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.

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

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.

Personal Insolvencies - Bankruptcy

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.

Moving Forward - What Might Be On The Horizon? 

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. 

If you want to have a free chat about what 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..

Businesses in New Zealand are facing challenging times. Directors of companies are pulled in all directions - employees to care for, bills to pay and creditors chasing them for payments. Directors are not alone in feeling the extreme levels of stress, fear and anxiety.

Directors however should not now be prolonging the inevitable where they had no viable business pre Covid-19 and if post Covid-19 there is no reasonable prospect of the company recovering from the current circumstances. If circumstances are dire, the shareholders should be looking to appoint a liquidator to avoid debt increasing and further harming creditors.  Liquidation does not necessarily mean the end of trading altogether.  Often the business is sold and sometimes there is an opportunity to be involved in the successor company. 

Trading On - Viable Businesses Versus Insolvent Companies at 31 December 2019

Viable companies at December 2019 that fail as a consequence of Covid-19 have relief measures available to them. The government has eased the rules around trading in insolvent circumstances to increase the survival prospects for businesses that were profitable at the start of COVID-19. This is to encourage directors of businesses that were viable pre Covid to not place their company into liquidation prematurely with the fear they be may held personally liable under 135 and 136 of the Companies Act.

The same relief is not afforded to businesses that have traded recklessly leading into lockdown and then carried on causing further demise to their creditors. Directors of companies that were trading insolvently pre Covid-19 could be held to have breached directors duties or found to have breached Section 380 of the Companies Act 1993 “Carrying on business fraudulently or dishonestly incurring debt”. Directors should be aware of their obligations and be taking proactive steps. The government’s message to show kindness also includes caring about the impact on creditors.

If the sudden and rapid economic effects of the COVID-19 pandemic, to be followed by the anticipated global recession and an expected long period of recovery, mean it is now unrealistic to continue trading, then liquidation is an option for both solvent and insolvent companies.

Liquidation – The Process

An insolvent liquidation is where there is a shortfall to creditors. A solvent liquidation is advanced to enable capital profits to be distributed tax free.

Some company failures are for reasons out of the control of the director. Many liquidations that are likely to commence in June/July 2020 will be attributable to the impacts of Covid-19.

Liquidation is not always the best answer and can be the last resort after exhausting all other options. Company compromises or the new Debt hibernation scheme are certainly options to review first as well as the loan schemes available. To some, liquidation is inevitable, there is insufficient light at the end of the tunnel, lack of funding or too much uncertainty or personal risk. Liquidation can be an opportunity to restructure, review, revise and build again and reduce personal liability.

Liquidators on appointment take control of the business and the process going forward. The liquidator acts for the creditors. They recover available assets, investigate the company’s affairs and distribute any available funds to creditors in the order of priority specified by the Companies Act 1993.

Liquidation can mean new beginnings

Liquidating a failed company does not necessarily mean the end of trading a business again or the inability to be involved in the liquidation process. Each liquidation is different.

Many directors have started again, learned from their failures and gone on to run highly profitable businesses. Many have relied on the exceptions in the Phoenix company rules to buy back the business and trade with the same/similar name.

With the agreement of the liquidator, there can be an opportunity to buy the business assets and Intellectual property (including brand/tradename) and trade again with the same/similar company/ trade name. An “exception” under the Companies Act is the ability to purchase from the liquidator and to then issue a successor company notice within a specific time period.

Directors of failed companies who do not comply with the exceptions at Section 386D are prohibited from being, directly or indirectly, a director, manager or promoter in a phoenix company or business.

Those that comply with the exceptions can go on to trade again with the support of their suppliers and customers.

Hive Down – restructure with immediate liquidation and buy back

An independent liquidator can consider a sale back to the director or management team or related party. The purchasing entity is termed a "phoenix" company, if the same (or a similar) company or trade name is used and the previous director or management team remain in a management position.

Since Insolvency practitioners hold and manage company assets in a fiduciary capacity and make decisions that can materially affect the total amount available for distribution to creditors, they typically gain independent valuations to support a sale back and prefer to test the market. In some cases the only market is the persons who were involved in the failed company.

