The Income tax Act 2007 allows a company to make a tax free distribution of capital gains “on liquidation”.

The IRD issued publication QB20/03 on 11 December 2020. The publication discusses the first step legally necessary to achieve “liquidation” in both the short form (s318(1)(d) Companies Act 1993) and long-form liquidation (s241(2)(a) Companies Act 1993).

IRD have confirmed when “liquidation” occurs under each process. It reinforces BR Pub 14/09 that a short form liquidation commences (for tax purposes) when a valid resolution is passed, when the directors (and/or shareholders depending on the constitution) make the decision to wind up the business, pay all creditors, distribute surplus assets and request removal from the register of companies, and then carry out the short from liquidation process. It also confirms that the first step legally necessary to achieve a long form liquidation is not the same. A long form liquidation commences when the shareholders pass a resolution to appoint a named liquidator.

Can you lose liquidation status?

The commentary talks of the trigger for losing the “on liquidation” status under the short form method. Quite simply, if the company continues to trade after the winding up resolutions under the short form process or before the formal liquidation, there is a risk a capital distribution in that period is taxable. Also, if a company commences a short form process then there is a significant delay or does not complete the formal strike off, earlier capital distributions may be held taxable.

Directors need to be wary that when they decide to wind up their company and opt for the shortform method that they cannot be held to have traded in the winding up process and they cannot incur significant delay without reason. Refer IRD’s example 3 below. The short form liquidation process must lead to the company strike off.

Can you change process from short form to long form?

Example 1 below shows it can take time to achieve a winding up, even years.

Changing processes from short to long form is less clear. The article suggests “unforeseen processes” as a legitimate reason. It does not specify the common position where companies resolve to wind up their businesses, start to carry out that process and then appoint a liquidator to complete the process down the track. Liquidation for tax purposes starts on the winding up resolution and then the formal long form liquidation starts from the shareholder resolution appointing the liquidators by name later. It seems so long as there is a clear intention and reason to change process that this is acceptable.

These are the key clauses relating to the change of process, from my perspective are at 12 and 13 of QB20/03 :

12. Changing Processes “Sometimes, a company that has embarked on a short-form liquidation may find it necessary due to unforeseen circumstances to appoint a liquidator. This could occur, for example, where a dispute arises in the course of winding-up the business that would be better to have a third-party liquidator resolve. The Commissioner considers that the period known as “on liquidation” began when a valid resolution was passed commencing the short-form liquidation process.”

13. Time Delays “In some cases, there may be an extended period between the first step legally necessary to achieve liquidation and the removal of the company from the register. The period may even span different tax years, so that a distribution is made in a period preceding the removal of the company from the register. The Commissioner will assume that any distributions are made pursuant to a genuine intention to liquidate. However, if the liquidation is not completed or, in the case of a short-form liquidation, the company does not cease to trade after a resolution to cease to trade is passed, then such a distribution will not have occurred “on liquidation” and the distributions will be taxable.”

This suggests that a company may change processes so long as there is a genuine intention to liquidate from the outset and “on liquidation” occurs from the initial resolution (so long as further trading does not disrupt that).

The Examples provided


Takeaway
The key message is, so long as your client can clearly show there was no trading after the winding up resolution then there should be no issue with advancing a short form method. For certainty advancing a formal long form solvent liquidation is recommended – particularly for companies with large capital distributions. It removes the risk.

For advice on solvent or shortform liquidations contact our team.

 

Related Article:  Ceasing to Trade a Company in New Zealand

Thursday, 29 April 2021 19:25

IRD focus on Construction Companies

IRD pressure on the Construction Industry

It is important to keep proper books and records and ensure you meet your tax obligations. IRD say “declare it all or risk everything” in a recent announcement.

Late payments and bad debts are the main triggers of insolvency in construction companies. The payment of taxes however contributes to cash flow problems.

IRD’s recent release is heavily focussed on enforcement. Winding up applications by the Revenue are also on the rise generally.

For more information on the Revenue’s latest release relating to “cashies” read here.

 
Dealing with IRD

We recommend communicating early and negotiating a time payment arrangement if your company falls into arrears but generally your business is viable. The IRD will likely require you to complete an IR591 (12 month cashflow forecast) to support any plan.  The IRD provide the following advice for managing tax and for gaining financial relief for companies, partnerships and trusts <read here>

If the financial position of the company is dire then contact a Licensed Insolvency Practitioner to discuss the options. The IRD may consider financial relief or an instalment plan.

There is a high risk of financial penalties for failing to take action. By making a full voluntary disclosure, IRD say you may have your penalties reduced by up to 100%, you may avoid prosecution and you may retain your good business reputation. By communicating early on, your business has more chance of survival. By taking action early as a director you are less likely to be breaching your duties under the Companies Act 1993 and to be held personally liable.

