The Impact of Covid-19 Delta Outbreak on Companies under Level 3 restrictions

Many small and medium businesses are in serious strife, some hanging on by a thread. Businesses are seeking certainty about how and when they can get back to business.

A recent MYOB survey has revealed confidence among small and medium businesses is plummeting and states SME revenue has taken its biggest hit since the 2008 global financial crisis.

The drop in revenue and profits smashed from the current Covid-19 lockdowns, staff retention and skill shortages, the supply chain crisis, surging house prices, rising interest rates, closed borders, climbing inflation and general consumer confidence are all impacting business and will continue to have an impact for the foreseeable future.

The government announced a comprehensive package which is a health-based approach on 22 October. This has provided some clarity and certainty and some financial relief. Increases in the resurgence package and wage subsidy scheme are welcomed though may be too late for some?

The government has confirmed more help for employers in the shortterm and a transition grant in the new framework to boost the “gear up” as businesses reopen in a traffic light framework. In the green framework, support payments will end. We expect to see a rise in insolvency appointments soon after.

Tourism/Accommodation Sector

The traffic light system may open the country up domestically but there is lack of clarity on when borders will reopen impacting the viability of many NZ businesses particularly in the accommodation and tourism sector.

The NZ Herald reported on 21 October that Auckland tourism employers were worried senseless as the Auckland lockdown would stretch close to three months. The article quotes a tourism provider ''In the tourism sector confidence is at an all time low. Businesses are reporting they're not even getting inquiries, let alone bookings, for the months ahead.''

The heat on companies particularly in the retail/travel/tourism/hospitality/aviation sectors is not currently being seen with a rise in companies facing liquidation. Instead many companies have closed waiting to reopen (but now may be revisiting that view?), some have ceased to trade, paid creditors and exited altogether. Many companies are holding out relying on business resurgence, the bank guarantee scheme and wage subsidies to keep their staff employed. It is unknown whether they will be as resilient as they were in 2020 and whether they will bounce back.

Debt Collection Actions

We are noticing increased attention from IRD for companies in Level 2 regions. It is recommended for any business struggling to meet tax arrears that negotiations are entered into now to avoid a potential winding up proceeding. They IRD are open to negotiation early on. Company directors that bury their heads in the sand and have no plans in place may face less leniency and liquidation proceedings in the future. There is a steady climb in IRD initiated appointments since 1 October 2021.

If you are facing a statutory demand gain some advice early. Ignoring a statutory demand will likely lead to the service of a winding up proceeding.

What should you be considering now?

• Consider the risks of trading insolvently and how directors can be held personally liable. For example, be careful to read the terms for applying for continued subsidies and resurgence.
• 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.
• Assess the viability of the business and its future. What is the position when wages subsidies end? Prepare a cashflow forecast.
• 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.

We can also provide some advice on the options from The Regional Business Network, who may be able to assist with the funding of specific advice relating to business continuity and restructuring.

Economic Rundown

Pressure and frustration continues to build for business owners and the wider economy; due to the lack of transparency, a proper plan in place as to when we may once again open up the country and what needs to be achieved to have these lockdown restrictions lifted.

We have now had our first full calendar month with Auckland and the surrounding regions at Alert Levels 3 & 4; while the rest of the country remains at Alert Level 2. The lockdown effects are being felt across the country, both financially and emotionally.

As we saw with the first round of lockdowns in 2020, lockdowns have a negative effect on insolvency figures, which have once again taken a sudden drop. Historically, we see a seasonal slowdown in insolvency figures over the Christmas period, so numbers may not see a recovery till 2022.

The factors affecting the NZ economy continue:
- Shipping delays and cost increases both international and domestic
- Supply shortages across several industries
- High consumer demand for goods
- Labour shortages
- Inflation higher than RBNZ’s targets leading to a lift in the OCR of 25 base points
- Continued quantitative easing and spending by governments propping up the economy

The August 2021 lockdown has introduced some additional uncertainty into the economy:
- Restrictions/Rules at each lockdown level continue to change from prior lockdowns
- Business’ that could previously open and trade at breakeven at level 2 have lost this option due to increased patronage restrictions of indoor spaces (hospitality, arts, tourism, venues)
- Central government support has been more targeted compared to previous lockdowns

Inflation figures released on 18 October 2021 for the quarter ended September show inflation of 2.2% in the quarter, putting yearly inflation at 4.9% driven largely by government spending and money printing. This will no doubt flow through into future OCR rises in attempts to curb the rise.

