The country is in the process of working its way back from the economic standstill that most industries experienced as a result of the Level 4 lockdown. For those that traded at Level 3 and Level 2, they had to shift their business models to meet the COVID-19 trading requirements. Many of those requirements squeezed margins.
In the coming months, many business owners will need to look at their businesses and decide whether to continue to trade going forward. While the Government has provided some support, recovering from lockdown is just one more hurdle for businesses that have been experiencing year on year increases in operating expenses and the minimum wage, both of which have made tight margins even tighter.
How lockdown and decreases to many people’s take home pay has affected consumer spending is not yet known.
As business owners look to the future, what can they do if they find themselves in a spot of financial hardship and what options do they have available to continue to operate while the economy recovers?
If a business addresses the stumbling blocks that it is facing at an early stage, many are able to work through those obstacles though decision making and implementing change.
A business restructuring or turnaround can be done by the business owners, usually with the assistance of third parties. The fact that a business is going through a restructuring or turnaround is usually only known to the company’s directors, its lenders, and its key stakeholders.
The process includes:
- assessing/reviewing the business
- identifying areas of strength and weakness within the business
- determining what areas of the business need to be changed
- assessing what changes are best suited to the business and its stakeholders
- making an action plan and implementing the decided upon changes
By undertaking a financial and strategic analysis of the company, you have the tools you need to create an action plan that maximises the return on investment in the business and improves the business’ performance.
It is important to have stakeholder buy in around the timeframes for the turnaround, the KPIs being measured, and the responsibilities of those involved in the turnaround. It is also important that the key stakeholders monitor the plan to ensure that the objectives and milestones are met and that corrective action is taken to get back on track, if targets are not met.
If a business was doing well before COVID-19 hit and now needs some breathing space to get itself back on track, entering into a BDH scheme may be the right option. While BDH does not compromise any of the business’ debts, it gives the business extra time to pay those debts off.
If a business needs the support of its creditors as well as its lenders and key stakeholders to continue and it is not in a position to pay its creditors in full, the business’ creditors may agree to a creditor compromise. The key ingredient to a successful compromise is for the business to have a credible and achievable plan that, when implemented, is likely to result in a better return to creditors than they would receive if the company was put into liquidation.
Compromises can propose that specified unencumbered assets be sold and the net proceeds of sale be paid to creditors and/or for a third party to inject funds into the business so that creditors can receive an agreed payment in satisfaction of their debts.
The aim of entering into a VA is for the business to enlist outside assistance to provide the business with an opportunity to restructure its debt and ultimately trade out of difficulty. VA gives a business a way to maximise the chances of the business recovering or, if that is not possible, for it to be administered for a time so that creditors receive a better return than they would from immediately liquidating the company.
A voluntary administrator may be appointed to a company by the directors, a liquidator or interim liquidator, a creditor holding security over the whole or substantially the whole of the company's property, or the Court.
Receivers can be appointed by a creditor that holds security over the whole or substantially the whole of the company's property, which means that receivers are usually appointed by banks or private lenders. The aim of the receivers is always the same - to protect the interests of the secured creditor and ensure that the secured creditor’s debt is repaid as quickly as possible.
Both solvent and insolvent companies can be put into liquidation.
A company can be placed into liquidation by its shareholders (by shareholders’ resolution) or by the High Court (usually at the request of a creditor but can also be at the request of a shareholder or director of the company).
A solvent company might be placed into liquidation by its shareholders after the business has been sold, closed down, and/or reorganised for tax and/or management purposes.
An insolvent company can be put into liquidation by its shareholders by resolution, usually after the directors and/or shareholders have identified that the company is insolvent and that it is in all stakeholders’ best interests for there to be an orderly winding-down of the business’ affairs.
If a company owes an undisputed debt, the creditor can issue a statutory demand for that debt. If the debt is not paid within 15 workings days, the creditor can apply to the High Court for the company’s liquidation. If the High Court puts the company into liquidation, the liquidators nominated by the applicant are usually appointed.
If a company is facing liquidation by a creditor, the shareholders can put the company into liquidation themselves as long as they do so within 10 working days of being served with the liquidation proceedings. Some shareholders choose this option because they consider that liquidation is inevitable and liquidation by shareholder resolution allows them to appoint liquidators of their choosing.
Early Intervention: The earlier issues are acknowledged and addressed, the more options a business has to tackle those issues and the easier they are to deal with. If you need outside assistance, seek it. In our experience, issues left unaddressed for too long can become insurmountable.
Personal Guarantees: While directors are not automatically liable to pay company debts, most directors will have some exposure to a company’s creditors because they have given personal guarantees. As a director, it is important to know what your personal exposure could be, if the company fails.
Have Up to Date Business Records: If your company’s financial information is not up to date, it is harder for you to make accurate financial decisions. If the information is up to date, you will be able to see where your money is going and where you might be able to make savings.
