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.
Corporate insolvencies remain lower than 2019 & 2018 levels, with a drop in appointments in the lead up to the election which is typical.
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.
September and October saw a lift in the number of creditors initiating winding up proceedings against debtors. Of the 199 advertised in 2020, 113 have ended up with liquidators or receivers being appointed. You will note that in August, September and October there were no winding up applications advertised by the IRD which is common in the lead up to an election, along with the increased leniency they have shown as the result of Covid-19. We expect to see that backlog get remedied in the coming months.
The September drop off remains at odds with the projections generated by MBIE and discussed in our last article as personal insolvency figures across the board drop off. We expect to get the October figures mid-month.
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, liquidations, voluntary administration, and personal proposals.
The October election is fast approaching and campaigning by all parties is underway. As policies and promises continue to be released, economic policies are likely to be front and centre for many voters. Not all parties have released their policies detailing how they plan to guide our economy through the post lockdown period, any tax policy changes they would like to see, and how they plan to pay New Zealand’s lockdown debt.
For some, the wage subsidy extension they received will have come to an end in August 2020. For other businesses who did not see a 40% downturn in their income following the end of the first lockdown period, the second lockdown period meant that they have now qualified for the wage subsidy extension. For these businesses, the wage subsidy extension will run out around the start of the Christmas trading period.
There were 147 new insolvency appointments in August 2020, which brings the total appointments for 2020 to 1102. Insolvency appointments in August 2020 are comparable to August 2019 levels (149) but the year to date figure is still down on both 2019 (1,290) and 2018 (1,492). There was an uptake in appointments in the last week of August 2020, which looks to be a result of non-licensed insolvency practitioners taking a number of appointments before the 1 September 2020 licensing requirements came into effect.
In August 2020, there were 12 winding up applications advertised, none of which were brought by the IRD. In 2020, only April had fewer applications advertised. In both these months, the country was in a Level 3 or 4 lockdown for some of it.
Of the winding up application advertised in 2020 (152), 92 of those applications (roughly 61%) have resulted in liquidators and/or receivers being appointed. Some of the applications advertised will still be before the High Court awaiting resolution. Around 70% of the applications advertised in January and February resulted in liquidators or receivers being appointed.
Personal insolvencies in August 2020 were at 95 (July 2020 was 81), driven largely by bankruptcies and Debt Repayment Orders. The No Asset Procedures figures remained consistent with earlier months.
All types of personal insolvencies in the year to date (642) continue to be down on the levels seen in 2018 (1,014) and 2019 (808).
We have compared corporate and personal insolvency appointments since 2018. The graph shows that, the appointments followed roughly the same pattern and spiked and dropped at roughly the same times, with neither being a lagging or leading indicator of the other.
Earlier this year, MBIE predicted that personal insolvency appointments in the final quarter of 2020 would rise to as high as 3,200, which would be a quadrupling in appointments when compared to the same quarter in 2019. While appointments in the first quarter of 2020 were higher than 2019, this year has seen lower personal insolvency appointment numbers since April 2020 when compared to last year. While MBIE has advised that revised projections will be released in October 2020.
In the last quarter of 2019, there were 464 corporate insolvency appointments. If corporate insolvency appointments continue to follow the same patterns as personal insolvency appointments, on MBIE’s current predictions, the last quarter of 2020 could see a significant number of companies fail in the lead up to Christmas. Only time will tell whether the government measures that have been implemented to save businesses has been enough to keep corporate insolvency numbers from growing exponentially.
One of the obligations on the liquidators of insolvent companies, whether appointed by the shareholders or the Court, is to review the books, records and affairs of the company to identify any potential causes of action that could lead to a benefit for creditors.
This could include identifying potentially voidable transactions, where an individual creditor has received a payment, giving it preference ahead of the body of creditors, or the transfer of assets or property to other parties for no, or insufficient, consideration.
It could also include identifying breaches of duties by the directors which has caused creditors of the company to suffer increased losses.