A quick side note we are seeing with October appointments is that IRD are now starting to apply pressure in those regions at level 2. Be sure to check back in for next months article for full details.

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

There has been a continued drop in appointments, as compared to the rest of 2021 and earlier years. Except for solvent liquidations when looking at the type of appointment, there is a drop. This is likely due to shareholders wanting to clear up their affairs in the lull created by lockdowns and the need to extract cash from the now dormant companies to meet other financial shortages. Traditionally, we see solvent liquidations peak in March, making up 20% of appointments in 2021. In September, solvent liquidations make up 25% of appointments.

With the Level 3 & 4 lockdown over parts of the North Island, the drop in appointments has not quite reached the lows seen following the late March 2020 full country lockdown. When September 2021 is compared with past year highs and averages, the drop off in appointments is noticeable.

Notable insolvency appointments in September:
- Allpress Expresso – The company has undergone a solvent liquidation following the sale of its business.
- Tai Ping Asian Supermarket (Beach Road)– Liquidators; then Receivers were appointed due to decreased patronage from overseas students.
- Cash Converters Onehunga; traded as an Onehunga based pawn broker. The Limited Partnership and Limited company have both been placed into liquidation by their shareholders.
- Ormiston Rise – The company was involved in the governments Kiwibuild projects, was placed into liquidation following its entry into Administration and Receivership earlier in the year.

Due to popular demand, I have taken the figures a step further and broken the appointment figures down by industry. Business operating in the construction industry and property development are currently making up 37% of total appointments. I expect to see Hospitality and Retail gaining a larger chunk of the pie in the coming months if the lockdown restrictions are not eased.

Personal Insolvencies – Bankruptcy, No Asset Procedure and Debt Repayment Orders.

The number of personal insolvencies has seen a drop to its lowest levels since pre 2018, with No Asset Procedures at an all time low. The plateau seen from April 2021 onwards, has now dropped off.

A common discussion I’ve had with colleagues, business owners and friends is around how insolvency figures can continue to track downwards when the country remains in lockdown, while business’ and individuals struggle to make ends meet. At this stage, it’s a wait and see approach for the future; coupled with guess’ as to how inflation will affect the economy and whether wages will track upwards to keep pace with it.

Winding Up Applications

The drop in Winding Up Applications, seen in the second half of August, has continued into September. The IRD have pulled back on enforcement action and provided business’ extra time and leniency to deal with arrears, while the country remains in lockdown. There has however been an increase in IRD activity in Level 2 locations.

We expect that this approach will continue from IRD until such time as the country is back at level 1, or until instructed otherwise by the government.

In addition to IRD stepping back their enforcement action, difficulities around serving documents on business’, court delays and the “be kind” mentality, have seen winding up applications continue to track down. As mentioned this will have a continued downward affect on creditor appointments in the coming months. Less winding up applications now, mean less liquidation appointments in the following months.

The below graph details how the numbers of advertised winding up applications, actually resulted in liquidation. While IRD was the only applicant with liquidations in September 2021, this is likely due to their need to chase every debt to the finale; they rarely write off unpaid debts.

If you want to have a chat about any points raised or an issue you may have you can DM me, call on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

I am always available for a chat and am happy to help.

Keaton.

August 2021 has been a story of two halves. Between 1 and 17 August 2021, the outlook for economic growth was continuing to look positive. On 17 August 2021, the government called a press conference and, at 6:00 pm that evening, Jacinda Ardern told New Zealand that the country would be moving to alert Level 4 from 11:59 om that night. From 18 August 2021, most businesses were again forced to shut their premises as we returned to Level 4 lockdown and our home bubbles. Those of us that could, readjusted to working from home but Level 4 left many businesses unable to operate. The short notice also meant that many businesses – including those in hospitality, agriculture (who do not supply to the supermarkets), and floriculture – suffered huge losses of product as a result of the lockdown announcement.

Since the COVID-19 pandemic began, at least part of New Zealand has been in an Alert Level 3 or Level 4 lockdown for a total of 91 days to the end of August 2021. All of September and at least part of October will add to this total.

According to Statistics New Zealand, electronic card transactions in August 2021 was $6.433 billion, down $1.257 billion when compared to July 2021. Spending on consumables was up by $216 million but spending in all other categories were down:

The increase in the OCR that was being anticipated in the first half of August 2021 did not eventuate at the 18 August 2021 OCR announcement, a decision made off the back of the just re-introduced Level 4 lockdown. The Reserve Bank confirmed that the OCR is below the neutral interest rate, estimated to be around 2 percent, and said that its economic projections imply OCR increases are coming. The language used at the OCR review in August 2021 strongly suggested that the OCR could increase as early as 6 October 2021, when the OCR is next reviewed. We will know shortly whether the Level 4 and Level 3 lockdowns, especially in Auckland, have caused further delays to the anticipated OCR increases. Further increases to mortgage lending rates by the banks in September 2021 indicate that expect the answer to be no.

