential advice to find out how we can help.

 

Alternatively, download our Free Guide to Avoiding Business Failure

The earthquakes in Canterbury created a disaster on a scale not previously seen in New Zealand during our lifetime. Christchurch will be rebuilt and when it gets into full swing it will be the biggest building project in New Zealand history. Treasury has forecast that the cost of the rebuild will be circa NZ$40 billion. Fortunes will be made out of the rebuild, but like any boom, history tells us there will be some spectacular failures along the way.

In this article we will explore the issues facing construction companies waiting for the Christchurch rebuild, the chances of another large construction company collapse and some advice on how you as a professional advisor or construction industry contractor can help protect your clients or yourself from another construction company failure.

Issues facing the rebuild

The rebuild of the CBD hasn't started. The government announced the Christchurch CBD will be reconstructed around 10 major anchor projects. The city centre shows little evidence of activity or rebuild projects having been commenced. Private developers are waiting for the anchor projects to get started before they erect their buildings because of concerns of not being able to attract tenants to a building surrounded by empty sites.

Increased competition. A number of large offshore companies have indicated they will tender for some of Christchurch's anchor projects. For example a MOU has been signed between Arrow International, one of New Zealand's largest construction companies and global construction giant China State Construction Engineering Corporation Ltd targeting the anchor projects in Christchurch.

Labour shortage and small supply chain. Christchurch still needs to find another 17,000 workers, including carpenters, joiners, electricians and plasterers, before the rebuild reaches its peak. It is estimated the rebuild will need a total of 35,000 construction related workers. The shortage of skilled labour could result in poorly constructed buildings that could leak or fail.

Rising costs. Escalation in construction costs is already exceeding 10% per annum in the residential market, as a direct result of material shortages. This is likely to spill over into the commercial sector.

High compliance costs. The cost of constructing commercial property in the Christchurch CBD will be very high as the new buildings will require deep and expensive foundations. The draft plan wants to restrict CBD buildings to a maximum height of 7 storeys. The end result is that landlords will have to charge very high rents to get the same yield they had before the earthquake. Tenants may not accept these high rents and elect to keep their business in the suburbs.

Cashflow constraints while waiting for rebuild. Construction firms are desperate to hold on to their good workers and supply chains in anticipation of the rebuild. They have huge overheads to absorb while they wait for the profitable work to start. Initially, it looked as though the rebuild would peak in 2015/16 but it now looks as though it will be in 2016/2017. The flow on effect is that construction firms may have to accept a lower margin for another 12 months to keep their employees busy.

Insurance fraud. The vast sums of money involved in the rebuild and recovery create an unprecedented opportunity for fraud and corruption and we are now seeing large scale frauds being uncovered. International experience shows that, regardless of the country in which it occurs, fraud and corruption activity increases significantly following natural disasters.

 

What is the likelihood of another Mainzeal?

To answer this question we need to consider the common causes of construction firm failures. From our experience these usually involve:

  • Tight margins
  • Insufficient capital
  • Lack of skills and experience
  • Leaky buildings and non-compliant construction
  • Over-investment in fixed assets
  • Inability to manage growth
  • Competition
  • Lack of understanding for procuring products/supply chain
  • Inaccurate estimates and tendering
  • Poor pricing decisions
  • Poor quality control
  • Unsafe construction sites

How can you or your clients better protect themselves?

  • Be familiar with the remedies under the Construction Contracts Act
  • Keep good records and contract files
  • Register on the PPSR a specific security over material supplies (a great defence if charged for a voidable transaction)
  • Suspend work if not paid, or consider the adjudication regime
  • Perform due diligence on developers or head contractors before commencing work
  • Research/credit check developer or head contractors before starting/signing contract
  • Get personal guarantees
  • Moneys held in Trust accounts
  • Set credit limits - enforce them!
  • Search the directors on the companies office to see the number of liquidated companies (history)
  • Be aware of phoenix companies and obligations of successor companies to give proper notice
  • Get sign off from a quantity surveyor, architect or engineer before paying invoices/completing variations
  • Review trading terms
  • Get advice if you suspect the head contractor is insolvent. Any suspicion of insolvency can be detrimental when facing a voidable transaction claim from a liquidator

Conclusion

When you compare the list of the most common causes of construction company failures to the issues facing construction companies in Christchurch, it appears that there is a high chance of another significant construction company collapse.

As a first precaution we would advise you to look at the list we have provided to help protect yourself or your clients.

McDonald Vague has considerable experience advising clients in the construction industry. If you or one of your clients is facing financial difficulties in the construction industry please contact Tony Maginness or one of our other Partners.

DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.

Page 1 of 2