While many such causes of action are identified and settled by agreement between the liquidators and the parties concerned there are also cases where there is no agreement and the liquidator is left with the options of either initiating legal proceedings or dropping the matter.
In making that decision, the liquidator will consider the strength of the case, the likely costs to be incurred in proceeding and how these could be funded, and the level of return to creditors that could eventuate from such action.
The funding of the proceedings is the major obstacle the liquidators need to overcome and many good cases are not actioned because of the inability to raise the funds.
Broadly speaking, a liquidator has 5 potential avenues of funding available –
If the liquidators have realised sufficient funds from the liquidation of the company’s unencumbered assets, they are entitled to use those funds to cover the costs of their investigation and any legal proceedings.
In those circumstances, the liquidators have to give careful consideration to the likelihood of success in the legal proceedings and, if those proceedings are successful, the likelihood that any amounts ordered are collectable and will result in a distribution to creditors.
It could leave a liquidator open to criticism if they use up funds, that could have been distributed to creditors, on a risky action against a director and ended up with no recovery or only sufficient recovery to cover the costs of the liquidator’s investigations and the legal costs incurred in running the case.
The Liquidators can decide to fund the proceedings from their own resources. This will be done by allowing their time to accumulate as unpaid Work in Progress (WIP) and by paying any legal costs from their own funds and recording those payments as a disbursement to be recovered when, or if, funds are available.
This is a reasonably common practice amongst insolvency practitioners, but the same things will be considered when making the decision. The bottom line is, will the actions lead to a return to creditors?
It is not the liquidator’s job to take proceedings that will lead to a penalty being imposed on the defendant that only pays the liquidators costs. If legal actions are not likely to lead to a benefit for the creditors, but the director’s actions warrant it, the Liquidators can, and should, report the breaches committed by the director to the Registrar of Companies, with a view to having them banned.
Creditors of a company in liquidation can be approached by the liquidators to see if they are prepared to provide funding to allow legal action to be undertaken. Those creditors that do agree to provide funding receive a priority ahead of other unsecured creditors pursuant to clause 1 (1) (e) of the Schedule 7 of the Companies Act 1993.
This allows payment of the unsecured debt of that creditor, and the amount of the costs incurred by that creditor in helping to recover the funds, ahead of some other preferential creditors and the rest of the unsecured creditors.
The use of 3rd party litigation funders is increasing in New Zealand but is generally limited to the larger cases, such as the Mainzeal Property & Construction Limited (in Liquidation) claim against its directors.
There have been questions raised about the ethics of this form of funding but, whilst there is no specific legislation about the use of 3rd party funding, it has been approved in various proceedings. The Law Commission is currently undertaking a review of class actions and litigation funding
The 3rd party funders provide the funding for proceedings, which would otherwise be unaffordable, in exchange for a percentage of any recoveries. If there are no recoveries, the 3rd party funder carries the cost, so there is no downside for the creditors.
Section 316 of the Companies Act 1993 establishes, and regulates the use of, the Liquidation Surplus Account (“the account”).
Funds that represent unclaimed assets from a liquidation must be paid to the Public Trust and will, if they remain unclaimed for a period of 12 months, become part of the account.
Liquidators can apply to the Official Assignee for New Zealand for a payment from these funds to cover the cost of proceedings, advice, or expert witnesses.
To be eligible for the funds, the liquidator must prove that it is fair and reasonable for the costs to be met out of the account. There should be a public interest element in the proceedings and the application must relate to the claims of the creditors in the liquidation.
It is understandable that the creditors of a failed company want to see errant directors held to account and forced to cover the losses they have incurred because of that director’s actions and they expect liquidators to do that.
The options outlined above all include one party or another taking on the often substantial risks and costs involved in taking legal proceedings, so, while the main objective is always to recover funds for the benefit of the creditors, any actions taken have to be carefully considered and reviewed objectively.
Throwing good money after bad, or spending money, that could have provided some return to creditors, without any recovery, is not in the best interests of either the creditors or the liquidators.