Welcome to the month of double lockdowns and Americas Cup racing.

February is typically the first month of the year where we see a steep uptake in all insolvency appointments across the board after the lower months of December and January. Directors will take a hard look at their company after a quiet Christmas period and January break and make the call on whether they want to continue through another year or pack it in. Individuals will often go through a similar process after having spent up large over the Christmas period and having little to show for it and no prospects of paying off the debts they may have racked up and will need to assess their insolvency options.

So aside from staying indoors and watching boat racing what else happened in the month of February on the insolvency stats front:
• Winding up applications for the month beat all individual 2020 months.
• IRD finally began pulling the trigger on winding up applications.
• Personal insolvency figures were up to the 2020 high point levels.
• February figures were still down on prior years.

We continue to hear grumblings from businesses around the country with the upcoming minimum wage increases to $20 per hour and the additional pressure this will put on already tight margins. Banks have not eased up stringency with which they are lending to small to medium size businesses making it increasingly difficult for new businesses to get the necessary funding, while residential lending powers are forward fuelling the property market. We are also seeing increasing material and shipping/logistic costs as product shortages continue as goods cannot be brought into the country fast enough with backlogs at ports across the country.

The latest two lockdowns have done no favours for businesses with the government maintaining some level of support for those businesses negatively affected the most by the lockdowns if they manage to meet the application criteria.

If you want to have a free chat about any issues your business is experiencing or about any other insolvency matters, please contact us on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

Graphs

Corporate Insolvencies

While the February numbers are still behind the previous year’s February figures, they have begun to approach the higher points of 2020. The bulk of the 129 appointments were made up by shareholder resolution liquidations at 87 followed by court appointments making up 31. This is a reflection on the lower winding up applications figures seen over the closing months of 2020 and the slow January start where the courts remain closed for a time and people remain on holiday. This will likely flow through to later months of the year.

 

Personal Insolvencies

While the personal insolvency figures remain down on the past 4 years Februarys, similar to the corporate insolvency figures, they come close to the higher points of 2020 levels. Bankruptcies and No Asset Procedures continue at similar levels respectively of 73 & 72, with Debt Repayment Orders dragging up third contributing 27.

 

Corporate Winding Up Applications

Finally, a graph and figures showing figures higher than 2020 levels across the board. This was boosted hugely by the IRD finally chasing some overdue debts and progressing to winding up applications of 18 for the month compared to non IRD applications of 15. Given IRD had only advertised 7 total applications in the prior 6 months they were long due to pull the trigger on these delinquent debts. Will this be a sign for the remainder of 2020 and the increased winding up applications will flow through to actual appointments? Only time will tell.

 

McDonald Vague have a team of licenced insolvency practitioners with experience across corporate insolvencies and assisting individuals with alternative options to bankruptcy. We can assist with company compromises, voluntary administrations, receiverships, liquidations, and personal proposals.

Tuesday, 02 March 2021 13:03

When Things Go Wrong

Murphy’s Law (or one version of it) states "whatever can go wrongwill go wrong" and that can appear to be the case when you are running a business in the current environment.  If it’s not a lockdown, it’s a shortage of supply, or it’s a major client failing, or it’s another of the myriad of things that can go wrong. 

While having good contingency plans in place, including cash reserves or access to a fighting fund, can help your business get through the hard times, when these problems come at you one after another in quick succession, things can turn to custard very quickly. 

When that happens, there are things that, as a director of the company, you should be doing and, equally as important, things that you shouldn’t be doing. 

What to Do:

The first thing to do, when you have run out of ideas on what can be done to rescue your business, is to seek professional advice.  Sometimes, all it needs is for someone who has the required expertise and experience and is one step back from the frontline, to look at what is happening and come up with viable rescue options.  These could include –

  • A compromise with creditors in which the creditor agrees to receiving an agreed percentage of the amount owed to them, with the balance written off, allowing the company to continue trading.
  • A Hive-down which transfers the valuable or profitable parts of a failing business to a new entity with the market value of the assets transferred paid to the failing business for the benefit of its creditors.

Consider your duties as a director of the company – to act in the best interests of the company or, if the company is insolvent, to consider the interests of the creditors. Take steps to ensure that you don’t allow the company to continue operating if it is going to increase the risk to creditors of the company.

What Not to Do:

Don’t put your head in the sand and decide that the only option is to keep working harder in the hope that things will come right in the long run.  All you may be doing is digging the hole deeper.

Don’t put your personal interests ahead of those of the company or its creditors. 