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

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

In August 2021, New Zealand spent 14 days in Alert Level 3 or higher. While the total number of corporate insolvency appointments in August was only down by 11.4 percent when compared to July 2021, the appointments over the lockdown period account for just 29.5 percent of the month’s total appointments.

There were four receiverships in August 2021, all of which started before the country went into Alert Level 4 lockdown. Four companies that entered voluntary administration earlier this year were put into liquidation at their watershed meetings this month. Of the two voluntary administrations in August 2021, one of the companies is now in liquidation and in receivership and the other has not yet reported on the outcome of its watershed meeting.

If the country had not gone into lockdown in the middle of August 2021, we expect that the appointment numbers would have been closer to the August 2019 (149) and August 2020 (154) appointments and the year to date appointments would have continued to approach the level of appointments in the year to date in 2019 and 2020.

 Notable insolvency appointments in August:
- Three of the Sacred Hill Vineyard entities have been placed into liquidation. These companies have been in receivership since May 2021.
- WNMC Limited (Wellington Night Market Cuba) is no longer trading and has been put into liquidation.
- Diners Club (NZ) Limited, who used to provide credit card services through The Warehouse, is going through a solvent liquidation.

Personal Insolvencies - Bankruptcy

The personal insolvency numbers have been fairly consistent since April 2021. The number of bankruptcies in August 2021 were lower than in July but the number of Debt Repayment Orders was higher.

As the cost of living continues to increase and businesses are put under more pressure, we expect that there will be more payment defaults and demands made on guarantors. Personal insolvencies are likely to increase as a result.

Winding Up Applications

The number of liquidation applications was the lowest year to date in August 2021, with only 41 advertisements appearing. By way of comparison, there were 75 advertisements in July 2021 and 83 advertisements in June 2021. The IRD advertised half as many applications in August 2021 as it did in July 2021.

We expect that the inability to serve documents at Alert Level 4 has affected the August advertising figures. The extension of Alert Level 4 into September and Alert Level 3 into October 2021, together with the IRD and many other businesses putting debt enforcement on hold while businesses are affected by lockdowns, will mean that advertising of winding up applications will be affected by the lockdowns for some time.

Many businesses are suffering from lower turnover because of lockdown why still incurring fixed overheads and operating expenses, which means many businesses have been operating at a loss for some time now. A number of Auckland retail businesses also lost out on potential sales when Auckland was in Alert Level 4 so could not operate but the rest of New Zealand was at Alert Level 2 and able to dispatch goods to Auckland customers.

While everyone understands that most businesses are doing it tough, the situation is precarious. For every business that closes its doors, employees will lose their jobs. While a company’s suppliers may be able to provide some breathing space in the short term in the hopes that the business’ cash flow will recover, that supplier will also have to deal with its own creditors. To date, we have not seen very many iconic businesses fail in New Zealand as a result of COVID-19.

When Mainzeal collapsed, there was a domino effect through the market, the effects of which are still at play. It remains to be seen whether, when (or if) the first large New Zealand business fails because of the COVID-19 pandemic, the house of cards will come tumbling down.

Our membership with the Global Restructuring and Insolvency Professionals (GRIP) network gives our clients and their referrers access to qualified and highly experienced insolvency and business recovery practitioners in over 36 countries worldwide.

The GRIP network was created in 2014 in Europe to provide a cross-border referral and marketing network for independent insolvency firms. Members are invited to join and commit to supporting each other to secure locally based work and resolve complex issues. GRIP members are based in Europe, Canada, Central and South America, Australia and the Asia-Pacific region.

Whether you need professional assistance with restructuring, selling assets, or winding up a company, a fellow GRIP member who has strong local knowledge, understanding of local regulatory and legal requirements, and contacts can help ensure a smoother process and optimal outcome.

Contact Iain McLennan today to find out more about our international connections via the GRIP network on +64 9 303 0506  or by email:  This email address is being protected from spambots. You need JavaScript enabled to view it. 