We are expecting August and September to be interesting months with the electioneering that will be taking place, we will see promises from all parties on how they will be spending our taxes if they are elected and hopefully some more details on their plans for how they will guide the economy post covid.
The latest unemployment rate figures have been released for the June 2020 quarter showing 4.0%. This is down 0.2% on the first quarter for the year. While the politicians will crow that this is well down on treasurers estimates for the same time frame there was an additional wage subsidy extension introduced which has assisted businesses in keeping people employed with 400,000 employees still utilising the subsidy.
Unsurprisingly, the unemployment rate lines up with the Insolvency figures we have seen in 2020 which continue to be down on 2019 levels. The true litmus test is yet to come as the wage subsidy comes to an end in September.
There were 142 new insolvency appointments in July 2020, which brings the total appointments for 2020 to 953. Insolvency appointments in July 2020 and for the year to date are still down on both 2019 and 2018.
Out of interest we have also begun tracking winding up applications in 2020 as a guide for what may be coming for the economy and the creditors tolerance for debtors. While there will be some creditors using it as a tool to prompt debtors to make payment a reasonable number have been following through with their application.
The IRD has for 2020 advertised the liquidation of 49 companies, of these companies 35 or 71% have subsequently entered liquidation as at the date of writing. The conversion rate on non IRD creditors being set lower with only 45 of the 90 advertised winding up applications ending in liquidation. Presumably an alternative satisfactory outcome was reached, or the liquidation may be included in next months figures and is only delayed.
Personal insolvencies in July 2020 saw a drop in bankruptcies but a lift in both No Asset Procedures and Debt Repayment Orders.
Numbers across the board though continue to be down on the levels set in 2018 and 2019.
After last month it looked like bankruptcy figures were tracking back to 2019 level but that only looks to have been a blip with figures again dropping off in July.
On 1 September 2020, the remaining provisions of the amendments to the Companies Act 1993, and Insolvency Practitioners Regulation Act 2019 (IPRA) will come into force. Some changes that creditors, directors, shareholders, and their advisors need to know about are:
The 10-working day window for shareholders to appoint liquidators from service of winding up proceedings is gone.
Once a company has been served with Winding Up proceedings brought by a creditor, the company’s shareholder(s) or board will be unable to appoint liquidators unless they have the consent of the creditor who is pursuing the winding up proceeding.
For shareholders needing or wishing to appoint liquidators we encourage them to start the process as soon as they are concerned about insolvency, and at the latest following an unsatisfied statutory demand.
If a company disposes of property after the company is served with a winding up application but before it is placed into liquidation by the High Court and that property was disposed of other than:
(a) In the ordinary course of business (eg sales of inventory); or
(b) By an administrator, a deed administrator, or a receiver (who will need to be a LIP); or
(c) Under an order of the Court;
the Company’s liquidators will have the ability to set aside those dispositions as voidable. The procedure is broadly similar to the insolvent transactions regime.
Only Licensed Insolvency Practitioners (LIPs) will be able to accept insolvency appointments from 1 September 2020. Transition arrangements mean that current CAANZ/RITANZ Accredited Insolvency Practitioners (AIPs) can be treated as LIPs for the period up to 1 September and the AIP will be able to continue to accept appointments while their LIP application is decided.
Anyone who is not an AIP by 1 September 2020 and who does not become a LIP in the meantime, will be able to continue to act on their existing insolvency assignments until 31 August 2021. If the insolvency practitioner does not become a LIP by 31 August 2021, any insolvency assignments that have not been completed by this date will need to be taken over by a LIP.
McDonald Vague employs 5 current AIP’s with a further AIP as a consultant. We are well placed.
If an administrator or liquidator considers that a related creditor is voting on a resolution, the related creditor’s vote must be disregarded unless the related creditor has given written notice to the administrator or liquidator that the creditor is a related creditor and that it intends to apply to the Court for an order that its vote be taken into account. The related creditor must make the application to the Court within 10 working days of [after] the creditors meeting in which the vote is held.