Review Your Business Model: Now is a good time to look at where your revenue comes from, who your ideal customer is, and whether you are catering to that customer’s wants/needs. If there is a mismatch, what changes can you implement to reach that market?
Landlords and Leases: For many businesses, rent is a large portion of their fixed outgoings. In response to COVID-19, the Government has made some amendments to the Property Law Act that affects landlords and tenants’ rights, including in relation to timeframes for terminating leases for non-payment of rent and introducing a fair reduction in rent term for some small businesses (this amendment has not yet been enacted). If you are concerned about steps being taken by your landlord, seek professional advice.
There has been a lot of commentary around what the COVID-19 global pandemic is doing to countries’ economies. Some economists are predicting a global economic downturn to be the worst recession since the Great Depression and most are expecting this downturn to be worse than the GFC.
Today, 14 May 2020, New Zealand is moving from Level 3 to Level 2 and a lot of businesses are re-opening for the first time since the Level 4 lockdown came into effect seven weeks ago. In the weeks and months ahead, we will find out what effect the lockdown has had, so now would be a good time to look at the NZ insolvency figures to April 2020 and how those figures compare to the last couple of years.
Today is also budget day and Jacinda Ardern has signalled that the government will be spending to support businesses and keep people connected to their jobs.
Between 1 January 2020 and 31 March 2020, there were 421 formal insolvency appointments. Appointments were down over this period when compared to the same periods in 2019 (454 appointments) and 2018 (559 appointments).
In April 2020, there were 94 appointments, which was just over half the number of appointments in April 2019 (159) and April 2018 (160).
When the April 2020 figures are added to the previous months, insolvency appointments in the year to date are down by roughly 16%+ when compared to April 2019 and April 2018.
As at 30 April 2020, there were 652,033 companies registered on the Companies Register.
Many people will be feeling the financial impact of COVID-19. Many have lost their businesses and/or their jobs. The number of people on a benefit has increased, as has the number of people receiving food parcels.
The number of bankruptcies between January 2020 and March 2020 are similar to the same period in 2019 (268 and 281 respectively). The number of bankruptcies in 2018 was roughly 33% higher over this period.
The number of bankruptcies in April 2020 dropped to 50, of which 80% were debtor applications, which is a significant decrease in the number of bankruptcies when compared to March 2020 as well as April 2019 and April 2018. The decrease in creditor applications was probably because the Courts were operating at reduced capacity so creditor's applications were held off. In April 2019 and 2018, roughly 73% of the 109 bankruptcies were debtor applications.
We expect to see both company and personal insolvency numbers start to increase, especially in the second half of 2020.
The Government’s 12 week Wage Subsidy scheme is approaching its end, and many are now looking at whether they can access the next stage of support via the Small Business Cashflow (Loan) Scheme (SBCS) available from 12 May 2020 Link Here
The announcements made in today’s budget are likely to provide further targeted stimulus probably for infrastructure and tourism, as the country's balance sheet is not limitless. We will need to wait and see what those announcements and the timing of further spending are...
We hope that for the many business owners and employees returning to work today their day is productive and safe. Day by day we will all need to deal with the effects the lockdown has had on our businesses and the ability to restart, especially those who have not been trading at all, and will now need to look at how to deal with seven weeks of expenses and no income over that period.
As a firm we have been working through these situations with a range of clients for the last few weeks. There are many ways to address those issues.
A survey carried out in 2017 by Franchising New Zealand identified the fact that New Zealand had, at that time, the highest proportion of franchises per capita in the world. With around 630 franchise brands, it was estimated that they made up about 7% of the small businesses in New Zealand, employed over 124,000 people and contributed $27.6 billion to the New Zealand economy, plus an additional $11.1 billion in motor vehicle sales and $7.4 billion in fuel sales.
We could not find any more recent figures, but which ever way you look at it, franchises make up a significant portion of businesses in New Zealand.
As with other business models, there have been individual franchisees fail before Covid-19 came to our attention, with a number of Mad Butcher outlets failing in the last couple of years being one high profile group.
Many of the franchises are in the types of business that cannot open and operate normally under Covid-19 levels 3 or 4, such as those involved in the food and hospitality, fitness, and health & beauty industries. Some involved in property care and maintenance might be able to operate under level 3 but will have suffered, along with practically every other business’ under level 4.
These same franchised businesses are also the type that provide goods and service which, in most cases, would fall into the category of discretionary spending for customers and therefore will be a bit further down the priority list for spending once the economy starts to get back to something approaching normal.
