There are three rescue procedures in NZ, the compromise (Part 14), the Court approved scheme of arrangement (Part 15) – an option seldom used, and Voluntary Administration (Part 15A).

Liquidation is not a rescue procedure. It is usually a terminal procedure. Liquidators typically trade only for a short term for the purposes of the liquidation. The purpose of liquidation is to realise and distribute assets, not business survival.

Some companies however advance liquidation for the purpose of restructuring and to purchase back part of the business from the liquidator (at market value). Some companies advance liquidation with a known purchaser lined up to purchase the business in a clean structure. The consideration attributed is often pre approved by the secured creditors in these cases.

Receivership can be a rescue procedure. It can result in the rescue of viable parts/businesses but the primary duty of a Receiver is to get the best return for the secured creditor (usually the bank). Business survival may be an outcome. Banks may agree to a VA proceeding to avoid the negative publicity from appointing a Receiver or to protect the value of the business goodwill achieved from the stay in an Administration.

A company compromise under Part 14 of the Companies Act 1993 is a useful method without (in theory) having to go to Court. There is however no automatic moratorium (like with a VA) so sometimes you go to Court anyway. A compromise requires the identification of classes of creditors and 75% approval by class. There is often no outside independent manager involved. The compromise is the likely least expensive option but it requires approval to essentially be assured in advance. It works well for smaller companies with lesser creditors involved.

A Voluntary Administration is advanced where the company is cash flow insolvent or likely to become insolvent. No Court application is required. The Board of directors can appoint an Administrator. If there is a winding up application (by a creditor) on foot, the Court will likely adjourn the winding up application if the Court is satisfied that it is in the interests of the creditors (Section 239ABV, Companies Act 1993).

A business must be truly viable to be successfully rehabilitated. The appointment of an administrator for any other reason apart from rehabilitation is unlikely to gain the requisite support.

Liquidation versus Administration

A liquidator can only trade on for limited purpose of winding up. An administrator on the other hand has wide powers including the power to borrow. Some contracts will have termination clauses on liquidation but not on Administration. Both options have their advantages.

The best option is best discussed and well considered before advancing. Contact our team for advice on the options available if your business is in need of rescue, restructure or an orderly termination.

Tuesday, 25 June 2019 12:58

Received A Statutory Demand ?

A statutory demand is a claim under Section 289 of the Companies Act 1993. Failing to comply with a statutory demand or applying to set it aside within the specified timeframes will result in your company being deemed to be insolvent and liquidation may follow.

A company is insolvent if it is unable to pay its debts when they fall due.

Non-compliance with a statutory demand served on your company allows the creditor that served the statutory demand to apply to the High Court to appoint a liquidator. The most common basis for a company in New Zealand to be placed into liquidation by the High Court is from failure to comply with a statutory demand.

If you receive a Statutory Demand you need to act quickly. You can either pay the specified sum, enter into some form of compromise to pay the debt, or offer up some form of security to the satisfaction of the creditor.

If the debt is disputed you must apply under Section 290 to have the debt set aside. You will need to engage a lawyer.

The court may grant an application to set aside a statutory demand if it is satisfied that

(a) there is a substantial dispute whether or not the debt is owing or is due; or

(b) the company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or

(c) the demand ought to be set aside on other grounds.

If no action is taken, nor a liquidator appointed voluntarily (by the shareholders) within 10 working days of the service of the Winding Up Proceeding, the Winding Up Application hearing takes place and if the High Court is satisfied that the company should be wound up, an order for the Company to be wound up is made and the Court appoints a liquidator. A liquidator is nominated by the applicant creditor and provides a consent to act prior to the hearing.

If your company does not satisfy the solvency test and is risking trading insolvently then the shareholders of the company can voluntarily appoint a liquidator so long as the appointment occurs within 10 working days from the service of a winding up application (which follows after the expiry of the statutory demand).

Pending Winding Up Proceeding – options to consider

Your company may be closed by the liquidator or the business sold. You can save your company from facing Court liquidation proceedings with the following options:

• Voluntary liquidation (if liquidation is inevitable)
• Voluntary Administration
• Company Compromise – Part XIV Companies Act 1993
• Debt Restructuring and a workout
• Advice on your options early on

Liquidation may be inevitable and a way out of a downward spiral. Speak to an Accredited Insolvency professional. It may not mean losing your business. Some companies advance liquidation voluntarily in order to restructure.