The business assets of a struggling company in liquidation are sold usually following a robust sale process and at market valuation and after considering the specific circumstances leading to liquidation. The proceeds of realisation flow back to the company in liquidation to be distributed to creditors. The purchaser of the assets (related party or third party) needs to acquire the assets following a fair process and to fairly pay for those assets. A hive down restructure requires careful planning to protect the brand, company reputation, and supplier/customer relationships. Restructuring where creditors in the failed company are not paid fully has its challenges for the new company to gain continued supply and support.

A hive down structure needs to consider:

• Restraints of trade
• Transferability of contracts
• Staff retention
• Customer / supplier support
• License renewal
• Retention of tax losses

The new “phoenix” company has an obligation to issue a successor company notice within 20 working days of the purchase - when this occurs, it gives the director of the new company (successor company) protection from personal liability. It also informs suppliers they are dealing with a new entity and need new trade terms. A similar system can also apply to a management buyout, where the purchaser wishes to buy assets rather than shares.

Where Phoenixing Goes Wrong For Directors And Managers 

A phoenix company can also arise for the wrong reasons, or can go very wrong, typically where a director of a failed company transfers assets to a new company at undervalue or alternatively transfers the assets for value but fails to take the required steps defined at Section 386A of the Companies Act 1993.

A sale of assets pre liquidation by the directors to another company prior to the liquidation of the failed company at undervalue, or even no value will be investigated by the liquidator. This is commonly referred to as ‘phoenixing’ and is contrary to insolvency law because fair value should be obtained from the sale of assets. The expectation is that the liquidator will seek to recover assets that were disposed of at undervalue or no value and add them to the pool of assets available for distribution to creditors.

Liquidators will also investigate the affairs of the company and decisions taken by the directors in the lead up to the liquidation. Directors can be held responsible to compensate the company for matters such as breaches of directors’ duties, insolvent trading or unreasonable director related transactions.

For those directors that sell at a market value and continue in a governance or a management role or as named directors in a new company structure before liquidating the failed company, they need to be aware of the phoenix company provisions in the Companies Act 1993 and apply to the court as a matter of urgency for Court approval to use the same/similar company/trade name.

Voidable Dispositions

Section 53 of the Insolvency Practitioners Regulation Amendments Act introduces sections 296A to 296D of the Companies Act in relation voidable dispositions of company property during the specified period. The specified period begins on the date on which an application is made to appoint a liquidator under 241(2)(c) and ending at the time the liquidator is appointed.

Disposition is not voidable if made in the ordinary course of business , or by an administrator of receiver or under a Court order.

The amendments will void the transfer of a company’s assets once a liquidation application has been filed, other than in the ordinary course of business, where the court has given leave, or where the liquidator has ratified the transfer, save for transfers by an administrator or receiver;

Concerns on Phoenixing and Remedies

Creditors of a business that failed leaving them exposed will often see it as wrong that the business can be transferred to a new corporate vehicle, leaving the creditors of the failed company with no recourse to the business for payment of the old debts. This is a valid concern but only when proper value has not been paid or where the director has sought to defraud creditors.

There are many existing remedies in the Companies Act and other legislation to address the harms caused by the misuse of the voluntary liquidation process. Examples of existing provisions that help the creditors of the old company are enforcement of directors duties and fraud and dishonesty offences, repayment orders, the setting aside of prejudicial and voidable transactions and banning people from being directors.

While the phoenix provisions in the Companies Act are sometimes criticised for being too narrow, they do provide important protections for the creditors of the new company. Creditors of the new company should not be led into believing (wrongly) that the business has been longer established than it has been. The provisions themselves do not focus on the creditors of the old company.

When Sale pre liquidation can go wrong – Phoenix Company Director Liability - Example

In Commissioner of Inland Revenue v Clooney Restaurant Ltd [2020] NZHC 451 the High Court granted relief to the Inland Revenue against a phoenix company and its sole director for the disposition of property intending to prejudice creditors; the breach of director duties; and the breach of s 386A of the Companies Act 1993 (phoenix company director liability).

Upon receiving winding up proceedings from Inland Revenue seeking to recover tax liabilities, the company director transferred the Clooney restaurant business to a new company Clooney Restaurant Ltd before the proceedings to place the failed company into liquidation.