Inland Revenue on Covid-19 Impact      Video Link Here

The IRD have advised that if taxpayers are adversely impacted by COVID-19, and they pay the outstanding core tax as soon as practicable that they will automatically write-off any penalties and interest. Taxpayers who are impacted by Covid-19 are suggested to apply for instalment arrangements. Customers who may already be in an arrangement but consider they may not be able to continue with the current terms due to being significantly affected by COVID-19 may ask to renegotiate an instalment arrangement. The key message is to get in contact with IRD.

It is the Commissioner’s view that a customer has been significantly adversely affected by COVID-19 financially where the customer’s income or revenue has reduced as a consequence of COVID-19 and that as a result of that reduction in income or revenue is unable to pay their taxes in full and on time.

The type of relief available for new debt due to COVID-19
• Instalment arrangement
• Instalment arrangement - deferred payment start date
• Partial write-off due to serious hardship and payment of the remaining tax by instalment or a lump sum
• Partial payment and write-off the balance under maximising recovery of outstanding tax
• Write-off due to serious hardship

You can request interest and penalty remission due to COVID-19 through myIR under the “I want to” menu by choosing “Notify of impact by COVID-19”. To request remission of penalties and interest you will be asked to confirm that:
• Some, or all of the amounts owing were due on or after 14 February 2020,
• Your ability to pay by the due date, either physically or financially, has been significantly affected by COVID-19,
• You have contacted the Commissioner as soon as practicable to request relief and your client will pay the outstanding core tax as soon as practicable.

Wider Government support available for businesses adversely impacted by COVID-19

There are a wide range of support measures available for businesses. A summary is in the table below (courtesy of IRD), and full details are available on the www.business.govt.nz webpage Financial support for businesses — business.govt.nz.

If the position is dire and this is the last straw, our staff are availalble to discuss insolvency options for companies. If you just need time, we recommend getting in contact with your tax agent to communicate with IRD and seek an instalment arrangement.

Video Link Here

July has mirrored the insolvency appointment figures over the last couple of months. The pressures affecting our economy have also remained fairly consistent over the last few months:
- Countries are continuing to fluctuate in and out of COVID-19 lockdowns
- Businesses and consumers are facing ongoing shipping delays and supply shortages
- Consumer demand for goods continues to exceed supply in many areas
- Labour shortages remain an issue
- Inflation remains higher than RBNZ’s targets and the affordability of goods remains an issue

To the end of July, the outlook for growth has continued to look positive:
- Unemployment rates have now fallen to pre-COVID-19 rates.
- The construction industry and the housing market continue to run hot
- Consumer spending remains strong
- The Reserve Bank has halted its Large Scale Asset Purchase programme

At the beginning of this week, most economists were predicting that the OCR would increase in the first time in 7 years. While the messaging continues to be that we should expect the OCR to increase before the end of the year, with a view to moving to an OCR of 2% by the end of 2023, subject to the impact of the latest COVID-19 lockdown. By the end of July, banks had already increased interest rates over the last couple of months, anticipating the August 2021 OCR increase that did not eventuate. We doubt that banks will decrease their mortgage rates before the next OCR update, given the indications that we should still be expecting the OCR to rise.

Data shows that 80% of residential borrowers currently have their mortgage interest rates locked in for 1 year or less, largely as a result of the historically low mortgage rates that have been on offer over the last few years. For new home owners with a 30 year mortgage, a 2% increase in mortgage rates will increase the monthly repayments on a $500,000 loan by around $550 per month. If wages do not increase in line with the cost of living, many could struggle to meet theses higher repayment obligations.

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

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

The number of company insolvency appointments in July 2021 were:
- Consistent with May and June this year, both by number and type of appointment
- Comparable to July 2020 but there were significantly more court appointments in 2021 (up around 68%)
- Down 20% compared to July 2019

The spike in solvent appointments is likely attributable to companies waiting for their financial statements to be prepared following the end of the 31 March 2021 financial year and other companies having a 30 June or 31 July balance date.

The number of liquidators being appointed by the Court on insolvent liquidations increased from 37% in June 2021 to 44% in July 2021. This trend is not surprising, given the number of liquidation applications that have been advertised in 2021.

Notable insolvency appointments in July:
- Receivers have been appointed over West Coast Brewery (New World Investment New Zealand (in receivership)). The business was listed for sale after one of its key people, a non-resident, could not get into New Zealand due to COVID-19 boarder restrictions. When the receivers were appointed, the business had not yet been sold.
- Many of the companies that were subject to insolvency processes this month operated in the following industries:
o Construction
o Dairy
o Forestry
o Hospitality

Personal Insolvencies - Bankruptcy

The number of personal insolvencies has been fairy consistent month on month since April 2021. Bankruptcies were around 24% higher in July 2021 than in in the previous few months, which correlates to fewer no asset procedures and debt repayment orders in July. This shift might indicate that the there has been more payment default on bigger debts.

