On 3 April 2020, the Government announced that it would be making changes to the Companies Act 1993 to provide insolvency relief for businesses affected by COVID-19.

Yesterday, 5 May 2020, the first reading of the COVID-19 Response (Further Management Measures) Legislation Bill) took place. That bill introduces, amongst other measures:

  • Reducing the voidable transaction and voidable charge period for non-related parties to six months (Schedule 2)
  • The safe harbour provisions for directors (Schedule 3)
  • The COVID-19 business debt hibernation (Schedule 4)
  • Extensions to the periods mortgages and rent can be in arrears before default notices can be issued and enforcement action can be taken under the Property Law Act 2007 (Schedule 14)

Both the Safe Harbour provisions and the Business Debt Hibernation scheme are intended to be used by companies who, but for COVID-19 would not be facing cash flow issues.

Safe Harbour Provisions

The safe harbour provisions allow directors to trade during the safe harbour period (initially 3 April 2020 to 30 September 2020) without breaching section 135 (reckless trading) and/or section 136 of the Companies Act 1993 if:

  • The company “was able to pay its debts as they became due in the normal course of business” as at 31 December 2019 (Pre-COVID-19 Solvent); and
  • In good faith, the directors are of the opinion that the company:
    • has or will have short term, COVID-19 related liquidity problems over the next six months; and
    • will (more likely than not) be able to pay its due debts on and after 30 September 2021.

                (Post-COVID-19 Solvency Opinion)

The bill puts the onus on the directors to show that they are entitled to the protection afforded safe harbour provisions. The bill also contemplates that the safe harbour period could be extended beyond 30 September 2020.

Business Debt Hibernation

The Business Debt Hibernation(BDH)  scheme will allow entities (including companies, partnerships, body corporates, and unincorporated bodies) to delay payment of their debts, whether in full or in part, for a period of up to seven months.

Entities will be able to enter into BDH if:

  • The entity was Pre-COVID-19 Solvent;
  • At least 80% of the entity’s directors vote in favour of a resolution to enter into BDH; and
  • Each director who votes in favour of the BDH:
    • Makes a statutory declaration that:
      • The entity was Pre-COVID-19 Solvent
      • The director holds a Post-COVID-19 Solvency Opinion
      • Sets out the grounds for his or her Post-COVID-19 Solvency Opinion

                     (Post-COVID-19 Solvency Declaration)

    • Is acting in good faith

The entity will enter into the BDH when it delivers notice of the BDH to the Registrar (as drafted, all entities will deliver the BDH notice to the Registrar of Companies, not just companies registered on the Companies Register). Entities entering into BDH will have an initial one-month protection period during which creditors will be prevented from starting or continuing enforcement action against the entity and its assets while the entity puts forward its proposed arrangement with its creditors. If the proposed arrangement is supported by 50% of the entity’s creditors (in number and value) who vote on the proposed arrangement, the protection period will be extended for a further six months and all creditors who were sent notice of the proposed arrangement will be bound by the proposed arrangement.

During the protection period (including the extended protection period), unless the approved arrangement provides otherwise or only with the court’s permission:

  • Creditors will not be able to enforce their charges over the entity’s property;
  • Lessors will not be entitled to take possession of the property used or occupied by the entity;
  • Creditors will not be able to begin or continue proceedings for a debt or the recovery of property from the entity;
  • Creditors cannot start or continue enforcement action against the entity;
  • Creditors cannot call on guarantors of BDH debts, if the guarantor is related party of the entity.

The extended protection period will come to an end if at least 80% of the entity’s directors are not prepared to make new Post-COVID-19 Solvency Declarations, if requested to do so by a creditor. Once given, each Solvency Declaration can be supplied to creditors requesting a new Solvency Declaration for a period of up to two months from the date it is given.

The following debts are excluded from BDHs:

  • Employees’ remuneration (including PAYE and other deductions)
  • Amounts owed to secured creditors with security over all or substantially all of the entity’s assets (after the initial one-month protection period)
  • Debts incurred after the company enters BDH
  • Excluded debts (the term “excluded debts” is not defined in the bill)

A BDH does not compromise any of the entity’s debts but an entity in BDH can advance a creditor compromise or be placed into voluntary administration during the protection period.

Progressing the Bill

The bill has been referred to the Epidemic Response Committee, who are due to report back to the house on 12 May 2020.

A date for the second reading of the bill has not yet been announced.

You can find a copy of the bill here

How We Can Help

Directors wanting to take advantage of the Safe Harbour provisions or entities considering the BDH will need to satisfy themselves that the entity was Pre-COVID-19 Solvent and that they have a good faith basis for their Post-COVID-19 Solvency Opinion. Because of these requirements, if you have any hesitation about your entity’s financial position, we strongly recommend that you take advice.