The High Court found that the transfer was prejudicial as there was no right to recourse against the transferred property. The court also found that the director breached his duties to the vendor companies and said “Relieving the companies of their only significant asset, while leaving them without means to meet substantial liabilities, is not in their best interests”: at [17].

The High Court also found that the unmet tax liabilities were exclusively caused by the directors actions and that as a director of the new company and a director of the phoenix company, the director had breached s 386A(1)(a) of the Companies Act rendering him personally liable for the phoenix company’s debts.

Under s 348 of the Property Law Act 2007, the phoenix company was ordered to pay compensation to the vendor companies in the sum of $383,959.40. The director was ordered to pay the CIR $383,959.40 under s 301 of the Companies Act.

The decision can be found here.

Conclusion

A struggling company can consider liquidation and starting up again but the right processes need to be taken to protect the creditors, the director and the liquidator.

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.

Bankruptcy:

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.

Wage Subsidy:

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.

Business Finance Guarantee Scheme:

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:

Tax:

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.

Conclusion:

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 regulation of insolvency practitioners has been welcomed by most, if not all, reputable insolvency practitioners and most of the matters covered in the Insolvency Practitioners Regulation Act 2019 relate directly to the practitioners.

The Insolvency Practitioners Regulation (Amendments) Act 2019 made amendments to various related legislation, including the Companies Act 1993 (“the Act”).

In this article we look at one particular amendment to the Act, which came into force on 1 September 2020 and has a direct impact on the ability of company shareholders to appoint a liquidator in specific circumstances.

Old Position:

Generally speaking, there are two sets of circumstances in which the shareholders appoint liquidators of an insolvent company –

• The company is insolvent, and the shareholders appoint a liquidator to wind the company up; or
• The company is insolvent, and a creditor makes an application to the High Court to wind the company up and appoint the creditor’s choice of liquidator. Within 10 working days of being served with the winding up proceedings, the shareholders can appoint the liquidator of their choice pursuant to Section 241AA of the Act.

The ability of the shareholders to appoint a liquidator of their choice has sometimes resulted in allegations of “friendly liquidators” being appointed to the detriment of creditors.

The New Position:

From 1 September 2020, the amendment to section 241AA took effect. In cases where a creditor has filed an application with the High Court for the company to be liquidated and has served a copy of those proceedings on the company, the shareholders will only be able to appoint their choice of liquidator with the approval of the applicant creditor.

Conclusion:

While it could be argued that the regulation and licensing of insolvency practitioners should mean that there is no difference, in terms of the approach taken to the liquidation, between the liquidators chosen by the applicant creditor and those chosen by the shareholders, we think this amendment is a good one.

The amendment reinforces the need for directors and shareholders to take action early if their company is failing to meet its obligations to creditors.

If you would like to discuss the solvency of your company and the options that are available to you please contact one of the team at McDonald Vague.

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 

In summary:

• Debt hibernation is binding on all creditors (we are uncertain about whether related party creditors can vote, or whether their votes are challengeable) providing that a vote of 50% by number and value is obtained
• Creditors will have 1 month from the date of proposal to vote during which time there is a moratorium on the enforcement of debts
• If passed, a further 6 months moratorium will be available
• To access debt hibernation a threshold will need to be met 
• It will not apply to Sole Traders

Warning for insolvent companies and directors

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.

McDonald Vague Consulting Support Services

The McDonald Vague team offer the following services as a cost-effective and efficient form of employer assistance in these challenging times.

• Independent Assessment of solvency to satisfy the Debt Hibernation scheme (requires financials to 31 December 2019)
• Assistance with Debt Hibernation arrangements, offers and documentation.
• Company Compromise (for insolvent companies) 
• Liquidation 
• Voluntary Administration (recommended for larger companies seeking to compromise with creditors).

CONTACT OUR TEAM 

We are all responding to the various impacts of Covid-19 containment measures over the past days. The Government has ordered wide ranging travel and event restrictions although it is important to note the restrictions apply to people and not goods and services.

NZ is in the early stages of the coronavirus outbreak but many small and medium-sized businesses are already feeling its effects on cashflow to which will be added impending cost increases such as the 1 April increase in the minimum wage.