June 2020 saw the New Zealand Government declare the country “virus free” after 17 days of no new COVID-19 cases and a move to Level 1 on 9 June 2020, ahead of schedule. With the exception of border control restrictions, all COVID-19 related restrictions imposed during Lockdown were lifted.
The post-Lockdown experience for SMEs has been varied. Some have seen incredible community support and are feeling confident about their futures, notwithstanding the difficult quarter they have just experienced. Others are struggling to adjust to the post-Lockdown economy and many are being confronted with difficult decisions on what their businesses will need to look like, if those businesses are to survive in the medium term.
The second half of 2020 is likely to be just as unpredictable as the first half. While the difference in corporate insolvency figures between the first half and second half of 2018 and 2019 were only marginally different (less than 5%), the decrease in insolvency activity caused by Lockdown is unlikely to repeat itself in the second half of 2020.
The first quarter of 2020 saw corporate insolvency rates decrease by 8% and personal insolvency rates increase by 9% when compared to 2019 while the second quarter of 2020 saw corporate insolvencies decrease by 23% and personal insolvencies fall by 34% when compared to the same period in 2019.
The economy is likely to be a hot topic over the next quarter, as political parties launch their election campaigns ahead of the General Election on 19 September 2020. The steps taken by the Government in response to COVID-19 saw huge borrowing and spending by the Government to support the economy during and post-Lockdown. This debt will need to be repaid at some point in the future but by who, how and when is still an unknown.
We are now through the first half 2020. Here’s what the insolvency space looked like over this period. Note: Figures were correct as at date of publishing.
There were 122 new insolvency appointments in June 2020, which brings the total appointments for 2020 to 795. Insolvency appointments in June 2020 were 23% lower than in June 2019 (150) and 54% lower than in 2018 (188).
June 2020 saw a 30% decrease in insolvency appointments when compared to May 2020 (158). A similar drop (29%) in appointments occurred between May 2019 and June 2019 (193 cf 150). While June 2018 saw few appointments than May 2018, the decrease was only 9% (204 cf 188).
Court appointments in June 2020 (30) were also back to levels consistent with March 2020 (27) and May 2020 (34), with April 2020 (2) – when the Court suspended all non-urgent hearings – being the outlier.
Insolvency appointments for the first half of 2020 are 20% lower than the same period in 2019 and 40% lower than in 2018. By comparison, insolvency appointments decreased by 16% in the first half of 2019 when compared to 2018.
Personal insolvencies in April 2020 (50) were the lowest number recorded since at least July 2003 (the earliest records we sighted).
May 2020 saw a 32% increase (66) on April 2020 and June 2020 figures were up by 20% (82) when compared to May 2020. The number of personal insolvencies in June 2020 (82) was similar to June 2019 (81) but the number of NAPs (75) was 39% lower than in 2019 (104).
With the exception of April 2020, debtor initiated bankruptcies between March 2020 and June 2020 were between 64% and 68% of all bankruptcies. The only High Court to make adjudication orders in April 2020 (when Lockdown restrictions started to ease) was Auckland, with 10 adjudications being made.
In May 2020, non-essential services reopened for trading. New Zealand moved from Level 4 to Level 3 on 27 April 2020 and the drop down to Level 2 happened on 13 May 2020. The “new normal” at Level 1 started on 9 June 2020.
Because of the Government assistance that has been provided to businesses, we anticipate that the economic effects of the Lockdown will be seen over a longer period of time than in previous economic slowdowns. Many businesses experienced a surge in trading activity when they reopened at Level 3 and another spike in revenue at the start of Level 2 but few businesses have seen consistent revenue week on week since reopening.
The budget announcement was made on 14 May 2020 and further support measures for businesses were also announced in May 2020. Some economists are now predicting that the coming recession will be deeper, and the economic recovery will be longer, than Treasury’s current forecasts. Many SMEs that have been taking a “wait and see” approach are hoping that further Government financial support will continue to be made available and that that support will be enough to allow their revenue to return so that their businesses can survive in the medium term.