  • It is not a legitimate transaction to move all of the assets out of the failing company into your own name, or into the name of a new company that you have set up, without making payment to the failing company of the true market value of the assets moved.
  • It is not appropriate to use company funds to repay yourself, for unsecured funds advanced to the company, ahead of making payment to the company’s other creditors such as the employees, IRD and trade suppliers. 
  • Do not continue to operate the company so that you can repay creditors who may have a personal guarantee from you but, at the same time, increase the amount that is owed to other creditors.

If liquidators are appointed to the company, either by the shareholders or by the High Court, the liquidators will look at the steps you have taken, as director, and consider how your actions have impacted on the creditors.

If you took actions that were to the detriment of the creditors, you may be held personally liable for the losses they incurred.

Conclusion:

The failure of the company may not have been as a result of anything that you did, or didn’t, do, but your actions once the issues have arisen can have a marked effect on the outcome for creditors and on any personal liability you may face.

As soon as you identify that your company is, or will become, insolvent, you need to get the professional advice required and take the appropriate actions required of you as a director. 

If your company is facing solvency issues, please contact one of the team at McDonald Vague for a free initial discussion about your company and the options available.

Welcome to the 2021 statistics.

January is traditionally a quiet month for appointments across all forms of insolvency and 2021 is no exception. With the courts closed for most of January, many companies extending their Christmas close down periods well into January, and the bulk of the country holidaying at the bach or camping in the great outdoors with the children, not a lot happened on the insolvency front. Typically, appointments begin to track up from February onwards.

Many of the woes from 2020 – changes in consumer demand, shipping delays, the loss of overseas tourists, domestic tourism visiting different destinations and spending less than their overseas counterparts, lower than expected income over the summer trading period, minimum wage increases, and labour shortages – are expected to continue to affect businesses well into 2021.

January saw winding up application advertising increase compared to both January and December 2020 but none of these applications were made by the IRD. A preliminary look at February 2021 figures to date suggest that the IRD has finally begun to put some formal pressure on some companies, after months of generally being trigger shy. We will discuss this further in our February stats analysis.

February 2021 brought another lockdown but this time it was only for a week. Still, the flow on effects will be felt in the months to come, especially because many businesses rely heavily on sales over the summer trading period to carry them through the slower winter months. Now more than ever, for many businesses, every dollar counts.

If you want to have a free chat about any issues your business is experiencing or about any other insolvency matters, please contact us on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

Graphs

Corporate Insolvencies

There were fewer corporate insolvency appointments in January 2021 than in any other month going back to January 2016 (when our monthly appointment stats start) and every month of 2020 saw more than double the number of appointments when compared to January this year. As expected there were no court appointments.

Corporate and Personal Insolvencies

We continue to see both personal and corporate insolvencies tracking down over time, as has been happening over the last decade. The last big upward spike in appointments flowed from the global financial crisis.

 

Corporate Winding Up Applications

We found only one January 2021 number that was higher than its 2020 counterpart – the number of winding up applications advertised. Is it an omen that there will be an increase in creditor applications this year? Will more applications lead to more court appointments of liquidators? Only time will tell.

We expect that many marginal businesses that survived 2020 thanks to financial support from the government and inaction by their creditors will start to have real difficulties in 2021, as the leniency granted to debtors by many institutional, corporate, and SME creditors in 2020 in order to “be kind” starts to be withdrawn.

 

McDonald Vague have a team of licenced insolvency practitioners with experience across corporate insolvencies and assisting individuals with alternative options to bankruptcy. We can assist with company compromises, voluntary administrations, receiverships, liquidations, and personal proposals.

With one month now under our belts into 2021 it is timely to have a look back on 2020 and how the year played out when lined up to past years so we can gauge the full affect of COVID-19. January 2021 figures will be published in a separate article when they are compiled over the next few days.

I’m not sure that we need to do a full recap of the major events of 2020, the notable ones were COVID-19 lockdown #1, COVID-19 lockdown #2 for Auckland then an election.

In any normal year with two economic lockdowns for an extended period you would expect there to be an upswing in the insolvency cases for an economy. This was not to be. While the average Joe and Jane off the street were sitting at home working and getting updates via mainstream media, they expected the insolvency industry was going gangbusters during the 2020 year, this was however far from the case.

The election had a similar effect to what it normally does every 3 years, the economy and in particular new insolvency appoints move into a wait and see holding pattern.

Let’s look at some pretty graphs and see how the numbers fell over the last 12 months to give us some context.

As you can see corporate insolvency appointments started off normally in the first quarter, took a large drop at the time of the first lock down and struggled to recover for the rest of the year coming in under 2018 & 2019 levels in almost every month. 1,611 total appointments compared to 1,960 in 2019 and 2,168 in 2018.