From the commentary we have seen it is possible that our summer has insulated us from the worst of the virus to date, however that could change as we move into colder temperatures. It is also likely that spending across all sectors (except perhaps government) is down as families and individuals react to the uncertainty that is emerging. Certainly hospitality, events, and tourism are taking a big hit. In some areas, industries such as logging have not worked for 5 weeks or so.

Discussion has been that a 30% drop in revenue is forecast. If that becomes reality many businesses large and small will struggle. The message to support businesses is for consumers to try to live as normally as possible and that includes maintaining your spending habits as best and as safely as you can, and to look after yourself and those around you. In other words “Support your local”. This could reduce the harm that enforced isolation has on the country and its communities and businesses.

The first option to assist you and/or your business is to check what insurances you have to cover your business and personal issues. Read Here - Chapman Tripp - COVID-19 business protection check list

Banks and financiers may also be able assist. The RB measures to reduce the interest rate will probably have a small impact. The larger impact will be from the RB deferring the increase in capital that banks hold, and will support any increase in the banks’ ability but not necessarily willingness to lend further or to reschedule repayments, as we expect that the fundamental rules around lending will continue to apply. So a sound underlying business with good history and prospects, security and cashflow will be required.

The government support package announced yesterday is aimed to inject money into the economy to support job retention. The sick leave and one off 12 week wage subsidy packages look to be available to every business that has experienced or expects to experience a 30% or more drop in revenue due to Covid 19. There are limits to how much each of the packages will assist for example the wages subsidy is capped at $7,029.60 per employee working 20 hours or more per week and $150,000 per employer. Assuming a 40 hour week the subsidy will assist business payroll funding by paying $14.62 per hour per employee up to a maximum of $150,000. As the subsidy does not abate, the per hour impact of the subsidy increases if employees work less hours until the minimum subsidy per employee of $350.00 per week for employees working less than 20 hours per week kicks in.

Some steps toward mitigation need to have been taken such as discussions with your bank, and you have a best endeavours obligation to maintain employment levels and to pay each employee at least 80% of their normal income for the subsidy period.

While property owners receive some other income tax support with cashflow impacts into the years ahead, unfortunately for those who lease there is no other support than the wages subsidy.

For businesses which have lost large percentages of revenue and support either a large number of employees, or have high fixed overheads the government measures will make some difference but probably not enough to trade without running the risk of breaching directors duties, if the company trades while insolvent.

So despite the support package it seems inevitable that some businesses will close, and possibly never re open unless arrangements can be made with their creditors.

If maintaining your business is too hard – there are a range of options

If your business was facing difficult times pre coronavirus and the impact of coronavirus is the last straw, then we can provide a number of options to wind up your company. If you think you can trade out and it is time that is needed to pay suppliers, then a formal or informal compromise with creditors may be an answer.

It is our business to help struggling businesses and to provide stress free advice. We seek to bring an end to messy situations and we are here to support you/your business. We may not always have the answer you want to hear, but we can offer options.

Some early advice is:
* If you are having difficulties or concerns about meeting your normal tax obligations due to the effects of COVID-19, Inland Revenue has a range of ways to help depending on your circumstances.
* Get in contact with your bank if you’re experiencing cash flow issues, especially in regards to loans repayments or lack of funding. They might be able to help or put you in touch with someone who can.
* Support local business
* Be health conscious
* Get advice if by trading you could be creating serous loss to suppliers/creditors
* Seek advice from your Chartered Accountant or Trusted advisor

Options for insolvent/struggling companies are:
* Company Compromises
* Voluntary Administration
* Liquidation
* Receivership

We assist companies and individuals facing financial difficulties through a range of insolvency services including liquidations, company compromises and receiverships. Our specialist advisors will guide you through your options.

The much-delayed City Rail Link (CRL) is having an enormous impact on businesses affected by its mammoth construction works. A cluster of financially devastated Albert St businesses are struggling for their financial future due to a blow-out in the completion of the CRL construction works.

City Rail Link Limited was set up in June 2017 and is a joint venture between the Government and Auckland Council. Initial excavation work on Albert St commenced in July 2017.

The CRL is New Zealand’s biggest ever transport-related infrastructure project. It is designed to double Auckland’s rail capacity. It comprises a 3.45-kilometre dual-tunnel underground rail link sunk up to 42 metres beneath the centre of Auckland’s CBD.