The appointment of receivers for the New Zealand owners of the Burger King franchise is the 1st high profile Covid-19 franchise victim but it is unlikely to be the last. Burger King is slightly different in that the vast majority of its outlets are owned by the New Zealand franchisor, as opposed to individual franchisees, but it still affects the lives of more than 2,600 staff across the country. Hopefully, for all those involved, a successful sale of the business will be achieved and mean that those outlets can all reopen for business.
We believe there is likely to be more franchised businesses to close in the coming months, or fail to re-open at all, and the effects on the individuals involved may be compounded by the fact that they are party to a franchise agreement.
The agreements will not all be the same, but most will include some, or all, of the following terms, which are there to protect the rights of the franchisor:
• The requirement to pay on-going franchise fees, licence fees and a contribution for advertising.
• The franchisee does not own the intellectual property.
• The franchisee cannot assign the rights under franchise agreement without franchisor’s agreement.
• The agreement can be terminated by notice in writing by franchisor on the occurrence of various events, including failure to pay amounts owed to the franchisor, failure to pay rent (where the franchisee is a sub-lessee of the franchisor), liquidation or receivership.
• On termination, there is a restraint of trade within specified areas for specified periods.
• Where the agreement is terminated as a result of one of the defaults (such as those listed above), the franchisee can be required to sell fixture and fittings and equipment etc to the franchisor, or nominee, at the lower of fair market value or book value as recorded in latest accounts.
• The franchisee will have given a personal guarantee to the franchisor.
The extra franchise expenses, on top of the normal business payments of rent, insurance, finance interest and payments etc, if not deferred or reduced by the franchisor, impose a further burden on the businesses concerned that have already faced 4 weeks without income.
The ability for the franchisee to sell and recover the maximum value from the business assets may also be limited by the terms of the agreement, as outlined above, and leave their personal assets exposed to claims under the personal guarantee.
Without question, franchisees in many categories of industry will have suffered under level 4 and many will continue to suffer under level 3.
If they have not already done so, they should be talking to their accountants and bankers in relation to the support packages that may be available to them.
When considering their options, franchisees should also be consulting their legal advisors on the effect the terms of their agreement with the franchisor will have on their ability to deal with the assets of the franchise, and on their personal liability, before making final decisions on what to do.
If a franchisee is looking to exit due to hardship then talking to the franchisor may be the first option. A new franchisee to take over the lease obligation, to continue to trade and to protect the brand may be a win-win for all concerned. The ceased business can then look at winding up options.
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
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.
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.
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.
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.
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.
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.
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.
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.
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!
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.
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
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.
(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?
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.
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.
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.
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 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.
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.
A Receiver is appointed under a general security agreement (GSA) or a deed, or by the High Court. A Court appointed Receivership is less common. Receivers are most commonly appointed over all present and after acquired personal property and undertakings of the company but can also (subject to the security agreement) be appointed over specific assets. A Receiver is most often appointed for financial reasons however Receivers can also be appointed as a result of shareholder dysfunction risking the welfare of the business or perhaps for the reason of fraud.
A Receivership is a mechanism for secured creditors to recover moneys due to them when the debtor fails to pay. There must be a default by the debtor for a Receiver to be validly appointed. The defaults that can be relied on are usually defined in the security documentation or in the case of the ADLS standard GSA in the memorandum that accompanies the document.
The Receiver takes control of the company, its assets and its business undertaking. The appointment of Receivers most often leads to the company assets being realised for the benefit of the secured creditor (the appointor). In some cases the Receivers recover the indebtedness owing to the appointor (and any higher ranking creditors) and then retires handing back the business to the directors to continue to trade. In most cases the Receivership leads to the sale of business and the remaining company is left with debt and is ultimately placed into liquidation by the shareholders or on application of a creditor, by the High Court.
Appointing a Receiver does not necessarily mean the business is over. A receiver can be appointed to manage a business and then return the control to the Directors.
A Receiver occupies a difficult position. A Receiver is required to carry out duties with the interests of the company, its creditors and shareholders in mind. A Receiver has obligations to the company (which is likely in extreme financial difficulty) and to the secured creditor (the appointor) and must act with due care, skill and judgment in obtaining the best results reasonably possible in the circumstances. It is a statutory duty for a Receiver to obtain the best price reasonably obtainable.
A Receiver is entitled to favour the interests of the secured party who appointed him/her but must not conduct the receivership without having regard to the interests of others affected.
It is the duty of a Receiver as agent to act with reasonable care in dealing with the company assets to obtain the best possible price. This duty is not only to the company to reduce indebtedness to the secured creditor but also to the guarantor – who is liable to the same extent as the company.
A Receivers duty is similar to a mortgagee in possession exercising a power of sale. A mortgagee owes duties to the mortgagor and subsequent security holders who receive any surplus after the mortgagee is paid. A mortgagee in possession has a duty to obtain the true market value of the mortgaged property at the date of sale.