So how have New Zealand’s May 2020 company insolvency figures shaped up as the country moved down the alert levels?
There were 158 company insolvency appointments in May 2020, which is roughly 22% lower than the appointments in May 2019 (193) and May 2018 (204).
Insolvency appointments to May 2020 total 673, which is 17% fewer than 2019 (806) and 28% fewer than in 2018 (923).
The personal insolvency figures for May 2020 have not yet been released by the Government. In both May 2019 and May 2018, there was an increase in the number of personal insolvencies when compared to April and June of the same years.
Since the beginning of 2018, month on month, the proportion of people entering into the No Asset Procedure (for those with up to $50,000 in debt, no assets, and no ability to repay their debts) and those being made bankrupt has been fairly evenly split. If the corporate insolvency figures increase as predicted, we expect that bankruptcies will make up a larger proportion of the personal insolvencies going forward. We anticipate that corporate insolvency rates will increase before personal insolvency rates do, as many creditors do not call upon personal guarantees until after a company has failed.
The Government assistance for businesses announced to date has contributed to the low number of insolvencies in the year to date. Once that financial assistance has been depleted, most will feel the recession start to bite. In preparation, businesses should be evaluating their revenue forecasts and looking at reducing their overheads and streamlining their businesses so that they are in the best position they can be moving forward.
There will be opportunities ahead for those in a position to take advantage of them. Those that are not currently taking active steps to prepare for the future risk waiting too long.
In the last few weeks, we have seen an increase in the number of clients who are moving away from the “wait and see” approach and have decided to actively prepare for the months ahead. We are currently assisting clients in a number of different industries to address the vulnerabilities they are seeing in their businesses. The earlier these concerns are acknowledged and addressed, the more options businesses have to deal with these issues.
There has been a lot of commentary around what the COVID-19 global pandemic is doing to countries’ economies. Some economists are predicting a global economic downturn to be the worst recession since the Great Depression and most are expecting this downturn to be worse than the GFC.
Today, 14 May 2020, New Zealand is moving from Level 3 to Level 2 and a lot of businesses are re-opening for the first time since the Level 4 lockdown came into effect seven weeks ago. In the weeks and months ahead, we will find out what effect the lockdown has had, so now would be a good time to look at the NZ insolvency figures to April 2020 and how those figures compare to the last couple of years.
Today is also budget day and Jacinda Ardern has signalled that the government will be spending to support businesses and keep people connected to their jobs.
Between 1 January 2020 and 31 March 2020, there were 421 formal insolvency appointments. Appointments were down over this period when compared to the same periods in 2019 (454 appointments) and 2018 (559 appointments).
In April 2020, there were 94 appointments, which was just over half the number of appointments in April 2019 (159) and April 2018 (160).
When the April 2020 figures are added to the previous months, insolvency appointments in the year to date are down by roughly 16%+ when compared to April 2019 and April 2018.
As at 30 April 2020, there were 652,033 companies registered on the Companies Register.
Many people will be feeling the financial impact of COVID-19. Many have lost their businesses and/or their jobs. The number of people on a benefit has increased, as has the number of people receiving food parcels.
The number of bankruptcies between January 2020 and March 2020 are similar to the same period in 2019 (268 and 281 respectively). The number of bankruptcies in 2018 was roughly 33% higher over this period.
The number of bankruptcies in April 2020 dropped to 50, of which 80% were debtor applications, which is a significant decrease in the number of bankruptcies when compared to March 2020 as well as April 2019 and April 2018. The decrease in creditor applications was probably because the Courts were operating at reduced capacity so creditor's applications were held off. In April 2019 and 2018, roughly 73% of the 109 bankruptcies were debtor applications.
We expect to see both company and personal insolvency numbers start to increase, especially in the second half of 2020.