As the cost of living continues to increase and more companies fail, we expect that there will be more payment defaults and demands made on guarantors. Personal insolvencies are likely to increase as a result.

Winding Up Applications

The IRD’s enforcement activity has continued but the numbers have eased off slightly since June 2021. It was the petitioning creditor in 66% July’s liquidation application and continues to lead the way by advertising 67% of all creditor applications in the year to date.

In the year to July 2021, 418 winding up proceedings have been advertised and 255 of the named debtors (61%) have ended up in liquidation. The IRD has advertised 161 (63%) court applications. The table below shows the number of companies that have gone into liquidation after their liquidation applications were advertised and how many of those were advertised by the IRD.

We have passed the halfway point of 2021 and it is now less than six months until Christmas. Quite a bit has happened in the first half of the year so let’s look at how the NZ economy has tracked to June 2021.

The global economy continues to face a number of challenges, which are impacting many countries to varying degrees:

- Countries are fluctuating in and out of lockdowns as a result of ongoing COVID-19
- Shipping delays are continuing
- There are materials shortages affecting many industries
- Consumer demand for goods continues to rise while international travel continues to be restricted

We see the building industry as one to watch. In New Zealand, COVID-19 brought a further increase in demand for housing as New Zealanders returned from overseas, many of them with house deposits. Because of ongoing shortage of housing supply (materials and labour), upward pressure is being put on housing prices. While the building industry appears to be picking up, the travel bubble between Australia and New Zealand may entice some builders to Australia to take advantage of the better wages and lower cost of living on the other side of the ditch, which will not help New Zealand’s house shortage.

Core Logic has reported that house price growth slowed down in May and June 2021, especially in the larger centres. It is too early to know whether this decrease in growth is the result of changes to the interest deductibility rules for property investors and/or an increase in the bright line test from five to ten years. Interestingly, mortgage rates under two years decreased while mortgage rates over two years increased in June 2021. As we now know, the short-term interest rates have since increased. We will also need to wait to see whether property investors start to exit the market, once they are faced with higher tax obligations on their rental properties, and whether fewer property investors will enter the market now that the bright line test has doubled.

As we anticipated in May 2021, we are seeing early signs that inflation is returning to the economy. Expectations out of Wellington are that inflation will be above the 1% to 2% target in the June and September 2021 quarters and will then return to within the target range after that. Experience would suggest that prices are quick to go up but are slow to come down and it is unlikely that the shipping delays and supply shortages currently being experienced will be resolved by the end of the year.

Off the back of the inflation figures, economists have been reviewing their OCR predictions and many are now expecting to see interest rates rise further before the end of the year. It is not surprising that the banks have already increased interest rates. Many are now expecting that the OCR will be back up at 2% by the end of 2022 to keep inflation under control. For new home owners, the predicted increases in mortgage rates could see those currently locked in at low rates really struggle with repayments when those fixed rates expire.

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

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

Company insolvency appointments for June 2021 were:

- similar to May 2021
- higher than June 2020
- similar to June 2019 – the first time the 2021 monthly figures have been close to the monthly figures in 2019

Insolvency numbers have increased steadily over the June 2021 quarter and are higher than the same quarter last year. This increased activity is likely the result of a jigsaw puzzle of factors including the increased pressure being put on companies by the IRD, labour shortages in many industries, seasonal show downs in some sectors, and the very limited number of overseas tourists that have visited since New Zealand’s boarders were first closed. While we saw Wellington move to Alert Level 2 for the last week of June 2021, affected businesses who met the Resurgence Support Payment criteria were able to apply for a lump sum government support payment.

Notable insolvency appointments for the month:
• ASB Showgrounds (Auckland Agricultural Pastoral and Industrial Shows Board) went into liquidation. It has been reported that the cost of the ground rent made it unsustainable for the venue to continue operating.

While there were no other companies of note that had insolvency practitioners appointed in June 2021, there were quite a few appointments in two industries, despite perceived booms in both industries:
• building and construction
• transport and logistics

Personal Insolvencies - Bankruptcy

The June 2021 personal insolvency figures closely mirror the May and April 2021 figures, in both numbers and breakdown by type. If inflation and mortgage rates both rise, as predicted, we expect the increasing cost of living will see more payment defaults, which will likely result in more personal insolvencies.

