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.

Benjamin Franklin said, “There are only two certainties in life – death and taxes”. Whilst failure to pay the second shouldn’t lead to the first, it can cause significant problems for individuals, as outlined in a recent Court decision.

Nicola Joy Dargie was sentenced to two years six months imprisonment for failing to pay PAYE deducted from employees’ salary to the IRD.

Ms Dargie’s explanation for the non-payment of $740,000, which occurred over a period of 10 years, was that she had withheld the tax payments from the IRD to keep her employees in a job.

It is a practice that we encounter on a reasonably regular basis in liquidations - directors using the amounts they have deducted from their employees’ wages for things such as PAYE, Kiwisaver, Child Support and Student Loans, to boost the cashflow of their business. Their priority being to keep suppliers paid so they can continue to employ staff.

There are several problems with this course of action.

First and foremost, the funds are not the directors, or the company’s, to spend. They are the employees’ funds deducted from their wage entitlement for specific purposes and should be held in trust.

Secondly, there can be severe penalties imposed on directors who follow this course, as evidenced by the sentence imposed on Ms Dargie.

Thirdly, even if the intention was that the payments would be withheld for only a short time, to get through a tough trading period for example, the penalties and interest charged by the IRD for non-payment are at such a level that it does not make economic sense to do it. It would be better (and safer) to go to the bank for a short-term loan.

By continuing to operate a business that is not able to pay its debts, including taxes, as they fall due, directors expose themselves to potential claims against them personally that they have breached their duties as directors by trading whilst insolvent.

The amounts deducted from employees’ wages, and, to a similar degree, the GST collected on sales, are not funds available to a company to cover operating expenses and pay trade suppliers. These funds should be put into a separate account and only accessed to pay to the IRD as they fall due.

If directors find themselves in the position of having to dip into those funds to pay other expenses, then they need to review the financial position of the company to assess its on-going viability.

If you are in arrears with PAYE you are in a far better position if you consult with IRD and reach an instalment plan on arrears. If hardship applies, then notify IRD early on. If the company is insolvent, consult an accredited insolvency practitioner.

If you would like more information or advice on managing tax payments and the solvency of your business, please contact one of the team at McDonald Vague.

Liquidation Timeframe

There is no prescribed timeframe under the Companies Act 1993 dictating the duration of a liquidation of a company. It is largely dependent on how quickly the assets of the company can be realised and distributed. Where litigation is involved the liquidation can span years.  Liquidators however has a duty under the code of conduct to attend to their duties in a timely way.

A company with no assets takes about 3 to 6 months depending on how quickly the liquidator completes his/her investigation into the affairs of the company. The length of time is subject to the complexity of the work.

A simple liquidation could span the notice period (4 weeks) and the objection period (4 weeks) plus the timing of the Companies Office to process the notice of intention to remove the company from the Register. The Companies Office also advertise the intention to strike off the company. The minimum time is therefore about 12 weeks. Most liquidations will span about six months.

The link to the flowchart sets out the process of liquidating an insolvent company.

As it is in all areas of business, when you are seeking advice or input on insolvency matters it is important to go to the right source.

There are lawyers and accountants that specialise in insolvency but, depending of the circumstances, and what you are looking to achieve, who you choose is important.

Under the current legislation, the Companies Act 1993, anyone, without conflict of interest, and with a few other exceptions, can take an appointment as an Insolvency Practitioner and be appointed as liquidator or receiver of a company. They do not have to have any formal qualification and do not have to be registered or subject to any particular code of conduct. This situation is likely to change with current law changes being considered but for the time being the current provisions of the Companies Act apply.

So both lawyers and accountants can be appointed as liquidators or receivers and can be referred to as Insolvency Practitioners.

There are also Insolvency Practitioners who may be neither a lawyer or an accountant, who can also be appointed as liquidators or receivers.

Generally speaking, there are two ways that a business could be involved with an insolvency matter – either as a creditor seeking to recover a debt, or as the business owners deciding on a course of action because of the financial situation the business is in. The information or advice you would need from a lawyer and / or an accountant is different in each case.

Insolvency Lawyer:

If you are a creditor of a business that has failed to pay its debts as they fall due, you may decide to take action to have the debtor company liquidated.

To do this, we recommend you consult a lawyer experienced in the insolvency field to prepare statutory demands for service on the debtor company and, in due course, to prepare and file the application in the High Court to have the debtor company liquidated.

The lawyer will, prior to the matter being heard in Court, obtain the written consent of  Insolvency Practitioner(s), to be appointed,

If you are a director/shareholder of a debtor company that has been served with a statutory demand or liquidation proceedings, you may want to consult with an insolvency practitioner to gain an understanding of your rights and obligations and the options that are available to you.

Insolvency Accountant:

Many of the insolvency practitioners practicing in New Zealand have formal accounting qualifications or accounting backgrounds. This is understandable given that a lot of the work carried out by insolvency practitioners involves the review and analysis of accounting information.

IP's often then engage lawyers. Some of the larger accounting firms will have an insolvency practice as part of their firm’s structure. McDonald Vague, are Chartered Accountants specialising in business recovery and insolvency

If you are the shareholders or director of an insolvent company, your business accountants, who prepare your annual financial reports etc, may identify the fact that you are technically insolvent but, under those circumstances, they cannot be appointed as liquidator of your company. You would need to appoint an independent insolvency practitioner.

Accreditation Protection:

Accreditation for insolvency practitioners acknowledges IPs with appropriate experience. The main benefit is, accredited IPs are subject to the code of ethics, CAANZ rules and standards, CPD, practice review and a disciplinary body. If the practitioner is a CA and accredited, the designation is CAANZ accredited IP, whereas a non-CA but member of RITANZ is RITANZ IP Accredited by CAANZ. Dealing with an accredited practitioner provides more assurance to the appointor that the appropriate actions will be taken.

You can check the accreditation status of a particular IP or look for an accredited IP by following the links to the RITANZ or CAANZ websites 

Conclusion:

Getting the right advice at the right time and from the right person can make a big difference to the final outcome in any given situation.

If you need legal advice in relation to an insolvency issue, then see a lawyer with expertise in that area of law.

If you need practical advice in relation to insolvency options and processes and the related accounting issues, then speak to an experienced insolvency practitioner.

The team at McDonald Vague are experienced and independent insolvency practitioners with the formal qualifications and experience to be able to provide good practical advice on your situation.