Businesses Under Stress

Debt levels are rising to potentially unsustainable levels, while banks view Albert Street as high risk and have ceased lending or extending overdrafts.

Subsequently, at least six Albert St owners have been forced to close due to the disruption to their business caused by the $4.4 billion project.

Moreover, Albert St businesses are obliged to continue paying their staff their wages, rent for the premises, council rates, GST, excise tax as well as their trade supplies.

Calls For Compensation

Local Albert St businesses affected by the CRL project have long called for help as construction continues to impact their businesses.

Locked in a lengthy and increasingly bitter struggle for financial compensation, the Albert St business group is highlighting the toll the protracted construction works have taken on their finances.

Back in August 2019, reports emerged that the $4.4 billion project had offered just $72,000 to help cash-strapped businesses battling survive behind its ever-present trenches.

Reports indicate Michael Barnett, chief executive of the Business Chamber, described the $72,000 funding for owners as "a shameful response to the businesses who have been grossly disadvantaged by this project."

Barnett was reported as saying that the derisory assistance offered to date illustrated the "total lack of understanding" of who "creates wealth and employment for our community" by the Auckland Council leadership team.

City Rail Link Limited defend its offers of assistance, pointing to numerous programs it has made available to businesses struggling with depressed trading conditions caused by the lengthy construction.

Leading business group, Heart of the City, has launched a petition to Parliament seeking financial compensation for their losses, while Auckland Central National MP Nikki Kaye has agreed to deliver the petition to the parliament.

What Is Being Done To Help Affected Businesses?

Transport Minister Phil Twyford announced the Government has agreed to set up for a hardship fund for Albert St businesses affected by the CRL works under a proposal initially put forward by Auckland Mayor Phil Goff.

Goff, who previously deflected calls by Albert St business owners for financial assistance, changed his stance on the issue. His new position advocates for a fund to be set up to assist embattled Albert St owners.

The new fund will assist small businesses impacted by the project taking longer than initially anticipated, providing they meet set eligibility criteria.

However, small businesses will need to prove they experienced financial hardship as a result of slippage in the project delivery. They will not be compensated for any inconvenience resulting from the extensive construction work.

Common Sense Actions To Continue In Business Without Trading While Insolvent

Many businesses faced with major infrastructure projects such as the CRL will experience depressed revenue and subdued trading results. This disruption can plunge them into operating at a loss until the construction work is completed and the business finds its feet again.

However, if those businesses are losing more money than they are generating, they’ll need to implement some changes to keep those businesses running in the short term.

One option is to raise or borrow money to cover costs until the construction is finished.

Another option is to reduce their expenses by identifying discretionary spending they can cut to reduce the drawings they are taking from the business, while trying to negotiate better interim payment terms with their suppliers.

In times of external financial stress, a further option may be to negotiate short-term rent assistance, a deferred payment plan, or a rent holiday with their landlord.

Many are considering selling assets they’re no longer using.

Common Pitfalls

Businesses confronted with the delays associated with the CRL should take care to avoid these common mistakes:

• Keeping your head in the sand about the potential insolvency risks associated with trading while in a loss position.

• Not having a fallback plan in place to survive the loss in revenue triggered by the construction work

• Buying products or services your business is not in a position to pay for. If you source materials or business inputs from your supplier when you know you can’t pay the invoice when it falls due, you are operating while insolvent, leaving yourself open to prosecution and bankruptcy.

Options For Insolvent Companies

There are essentially three basic options for businesses hit by the CRL construction delays and facing insolvency. They are:

• Voluntary Administration: An administrator is appointed to review the company’s operation with the intention of restructuring the business to avoid its eventual liquidation. Businesses often emerge from voluntary administration in sounder financial shape to continue trading.

• Receivership: A receiver is appointed by a secured creditor to deal with the company’s secured assets. This usually results in those assets being sold off and the business closed. A company can simultaneously be in receivership, voluntary administration and liquidation.

• Liquidation: A liquidator is appointed to investigate and deal with all the business assets. Creditors have the option of applying to the High Court for the company to be placed into Liquidation. Alternatively, the company’s shareholders can pass a special resolution to place the business into Voluntary Liquidation.