Bankruptcy adjudications followed a similar pattern to corporate insolvency trends and across the board figures were down on the previous two years. 908 total bankruptcies compared to 1,220 in 2019 and 1,481 in 2018.

The last graph we will take a look at is the Winding Up Applications. You will note a strong start to the year with drops around both lockdowns as the courts could not open to process the applications. This was followed by a complete drop off in IRD applications from August to November also the time of the election and the new governments first 100 days.

What are the reasons behind the economic phenomenon?

We have a government that has injected massive amounts of cash into our economy to keep it propped up in the short term while we try deal with lockdowns and to support several industries and the job market.

This influx of cash has kept unemployment figures under the 6% mark, but the negative effects on the economy are beginning to creep through in other measures with the underutilisation rate slowly creeping up to 13.2% and the number of people receiving the main benefit at 12.4%.

While these figures would have been higher without the stimulus packages used by the government, households have increased both their savings and spending on big ticket items that would normally be spaced out over a 1 – 5-year period. With less overseas travel and house prices increasing across the country, homeowners are spending their paper gains on all manner of big-ticket items.

Low interest rates have made access to funds easier for individuals, along with the mortgage deferral scheme pushing out repayments into the future.

What do we have to look forward to in 2021?

  1. Anyone who has been into a retail shop over January or dealing with the construction sector will know that the shelves are looking a touch empty and sourcing materials has become increasingly difficult as pre-Christmas stock remains sitting on boats in the various harbours across the country and overseas. We may see a gut of Christmas stock flowing into the market along with the previous seasons stock being discounted to assist with cashflow.
  2. The lost summer of tourism. While domestic tourism may have carried us through the slower winter months, we do not have the population or spending power to make up for our summer influx of tourists along with the lost business opportunities from the Americas Cup. This will have long lasting effects for businesses that rely on this summer influx to carry them through the winter months. They were able to access this tourist cash in 2020 before the lockdowns took effect.
  3. IRD are now in a new year with the election and first 100 days behind them, how long will the COVID-19 tolerance and flexibility of 2020 last until they begin to apply pressure on those businesses and individuals with significant arrears.
  4. The minimum wage is set to hit $20 from 1 April 2021, despite MBIE advising it to delay/stagger this to assist businesses with the extra cost this will impose on their bottom line.
  5. Labour shortages, with a lack of overseas workers coming into the country certain industries are struggling to find staff for jobs that New Zealanders are either unwilling or unable to do at that price point or are lacking the necessary skills.

 

If you want to have a free chat about any issues your business is experiencing or about any other insolvency matter, please contact us on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

If you/your client has closed down a business and needs some advice on what to do with the company (with creditors remaining or possibly a capital gain), we are available.

 

 

With the NZ election behind us and certainty of which party will maintain the lead in government, we move into a busy Christmas period. The wage subsidy is beginning to fall off. From September we are starting to see businesses having to stand on their own two feet once again.

From an industry standpoint of the economy what are we expecting to see for businesses over this time and into 2021?

As we all know the NZ government has injected massive amounts of cash into the NZ economy in a reasonable short time frame propping up a number of industries and supporting our job market. Because of this, unemployment figures continue to stay subdued with September quarter figures set at 5.3%. A large chunk of the unemployment is coming from a select few sectors that were heavily affected by the border closures and lockdowns (tourism, hospitality, accommodation, retail, entertainment).

One of the benefits of the lockdown has been that it has allowed households to save some funds over this time that has led to a bump in spending from these savings and funds normally used for overseas travel. This spending has been focused around big ticket items for around the house and domestic travel. Unfortunately, this type of spending is something that happens every few years as the big-ticket items typically last a number of years so while there will be an initial bump with the saving, it is not something that can realistically continue year on year.

From the business perspective, the low interest rates currently on offer from the banks have made access to funds easier along with the mortgage deferral scheme for those operators in need. The lower interest rates have also led to a bumper housing market across a number of regions that has a positive affect on the economy as homeowners feel equity rich. It is expected that the interest rates will remain low for the next few years to come.

If you want to have a free chat about any issues your business is experiencing or about any other insolvency matter, please contact us on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

Graphs

Corporate Insolvencies

Corporate insolvencies remain lower than 2019 & 2018 levels, with a drop in appointments in the lead up to the election which is typical.

Total Insolvencies

Out of interest we ran the total insolvencies from the 2017 election vs the 2020 election, it seems hard to believe that from an economic standpoint there have been less insolvencies in 2020 than there were in 2017. Is the 2020 economy in a better position than the 2017 economy? Probably not, so the obvious answer is that the government assistance provided to date continues to prop up a number of businesses and individuals.