The Government’s 12 week Wage Subsidy scheme is approaching its end, and many are now looking at whether they can access the next stage of support via the Small Business Cashflow (Loan) Scheme (SBCS) available from 12 May 2020 Link Here
The announcements made in today’s budget are likely to provide further targeted stimulus probably for infrastructure and tourism, as the country's balance sheet is not limitless. We will need to wait and see what those announcements and the timing of further spending are...
We hope that for the many business owners and employees returning to work today their day is productive and safe. Day by day we will all need to deal with the effects the lockdown has had on our businesses and the ability to restart, especially those who have not been trading at all, and will now need to look at how to deal with seven weeks of expenses and no income over that period.
As a firm we have been working through these situations with a range of clients for the last few weeks. There are many ways to address those issues.
With the upheaval being caused to many SMEs by the Covid-19 lockdown and the potential for many of those SMEs to fail, the risk to people who have provided personal guarantees (PG’s) for company debts increases.
The support packages for companies being provided by the Government and the major trading banks is good news for the employees, because of the 12-week wage subsidy package, and for those businesses that can meet bank lending requirements to access the business finance guarantee scheme or possibly can use the debt hibernation and tax packages.
But the position for those companies that have other significant overheads and possibly were loss making startups or were already struggling, and for the individuals involved with those companies that have personally guaranteed some of the company obligations, the picture is not so bright.
It is expected that some creditors will make demand on individuals for payment of those company debts, pursuant to their PG’s, and, in the event the debt is not paid, proceed to bankrupt the individual concerned.
If the holders of PG’s or sole (unincorporated) traders end up being bankrupted, or declaring bankruptcy, due to the financial impact of the lockdowns largely through circumstances and decisions outside of their control, the current repercussions are, in our opinion, too harsh.
We would support a new personal insolvency regime that allows those bankrupted (say a Covid class) that can reasonably show the bankruptcy arose from Covid 19’s impact, be given a clean slate alongside an agreed reasonable repayment plan for the personal debts over time (potentially managed by responsible third parties) so that those people are:
- Not impacted further;
- Not consigned to the unemployment lines or pushed into the “black economy”;
- Able to access credit
- Able to open bank accounts
- Able to restart in business
Reducing the prospect of bankruptcy the below packages have been and remain available.
There are some companies who have applied for and received the 12-week wage subsidy for their staff that will not survive through the 12 week period and will be placed into liquidation.
The subsidy was provided so that staff could be retained to enable businesses to continue post lockdown. So, what happens if that doesn’t occur?
We understand that individual employees who received the wage subsidy payments will not be asked to pay any of those funds back, but what about the company and the directors involved who signed the declaration confirming employment for 12 weeks and best endeavours to provide ongoing employment? Will the directors be personally liable under the scheme for those funds?
MSD have advised that on liquidation, if the Liquidators cannot retain the staff, then they can use the subsidy to pay out employee entitlements (i.e. notice period) and any surplus funds should be returned to MSD. The wage subsidy cannot be used to pay out any redundancy obligations in an employee’s employment contract.
The wage subsidy, although providing some relief, doesn’t cover the other on-going expenses of the company that may be continuing whilst in lockdown such as rent, insurance, ACC payments, hire purchase payments and finance payments and interest.
Those amounts will continue to accrue, some with penalties being incurred for non-payment and many, such as rent, hire purchase and finance payments will in all likelihood, be covered by personal guarantees.
This provides for extra finance to be provided by the trading banks to eligible companies with the Government carrying 80% of the risk and the bank 20%. The bank will still be in the position of deciding whether or not a company is worth lending to but, with the bank carrying 20% of the risk it is to be expected that their lending criteria will continue to be enforced.
The loans have to be repaid in the normal manner, according to the terms agreed to and will, in all likelihood, be covered by a General Security over the company’s assets and either a pre-existing or new personal guarantee. So, what happens if the company fails before the loan is repaid?
