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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
The directors of a company have all the powers to decide what will be done, when it will be done and how – but with that power goes the responsibility to the company and its shareholders, to the company’s creditors and last, but not least, to themselves.
As a director, whether that be as the sole director of a small company or one of many in a large company, you have duties imposed on you under legislation, such as the Companies Act 1993 (“the Act”), and the company’s constitution.
In any circumstances, you must firstly comply with the duties imposed by legislation, which are set out in sections 131 to 138A of the Act. Your first duty is to act in good faith and in what you believe to be the best interests of the company – not your own.
In tough times, if the company is insolvent, then the focus changes and you must act in the best interests of the company’s creditors by ensuring the company doesn’t incur debts and liabilities that it cannot pay.
If you do not fulfil your duties as a director, you could be held personally liable for those breaches and face monetary penalties or imprisonment and you could be ordered to contribute funds to the company to pay creditors.
Where you are the sole director, the thought process is simple.
Where you are not the sole director, and your company is insolvent, then the thought process is the same but (and it’s a big but) being able to put into effect any actions you think are the correct and proper thing to do is dependent on the majority of directors agreeing with you.
If you do not get that agreement, you need to start making decisions about what is best for you personally.
"Should I Stay or Should I Go" is a song by English punk rock band the Clash and one of the verses is as follows -
Should I stay or should I go now?
Should I stay or should I go now?
If I go, there will be trouble
And if I stay it will be double
So come on and let me know
The 3rd and 4th lines of the verse highlight the issue for you, as the director holding the minority view, of what you should do.
Do you remain as a director to try and bring about the changes you think are required to get the best results for the creditors of the company or do you accept the other directors will not change their point of view.
That is a decision for you to make, based on the circumstances of your company and on any professional advice you may take but, if you do not see any way that you can stop the company failing because the other directors won’t take the course you are proposing, there is no obligation on you to “go down with the ship”.
To protect yourself, you should keep good records of the events that occurred, the proposals you put to the Board and responses you received and seek independent professional advice.
Barring a major disaster, a business doesn’t go from being perfectly fine to insolvent overnight. There is usually a whole list of precipitating events that go overlooked or aren’t managed correctly in order to get to the point of no return.
Sometimes, you can be so involved in the day-to-day running of the business that signs of financial trouble can pass you by. Usually, your accountant should pick up on these signs, as we discussed in a previous article, but sometimes these signs slip through the cracks.
In this article we look at three different risk stages for business owners. What are the signs you need to look out for to recognise financial trouble? What can you do right now to help avoid insolvency?
What to do: Don’t ignore the problems and hope they go away. Start working toward solutions now before these problems become overwhelming. Speak with your accountant to get an accurate picture of your finances and plug the holes.
What to do: Negotiate creditors compromises, and work towards paying down/paying off business debt. Speak with a qualified professional – like the team at McDonald Vague – about your options to avoid insolvency and improve cash flow.
What to do: Your business is in emergency mode. You need to act fast to salvage your company. Contact the professional team at McDonald Vague to find out your options.
You can avoid insolvency by catching the warning signs early on, and solving problems before they grow too big.
If you think your business is in financial trouble or have a client who may be, you may benefit from our free Guide to Options for Companies in Financial Difficulty.