The Case For Infrastructure Development

Historical data supports the claims that infrastructure renewal projects stimulate the local economy. These projects typically deliver new jobs while attracting an influx of visitors to a community.

By doubling Auckland’s existing rail capacity, the City Rail Link (CRL) project should stimulate local employment, boost business turnover and enhance property values.

The CRL is also envisaged as delivering indirect benefits such as the social benefits of community revitalization together with increased consumer expenditure, all of which drive demand.

Final Observation

The problems experienced by local Albert St businesses affected by the CRL construction brings into sharp focus the importance of community engagement. Any infrastructure renewal project set in a major CBD inevitably poses challenges for existing local businesses while holding out the promise of long-term future benefits. The trick appears to be striking a fair balance between the two!

SMEs make up a large part of the insolvency work that we at McDonald Vague handle and the reasons for those insolvencies range from events beyond the control of the company officers to a complete lack of knowledge and understanding by the company officers of what is required of them.

• What led to those companies failing?
• What were some of the red flags that might have been seen along the way?

CAUSES OF FAILURE:

The causes of company failures, as reported to us by the directors, are many and varied and the real reason is not always identified correctly by the directors.

There are, however, common themes that come through in the reasons for company failures.

All the Eggs in one Basket:

It is not uncommon in insolvencies to find that the failure of the company has come about because they have all, or at least most, of their eggs in one basket. The sudden failure of their major client or the decision by that client to go elsewhere leaves a yawning gap in their cash flow.

In tight economic times there is not always the ability to find new business in a short period of time to enable the business to continue to operate. They can also be left holding stock that is particular to that client and have no ability to move it on.

Company directors don’t always have the marketing skills to get out and promote their business nor the financial understanding to see ways to restructure their business to take account of the sudden loss of a major client.

The unexpected loss of a vital staff member can have the same effect, leaving the business unable to operate to its potential while another suitable employee is hired or trained up.

The Economic Climate:

Often directors will point to a particular period and claim that this was when orders dried up.

A sudden down turn can sometimes lead to the company cutting its prices in an endeavour to obtain work but without giving enough thought to what it actually costs them to do that work. So they continue to operate but have no margin or insufficient margin to enable them to meet their costs and catch up on old debt.

Lack of Knowledge:

A number of the small companies that we manage the liquidation of are companies incorporated by a tradesman to charge out their services. Many of these are tradesmen who have moved from employee status to company director and employer because they have been advised that they will be better off working for themselves through a company structure.

While they may all be very capable plumbers, builders, electricians etc many know next to nothing about the requirements of running a company and managing the finances.

They often start with a few tools and a vehicle, no operating capital and no administration systems in place.

They fall behind in filing their PAYE and GST returns, they fall behind in invoicing out the work that they have done. They fail to differentiate between what is the company’s and what are their own personal assets and the company bank account is used for everything, including buying the groceries.

They do not keep accurate records of the income and expenses and fail to carry out even basic functions like checking off bank statements. They have no prepared budgets or cash flow forecasts and, essentially, exist day to day. If there is money in the bank account they can spend it without giving any thought to things like GST & PAYE that may be falling due in the next month.

The cumulative effect of these failings is the downward spiral of the business until a creditor, generally the Inland Revenue Department, puts the brakes on them by threatening to wind them up unless payment is made.

Related Party Loans:

This can include loans to shareholders, family and friends, as well as related companies. The temptation is there, if one company is flush with cash at any stage, to lend the funds to related parties.

Problems arise when there is no clear documentation of the loans and no specific requirement on the related party to make repayments.

While the related entities are still in existence and the loan sits on the company’s statement of financial position as an asset – giving a semblance of solvency – the truth of the matter is that there is no substance to the asset with no likelihood of the loan being repaid.

Allied to this is the giving by the company of guarantees for related entities leading to claims made on the company in the event of default by the related party.

RED FLAGS:

What are the red flags, or danger signs, that the company’s directors or professional advisors might note along the way that indicate all is not well with the business?

• Notifications that PAYE or GST returns haven’t been filed

• GST refunds for 2 or 3 periods in a row. If the company is consistently spending more than it earns, what are the reasons.

• Failure to pay PAYE and GST. PAYE, in particular, is “trust” money deducted from employees’ wages. It should not be available for operational purposes.

• A steady increase in the outstanding creditors and increased age of the debt.