For entities that cannot meet the solvency requirements of the Safe Harbour provisions or the BDH scheme, there are a number of business restructuring options available that could help directors and shareholders navigate their way through the financial challenges brought about by COVID-19.

If you want to discuss the issues your business is facing, email us on This email address is being protected from spambots. You need JavaScript enabled to view it. to request a phone call from or Zoom meeting with one of our insolvency practitioners.

 

There are many very small companies in New Zealand, where the sole director and shareholder is also the sole employee, or a couple are the directors and shareholders and one is the sole employee. 

These companies don’t have some of the issues faced by bigger companies in the normal course of business, such as dealing with employees and paying wages, but do have to deal with suppliers and clients and maintain workflow and profitability.  

In this article, we look at a couple of the issues facing very small companies and how the Covid-19 lockdown period could provide a chance for review.

Objective Assessment:

One of the problems for the directors of these very small companies is that they can get so involved in the operation that they can’t see the forest for the trees. Their time and energy is put into the day to day operation and they don’t take the time to stand back and look objectively at what they are doing, how they are doing it, and whether it could be done better to achieve what they want.

One possible upside of the lockdown period imposed in response to Covid-19 is that it could provide the opportunity for that objective review. 

It is likely that the business has suffered as a result of the lockdown – being unable to trade means little to no income for the people involved and no money coming in from which to pay mortgages, business loans, rent etc – so the director is likely to be looking closely at the business anyway.

Various support packages are available from the Government and the trading banks but before going to the bank to borrow money to support the company through the lockdown, the director needs to look closely at the financial position of the company.  If the company was insolvent, or marginal, prior to the lockdown, the bank may not agree to a further loan.

 While doing that assessment, directors should take the opportunity to go back to basics and look at why they are in business, what they are doing, and how they are doing it.  Some things to consider are: 

  • Is the company’s business purely to provide a wage for the director or is it an investment to provide a retirement fund?
  • If it is an investment, what plans are in place to sustain and grow the business so that there is a going concern business to sell when the director is ready to retire?
  • Are the job costing or product pricing systems current and set at the right level?
  • Is the manner in which the work is done up to date and efficient?
  • Are the advertising / promotional strategies currently being used proving to be cost effective? 

Separate Identity:

Another issue that is particularly relevant to very small companies is the blurring of the line between what is company business and what is the director/shareholder’s personal business. 

It is not uncommon in small businesses for the director to take drawings from the company rather than paying a regular salary and deducting and paying PAYE, etc. Sometimes, the mortgage over the family home is paid from the company’s bank account and the company vehicle is paid for by the company and used for both business and private travel.

If the company remains solvent, the merging of the private and business assets and activities won’t cause any issue but, if the company becomes insolvent and is placed into liquidation, the director’s actions and the shareholder’s current account will come under scrutiny.

The shareholder’s current account records the funds introduced into the company and the amounts taken out in drawings by the shareholder. If more is taken out than is introduced, then the difference is a debt owed by the shareholder to the company and it is repayable on demand.

During an objective review of the company, directors and shareholders should look at whether they are creditors or debtors of the company and how the money they are taking from the company is being treated such as:

Are drawings being taken instead of or in addition to a salary?

  • Are the drawings taken as a regular fixed amount or is the company bank account used for all personal expenses?
  • Is there an overdrawn shareholder current account? If yes, how big is it?
  • Have the annual financial accounts for the company credited a salary to the shareholder each year? Have the necessary resolutions been passed?
  • Are there any personal assets recorded in the company’s asset register?

Directors and shareholders also need to consider whether the amount that they are taking from the company is fair to the company, when looked at objectively.  When salaries are taken by director/shareholders, section 161 of the Companies Act 1993 requires that the company’s board (which would be the director or directors):

  • Authorise the remuneration and/or benefit;
  • Record the authorisation on the company’s interests register; and
  • Sign a certificate confirming that, in their opinion, the authorised remuneration and/or benefit is fair to the company and the reasons for that opinion.

If the company fails and the section 161 requirements were not met or they were met but it was not reasonable for the directors to believe that the authorised remuneration was fair to the company, the directors can be held personally liable for the remuneration paid to the director.  While there is some limited relief available to the directors if they can show that the remuneration and/or benefits paid were fair to the company at the time it was given or paid, any payments above what was fair at the time will need to be repaid.

Conclusion:

The issues faced by very small businesses can sometimes be overlooked by the directors involved in the day to day operation, but the issues are still there. 

Take the opportunity to look at those issues and discuss them with your accountants or other professional business advisors.

 

 

 

 

 

 

 

 

 

 

 

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