Winding Up Applications

The IRD’s activity continued to ramp up through to the end of June 2021. It was responsible for advertising 76% of all June 2021’s liquidation application.

There has been 341 winding up proceedings advertised in the year to June 2021 and 210 of those (61%) have ended up in liquidation. The IRD has been the petitioning creditor in 130 of those applications (62%).

Let’s look at the NZ economy and the insolvency space in May 2021.

In the media, the concerns about the current labour shortages grew. While these concerns were previously focused on the horticultural sector (a shortage of pickers during harvest) and the hospitality sector, the number of industries calling out for workers is increasing. Of late, the labour shortages in the construction sector – an issues that has been around for some time – have been noticeable, as anyone who has tried to organise a tradie or become a DIY expert thanks to YouTube can attest to. Supply shortages for building materials is also biting, which is not helping New Zealand’s ever present housing crisis.

The pressure points for the economy continue to loom. While some critical issues are being addressed urgently to address their negative impact, other issues have been put to the back burner. It looks like shipping issues and materials shortages will be with us for some time. China has gone on a materials spending spree but has overwhelmed its ports in the process. China’s ports backlog has the potential to cause more shipping disruption than the March 2021 Suez Canal blockage – the canal was blocked for six days but disrupted global shipping for months plus the vessel and its $3.5 billion in cargo has not yet been released.

There is continued talk of the pressure on the NZ housing market. Although the government and others are looking to increase supply, they are constrained by both material and labour shortages. It looks like the house price projections outlined by the government in their last budget seem overly optimistic and, when looked at critically, unrealistic.

Inflationary pressures are continuing to creep into the economy. The cost of goods is on the rise as a result of supply shortages, wage increases, and government policies that have increased the cost of doing business. The Reserve Bank will likely tolerate these inflationary pressures for a time but some economists are questioning whether the projected OCR increases will be brough forward. Banks have started to price interest rate increases into their longer- term (3+ year) mortgage rates but, paradoxically to some, lowered their shorter term interest rates. As mortgage rates rise, many will start to feel the pinch, especially those who took out a mortgage after mid-2008, as we have been in an environment where the OCR has tracked down and interest rates have generally been on a downward projection. In March 2008, the average one year “new standard residential mortgage interest rate” was 9.9%, in March 2009 it was 5.76%, and in March 2021 it was 3.24%.

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

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

Company appointments are only slightly down on 2020 levels and the number of insolvency appointments in May 2020 and May 2021 were similar. The types of appointments are, however, quite different. Solvent liquidation have continued their upward trend, with 17.8% of the total liquidations in May 2021 being solvents.

Notable insolvency appointments in May 2021:
• Wine Industry
o Four companies in the Sacred Hill group of companies (including the parent company) had receivers appointed, one of which has also been placed into voluntary administration. Another one of the companies in the group was placed into liquidation by its shareholder.
o Villa Maria’s parent company (FFWL Limited) had receivers appointed.
• Building Industry
o Silverfern Property Services Limited, the largest recipient of emergency housing funding, was placed into liquidation by its shareholders.
o Ormiston Rise Limited, a KiwiBuild supplier, was placed into receivership.

Personal Insolvencies - Bankruptcy

Personal insolvencies have continued to decline year on year and the 2021 figures are lower than comparable periods in the pre-Covid-19 disruption period. Notably, May 2021 figures are only slightly above May 2020. Bankruptcy figures to decline, with many individuals in trouble opting to submit to a No Asset Procedure or Debt Repayment Order. Is this a positive sign that individuals are taking early action in response to financial pressure rather than burying their head in the sand and letting the debt blow out? We will continue to monitor the position.

Winding Up Applications

Winding up applications for the year to May 2021 have picked up slightly month on month. Since the start of the year, the IRD has been applying pressure to those in default and who were given a grace period in 2020. While the IRD was lenient following the Covid-19 outbreak and quiet in the period leading up to the election (which is common), the IRD has advertised over half of all the liquidation applications in the year to date and was the petitioning creditor in more than 80% of all liquidation applications advertised in May 2021 .

To date, 260 winding up proceedings have been advertised. Of those, 160 (61%) have ended up with the debtor company being placed in liquidation. The IRD was the petitioning creditor in 88 of the 160 (55%) of the court ordered liquidations so far this year. This is another trend we will continue to monitor.

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 short form liquidations contact our team.

Related Article:  Ceasing to Trade a Company in New Zealand

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.