Navigating Financial Difficulty: Essential Steps for Companies in Crisis

Business is unpredictable. Even the most successful companies may find themselves facing financial difficulty at some point. Whether due to economic downturns, industry disruptions, or internal challenges, financial distress requires prompt and strategic action. In this article, we will explore the steps a company should take when encountering financial difficulty, encompassing a review of the big picture, operations, cost-cutting measures, tax management, and cash flow. Additionally, we will discuss the concept of company compromise (Part XIV of the Companies Act 1993) as a means to protect a viable business.

1. Review of the Big Picture: When a company encounters financial difficulty, it is essential to step back and take a comprehensive view of the situation. This involves assessing the underlying causes of the financial distress, identifying areas of concern, and understanding the company's strengths and weaknesses. Analyzing financial statements, profit margins, customer feedback, market trends, and competitive positioning can provide valuable insights. Such a review allows the company's leadership to gain a clear understanding of the challenges ahead and develop a strategic plan for recovery.

2. Review Operations and Procedures: Examining the company's operations and procedures is crucial to identifying inefficiencies and areas that need improvement. This includes evaluating production processes, supply chain management, inventory control, and customer service. Streamlining operations and implementing best practices can lead to cost savings and enhanced operational efficiency.

3. Cost Cutting Measures: In times of financial difficulty, prudent cost-cutting measures can help the company weather the storm. This involves identifying non-essential expenses, renegotiating contracts with suppliers, optimizing staffing levels, and reducing overhead costs. Careful consideration must be given to strike a balance between reducing costs and maintaining the company's ability to deliver its products or services effectively.

4. Managing Taxes: Managing taxes is a critical aspect of financial management. Companies should explore available tax instalment plans and ensure compliance with tax regulations. Engaging with tax professionals can provide valuable guidance on tax planning and optimizing the company's tax position.

5. Cash Flow Management: Cash flow is the lifeblood of any business, and effective cash flow management is imperative during financial difficulty. The company should closely monitor its cash inflows and outflows, accelerate collections from customers, negotiate extended payment terms with suppliers, and carefully manage inventory levels. Creating cash flow forecasts and contingency plans can help anticipate and mitigate potential cash flow crises.

The Company Compromise (Part XIV Companies Act 1993) is an option available for struggling companies who have viable businesses and simply need some time.  This offers an option for companies in financial difficulty to protect their viable business while repaying debts to creditors. The company compromise mechanism allows the company to propose a compromise arrangement to its creditors. The proposal outlines the company's intention to restructure its debts, alter its capital, or any other arrangement to facilitate its survival.

The company compromise mechanism involves the following steps:

a. Initiation of Compromise Proposal: The proponent presents the compromise to creditors. The proposal should include details of the company's financial position, the proposed arrangement, and how it will benefit the creditors and how it provides a better outcome than in liquidation. The proposal sets out the payment plan which may be a reduced settlement sum and the time period.

b. Approval by Creditors: The compromise proposal is presented to the company's creditors, who at a meeting (in person or by postal vote or proxy) must vote by class on whether to accept or reject it. For the proposal to succeed, it must receive approval from the majority in number and 75% in value of the creditors voting by each class.

c. Acting on the Compromise Terms:  Compromise managers managing the agreed compromise proposal and distribution to compromise creditors.

Financial difficulty is a challenging phase for any company, but proactive steps can pave the way for recovery and resurgence. A comprehensive review of the company's big picture, operations, and procedures is essential to identify the root causes of financial distress. Implementing cost-cutting measures, managing taxes, and optimizing cash flow contribute to financial stability. For companies facing severe financial strain, exploring the option of a company compromise under Part XIV of the Companies Act 1993 can provide a structured path to protect a viable business and foster a successful turnaround. Through strategic decision-making and adaptability, companies can emerge stronger from financial difficulty and continue their journey towards sustainable growth. For more information on company compromise refer here.

Picture yourself at the beach. It’s a beautiful day, and you decide to go for a swim. You’re so busy enjoying the sunshine and the refreshing water, you don’t realise you’re drifting further and further from the shore.

Little do you know you’re heading right into shark-infested waters.

Being in business can be the same. Sometimes, you are focused on the day-to-day tasks and you miss the bigger picture. It can be difficult to see when you’re heading for trouble. But it’s important to know there are five huge warning signs pointing you to change before it’s too late.

SIGN 1: YOUR BUSINESS CANNOT PAY YOU A WAGE

If your business is not generating a return to you, why are you doing it? Are you risking or spending your personal equity in a business that is out of fashion or no longer sustainable?

When was the last time you asked yourself these questions? If the answer to the first is no, and there is no realistic prospect of a change in your circumstances, then you should get advice. Your personal equity may be at risk.

SIGN 2: THE IRD IS ASKING QUESTIONS

The IRD will only investigate a business if they see activity that is in some way out of the ordinary or you are in arrears. If the IRD is requesting an investigation, then it’s a sure sign you’re not compliant and need to clean up your accounting in terms of your tax obligations. Speak to your accountant immediately about how you might be in breach of your obligations.

If you are in arrears contact the IRD and arrange a repayment plan. If you are suffering from hardship you may qualify for a debt reduction or some form of relief.

SIGN 3: YOU’RE STRUGGLING TO PAY DEBTS

- Are you juggling money from one account to another in order to find the cash available to pay your debts?
- Are you finding it difficult to restock shelves?
- Is your overdraft exceeding its limit regularly?
- Have you lost key customers?
- Are you missing forecasts and budgets?
Answering yes to any of these questions suggests a poor cash flow strategy, and it can sink a business if caught unawares. You could also be in breach of your Director’s Duties if you do not have enough funds to pay your debts as they become due.

Speak to your accountant or an insolvency specialist about your debt situation. A simple solution might be to tweak your terms of trade, use invoice factoring, or to seek a creditor compromise to pay down debt over time. You may be able to give yourself more of a cash flow buffer to create a successful business turnaround.

SIGN 4: YOUR BEST STAFF ARE LEAVING

If they sense the ship is sinking, are your staff going to brave those stormy waters instead of staying on the boat? Oceanic metaphors aside, if you’re seeing a huge exodus of staff, this could be a clue that your company is in trouble.

Luckily, you have an opportunity here to hire some great minds who can help you turn things around. By hiring some clever people with great problem-solving abilities, you may be able to rescue much of what has been lost.

SIGN 5: YOUR ACCOUNTS ARE A SHAMBLES

Do you have a balance sheet that you’re regularly reviewing? When was the last time you reviewed a profit and loss statement? Do you know at any given time what your liabilities are or if your business passes the “Solvency Test”?

This is where a business turnaround specialist – like McDonald Vague – can help. We can spot issues in your business and help you repair them … before they result in insolvency or liquidation. Contact us now This email address is being protected from spambots. You need JavaScript enabled to view it. 

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

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

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

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

Ignorance Isn't Bliss

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

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

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

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

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

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

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

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

Relief Options

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

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

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

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

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

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

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

Voluntary Liquidation

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

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

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

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

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

WHAT SHOULD YOU BE CONSIDERING NOW?

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

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

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

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