• A constant need for the shareholders to support the company with funds without any light at the end of the tunnel. How long can the shareholders continue to fund the company?

• A sudden change by creditors to expecting COD for supplies rather than place the amount on credit.

CONCLUSION:

The vast majority of company directors and shareholders don’t deliberately set up their company to fail but sometimes, through a combination of matters beyond their control and a lack of skills and understanding of the requirements, that is what happens.

Good advice at the outset and continued support and assistance during the operation of the business from accounting and legal professionals could go a long way to reducing the likelihood of failure.

If you would like more information about the causes and symptoms of company insolvency, please contact one of the team at McDonald Vague.

Employees’ Employment on Liquidation

When a company goes into liquidation, all of the company’s employment agreements may be terminated.  If the company has employees when it is put into liquidation, the liquidators will usually visit the business and inform the employees of the liquidation.  And, employees who have outstanding entitlements will be notified of the liquidation in writing, which is normally sent to the employee’s last known email or postal address.

 If the liquidators continue to trade the business or they require the expertise of certain employees after the company’s liquidation, the company in liquidation will re-employ the employees they require for the period they are required, which could be anywhere from a few days to months.  Employees who work for the company after its liquidation are paid as part of the company’s trading on expenses.  If the liquidators are able to sell the company’s business, the purchaser may be able to offer at least some of the company’s employees new employment.

Employees’ Claims in a Liquidation

 The Companies Act 1993 provides that employees have preferential claims for any:

• Unpaid salary or wages and any commissions earned in the four months before the company’s liquidation; plus
• Untransferred payroll deductions and donations made for an employee in the four months before the company’s liquidation; plus
• Unpaid holiday pay payable to the employee as at the date that the company is put into liquidation, regardless of when the holiday pay accrued; plus
• Untransferred KiwiSaver contributions, child support payments, and/or student loan payments deducted from the employee’s salary or wages; plus
• Redundancy compensation, if provided for in the employment agreement.

These claims all rank equally amongst themselves.

Employee’s preferential claims are currently capped at $23,960 before tax (as from 30 September 2018).  This figure is reviewed and adjusted every three years.  The next review will be in 2021.

Some employees have both preferential and unsecured claims in a liquidation.  Claims for payment in lieu of notice of termination are currently unsecured, although this will change soon, and any preferential amounts that exceed the cap of $23,960 are both unsecured.  Any claims by employees for compensation under section 123(1)(c)(i) of the Employment Relationships Act 2000 are also unsecured. 

Draft legislation proposes employee claims for long service leave and payment in lieu of notice should be preferential claims.  These amendments are expected to be introduced in 2020.

Personal Grievance Claims

From the time a company is placed into liquidation, all proceedings against it are automatically stayed.  If an employee or former employee has filed a claim in the Employment Relations Authority (or any other Court or Tribunal), that claim cannot continue without the liquidators’ consent.

Having an order from the Employment Relations Authority or the Employment Court requiring the company to pay wages or salary, holiday pay, compensation, and/or costs does not affect whether any part of an employee’s claim is preferential or unsecured.  Generally, liquidators will not consent to the proceeding continuing unless the outcome is likely to affect the employee’s claim in the liquidation and the liquidators consider that they are not in a position to accept the employee’s claim as submitted, which the liquidators have the power to accept in part or in full.

Timing of Employees’ Preferential Payments

Companies do not usually go into liquidation with the funds to pay employee entitlements sitting in their bank accounts – in most cases, the company’s bank accounts are in overdraft – so there is likely to be some delay in collecting funds and payments to employees. 

Even if a company has lots of assets, if any of the company’s assets are secured by a specific security, the secured creditor is entitled to that asset in priority to the company’s preferential creditors until that debt is repaid.  Even if the company has late model vehicles or recently purchased new equipment, the value realised rarely covers the amount owed to the secured creditor.  If there is any surplus from realising these secured assets, those funds are paid to the liquidators for distribution. 

Payment of employees’ preferential claims rank behind the cost of the company’s liquidation, which includes any trading on costs, the cost of realising the company’s assets, the liquidators’ fees and expenses, and the petitioning creditor’s costs (if the company was put into liquidation by the High Court).   