Get Advice

For advice on statutory demands, liquidation, hive down, voluntary administration or compromise contact our team at McDonald Vague.

If you need a CAANZ and/or RITANZ Accredited Insolvency Practitioner to consent to act as liquidator on an upcoming court liquidation or to manage a voluntary liquidation, Boris, Iain, Colin or Peri would be pleased for the referrals and to assist.

 

Other Links:

1. Statutory Demand Infographic

2. Guides on Statutory Demands and Options

3. Serving Statutory Demands

4. Further Discussion on Statutory Demands - Steps to Take

Monday, 03 March 2014 13:00

Bringing about company recovery

SMEs make up a large part of the insolvency work that we at McDonald Vague handle and the reasons for those insolvencies range from events beyond the control of the company directors to a complete lack of knowledge and understanding as to what is required of them.

 

In this article we will look at some of the causes, symptoms and actions that can be taken to recover companies facing financial difficulties.

 

Causes of company failure

The causes of company failures, as reported to us by directors, are many and varied and the real reason is not always identified correctly by the directors. There are, however, common themes that come through which include:

 

1. Having all their eggs in one basket

 

It is not uncommon in insolvencies to find that the failure of the company has come about because it has all, or at least most, of its eggs in one basket. The sudden failure of the major client or the decision by that client to go elsewhere leaves a yawning gap in the company’s cash flow.

Directors don’t always have the marketing skills to get out and promote their business, nor the financial understanding to see ways to restructure their company to take into account the sudden loss of a major client and bring about recovery of the company.

 

2. Economic downturn

 

A sudden down turn can sometimes lead to the company cutting its prices in an endeavour to obtain work but without giving enough thought to what it actually costs to do the work. The directors continue to operate but have no margin or insufficient margin to enable them to meet their costs and catch up on old debt.

 

3. Lack of company administration and accounting skills

 

A number of the small companies that we liquidate are companies incorporated by tradesmen who charge out their services. Many of them have become company directors because they have been advised that they will be better off working for themselves through a company structure.

 

While they may all be very capable plumbers, builders, electricians many know little about the requirements of running a company and managing its finances. They often start with a few tools and a vehicle, no operating capital and no administration systems in place.

 

Many do not keep accurate records of the income and expenses, fail to carry out basic functions like checking off bank statements and essentially exist day to day. If there is money in the bank account it may be spent on personal items without giving any thought to things like GST & PAYE. What generally follows is failing to pay the IRD.

 

The cumulative effect of these failings is the downward spiral of the business until a creditor, generally the IRD, puts the brakes on them by threatening to wind them up unless payment is made.

 

Red flags that indicate all is not well with the business

 

These often include –

 

  • GST refunds for 2 or 3 periods in a row. If the company is consistently spending more than it earns investigating the reasons.

 

  • Failure to pay PAYE and GST on time or at all. PAYE, in particular, is “trust” money deducted from employees’ wages. It should not be available for operational purposes.
  • A steady increase in the outstanding creditors and increased age of the debt.

 

  • A constant need for the shareholders to support the company with funds without any light at the end of the tunnel.

 

  • Increasing pressure from creditors to make payments and a change to COD for supplies rather than on credit.

 

  • Statutory demands being made on the company by creditors.

 

How McDonald Vague can help bring about a company recovery

 

If you go back to the causes for company failures you will see that most of the problems can be rectified by seeking, receiving and acting on good advice.

 

McDonald Vague typically look at the past performance of the business, its current financial position and give our expert opinion as to whether or not a company recovery is possible. We can then assist by identifying and helping to implement a company recovery plan.

 

This can include –

  • Putting in place improved management and financial reporting systems
  • Restructuring the current debt through negotiations with lenders and compromises with creditors
  • Identifying areas within the business where the company may need to engage other outside expertise such as marketing and legal advice

 

The vast majority of company directors and shareholders don’t set up their company to fail but sometimes, through a combination of matters beyond their control and a lack of skills and understanding of the requirements, that is what happens.

 

Getting expert advice at an early stage of the company’s problems means that recovery is possible so, if you are seeing some of the red flags outlined above in your own business, or that of a client, give our office a call and arrange an initial consultation at no cost. It may be the first step to a full company recovery.

 

Download our free Guide to Liquidations

 

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.

 

Colin Sanderson

Insolvency Manager