Does the bank have to try and recover the full amount owing under the loan in the usual fashion – firstly from the company concerned and, if necessary, from the guarantors before it can call on the Government for its 80%? That appears to be the case.
An article published by Simon Thompson on Linkedin on 21 April 20 “How Does the NZ SME Loan Guarantee Scheme Measure Up To Others?” read here he comments “The simplistic property based focus will not be enough and their [the banks] blanket catch-all personal guarantees discourage applications.”
The article further suggests “An alternative model is to have a limited personal guarantee whereby the SME owners are only liable for the debt if there has been fraud or theft of funds from the business. The SMEs must pledge that the finance will be used exclusively for business purposes and that personal drawings will be no higher than in previous periods or as per a business plan.” And “The personal guarantee, if it is applied, should also be capped at 20% of the loss, as the UK model allows. The NZ Government already guarantees 80% of the risk under this scheme, while the bank takes 100% of the profit from the loans and has just 20% risk. Surely under that environment special conditions should apply.”
The following table developed by Mr Thompson compares the loan schemes in NZ, Australia and UK:
There are a wide range of proposed tax changes including;
• Depreciation on assets for some classes of assets
• Not charging UOMI on new debt
• Temporary loss carry back scheme
• Possible Permanent Removal of loss continuity provisions for the 20/21 period – discussion later in 2020, could be enacted before March 2021.
Tax payments arrangements can be modified by agreement if the taxpayer can show they have been significantly adversely affected and “income or revenue has reduced as a consequence of Covid-19 and as a result is unable to pay taxes in full on time. The key is to interact with IR as soon as practicable to agree to an arrangement to pay at the earliest opportunity.
The support packages provide somewhat of a life line for businesses that were viable before the Covid-19 lockdown and will be able to recover once “normal” (what ever that is like) trading resumes, but for those companies that were already struggling and cease operating, Covids impact and the support packages could become a millstone around the neck of the directors, and others, who have provided personal guarantees.
It is important that individuals who have provided personal guarantees and may be exposed to claims against their personal assets, seek independent advice from their professional advisors before taking any actions that might increase that risk and the level of exposure.
The Government is introducing legislation to change the Companies Act to help businesses facing insolvency due to COVID-19 to remain viable, with the aim of keeping New Zealanders in jobs.
The temporary changes are outlined here
A safe harbour is granted to directors of solvent companies, who in good faith consider they will more than likely be able to pay its debts that fall due within 18 months. This would rely on trading conditions improving and/or an agreed compromise with creditors. It essentially provides certainty to third parties of an exemption from the Insolvent transaction regime.
The changes allow directors to retain control and encourage directors to talk to their creditors and will if needed enable businesses which satisfy some minimum criteria to enter into a debt hibernation scheme with the consent of creditors.
The following article on the Company Law changes released by Martelli McKegg provides more detail read here
Directors considering trading on their company need to be careful and cautious and should have their decisions supported by accounts as at 31 December 2019 (as a minimum), and reliable cashflow projections. Companies that cannot satisfy the solvency test at 31 December 2019 or pre Covid-19 impacts should not be advancing a debt hibernation scheme and directors of those companies will not have protection from S135 and S136 claims.
Insolvent companies that are now facing further financial harm as a result of the lockdown should be seriously considering ceasing to trade and entering into either a formal company compromise under Part XIV of the Companies Act 1993, liquidation, or in some cases voluntary administration. The options depend on the viability of the business.
We consider directors of companies on the brink of insolvency should seek independent advice on whether the company meets the debt hibernation criteria and as a minimum we would recommend that financial accounts are being prepared now to 31 December 2019 along with forward looking cashflow projections to support the decision to trade. We expect creditors being asked to vote will require that sort of information to be available. We urge directors to get their Chartered Accountants involved.
Directors need to be aware that the safe harbour provisions may not protect you. For example, if your company has not been able to meet a statutory demand immediately pre-covid, then your company may be deemed insolvent.
The McDonald Vague team offer the following services as a cost-effective and efficient form of employer assistance in these challenging times.