If there are funds available to pay employee preferential claims, those funds are likely to come from selling the company’s business and assets and collecting any debts owing to the company, all of which can take time.  If there are some funds available to pay employee claims, it is not uncommon for partial distributions to be made as and when those funds become available.    

If the company does not have enough assets of value and easily recoverable accounts receivable to pay the employees’ preferential claims in full shortly after liquidation, there is likely to be a reasonable delay before employees receive any further payments, if at all.  Those further payments will be dependent on the company and/or the liquidators having claims against third parties that, if pursued, are likely to result in creditors receiving a distribution. 

Once all avenues of recovery have been exhausted and all funds have been distributed, the liquidation comes to an end.

If the company has outstanding PAYE at the end of the liquidation, as between the IRD and the employee, the IRD treats the amounts declared by the company as PAYE as paid.

You wouldn’t pick a tradie on price alone so why would you pick an insolvency practitioner solely on this basis?

You expect your tradie to work to industry standards when working on your house or car so why wouldn’t you take the same care before you hand over control of a business to an insolvency practitioner, who will be dealing with your company, its assets, its creditors, and its stakeholders?

Not all insolvency practitioners are created equal. They have different levels of experience and qualifications, work in different size firms, and may or may not be accredited. If you appoint the wrong insolvency practitioners, it can be difficult to remove them. If it’s shortly after appointment, the company’s creditors may be able to appoint replacement insolvency practitioners at the initial creditors’ meeting. If not, it will likely involve a trip to the High Court. If the insolvency practitioner is not accredited, they will not have to answer to a disciplinary board.

You should expect your insolvency practitioner be law abiding and to deal with the company’s directors, shareholders, and creditors fairly and ethically. We have put together a handy list of what to look for, what to ask, and what to consider before engaging an insolvency practitioner.

WHAT SKILLS DO I NEED TO LOOK FOR IN AN INSOLVENCY PRACTITIONER?

Your insolvency practitioner should:

1. Have experience in the industry the business operates in

2. Have relevant insolvency experience, including in relation to the type of appointment you are considering and any steps you expect them to take after their appointment

3. Be an Accredited Insolvency Practitioner, either through RITANZ or CAANZ

4. Have sufficient resources behind them to properly carry out the appointment

5. Have a history of making distributions to creditors

HOW DO I CHOOSE THE RIGHT INSOLVENCY PRACTITIONER?

Ask questions, and lots of them. The more information you are able to get up front the better position you will be in when it comes time to make the decision on who you should go with.

WHAT QUESTIONS SHOULD I ASK AN INSOLVENCY PRACTITIONER?

(a) Are they members of RITANZ and Accredited Insolvency Practitioners (AIPs)? Until regulation come into force in June 2020, we recommend that you only use AIPs. AIPs are required to comply with a code of conduct that dictates the professional and ethical standards they are expected to meet. The code is enforced by Chartered Accountants Australia and New Zealand. There is a public register of AIPs on both the CAANZ and RITANZ website.

(b) What previous relevant experience do they have? There are different types of insolvency appointments (advisory, compromises, voluntary administrations, receiverships, and liquidations). If you are looking at appointing voluntary administrators, you probably do not want to appoint someone who has never done one before.

(c) What kind of qualifications and experience do they have within the firm? Depending on the type of post-appointment work that will be required, you may want to appoint AIPs that are chartered accounts, have legal knowledge, or are experienced in forensic accounting.

(d) Are they Chartered Accountants, do they have a legal background, or forensic accounting skills? The appointment may determine what kind of background you should be looking for.

(e) Do they have the resources necessary to deal with the appointment? If the business operates multiple stores across the city or the country, does the AIPs’ firm have enough staff to take on the appointment?

(f) Do they have a history of making distributions to creditors? What level of overall fees would the AIP expect to charge on the job?

FINDING THE BEST INSOLVENCY PRACTITIONER FOR YOU

It is important that the AIPs you appoint understand your personal situation and your business’ needs so they can help achieve the best result for all parties. It is important that you take your time with this decision because you will be trusting them with the business.

McDonald Vague’s directors are AIPS and Chartered Accountants. We also have three non-director AIPs and our professional staff are members of RITANZ. McDonald Vague is also a Chartered Accounting Practice and is subject to practice review.