A Receiver that trades on a company in an attempt to trade it out of receivership must take reasonable precautions and be satisfied that there is a realistic prospect of trading out of indebtedness.
A Receiver cannot act hastily and must properly organise and advertise. Receivers have been criticised for taking casual approaches. If a Receiver does not for example rely on specialist advice when the circumstances warrant it, the Receiver can be held liable for negligence.
Examples of acting with a duty of care are:
• Ensure proper advertising of sale of business/business assets to attract the best interest and offers;
• Ensure the advertisement fully details the asset being sold and is published to reach the widest circle of possible buyers;
• Ensure customers of the debtor are advised of the sale of business;
• Gain expert advice on the best method for sale;
• Engaging experts/specialists such as brokers and real estate agents to sell specialised assets to the best advantage;
• Using reliable methods of sale for the type of assets – public auction or trademe for cars is an established well known method for sale;
• Gaining advice from specialist brokers for specialist equipment particularly when the market may be offshore;
• If assets are sold at auction sufficient time must be granted for purchasers to inspect the assets.
Receivers have a duty of care and occupy a difficult position.
An increasing number of building firms "went bust" in 2014 despite the building boom in Christchurch and Auckland, leaving homeowners, contractors, and the taxman out of pocket. As the construction boom in Auckland gathers pace the situation is going to get worse.
Nearly 100 rebuild-related companies have gone into liquidation or receivership in Christchurch alone since the February 2011 earthquake. We see the same trend occurring in Auckland.
People often ask us why so many building firms are going under as they should be making a fortune. The simple answer is that the good ones are, but there are many that have been caught out by over trading (transacting more business than the firm's working capital can normally sustain), thus placing serious strain on cashflow and risking collapse or insolvency. Some of these companies shouldn't be in business in the first place.
This trend could worsen as mismanagement woes continue and big ticket construction projects open new avenues for white collar crime.
More than half of the failures came in 2014
Construction-related liquidations more than tripled between 2013 and 2014 (mainly in Christchurch). Subcontractors were heavily represented in the liquidation numbers and the Serious Fraud Office ("SFO") received 29 complaints about suspect dealings in the rebuild and has launched six investigations. As a result, the Government introduced new laws in 2015 to protect consumers, including mandatory written contracts, and builder requirements for residential building work costing $30,000 or more.
With an increasing number of small operators who were previously working as employees deciding to go out there and do it themselves there is increasing concern that many don't have the skills needed to run a business. Many are good tradesmen, but not good businessmen. Some don't manage their cashflow well and don't file PAYE returns, GST returns, or get their invoices out on time. We often see overdrawn current accounts where the tradesman has operated the business account as their own personal bank account.
As the building boom gathers pace, tradespeople with varying levels of skills have poured into the industry as they see it as a cash cow. They often have little or no capital. Many of them "gear up" with the latest tools and ute all purchased on HP.
New Zealand is an extremely expensive country in which to build houses. McDonald Vague has recently been appointed over two large building companies (eHome NZ Limited and Shears and Mac Limited), both employing over 100 people and both manufacturing in a factory and then installing onsite. eHome NZ Limited built houses in a factory and Shears and Mac Limited did commercial and shop fit-outs in New Zealand and Australia. They operated in different sectors of the building industry but failed for similar reasons including:
High costs driving failures
We provide consultancy and turn-around advice to a number of building firms and often the problems are the same. Fixed price contracts stay constant but the cost of labour and materials constantly increases in a construction boom. The costs of labour and materials will continue to increase until there is a slowdown in demand.
Why so many fail
What can your clients do to protect themselves?
There are a number of things they can do, including:
We can help
Please contact the team at McDonald Vague Limited if you would like to learn more about how your client can protect/mitigate the risk of a customer going into liquidation.
It is an unfortunate fact that many companies experience financial difficulties at times. Often the directors/shareholders do not realise that there are a number of options available to them. This article provides an overview of the various options for distressed companies.
A compromise is an agreement between a company and its creditors. The purpose is to enable a company to trade out of its financial difficulties and thus avoid administration, receivership or liquidation. In this way the company can survive into the future and provide continuing business to creditors.
There are two basic features of most compromises:
Usually, the directors of a company decide to allow the company to enter into a compromise, subject to creditor approval. Creditors will only approve if they believe that they will receive more money than in an administration, receivership or liquidation.
Compromises are governed by Part 14 of the Companies Act 1993. Each class of creditors affected must vote as a class. Classes can include trade creditors, landlords, employees for preferential wages and holiday pay, Inland Revenue for preferential GST and PAYE, hire purchase creditors and other secured creditors.
For a compromise to be approved, a majority in number representing 75% in value of each class of creditors must vote in favour of the proposal.
A creditor's compromise can be a good option for businesses that are fundamentally sound, but are experiencing financial difficulty.
Voluntary administration is a relatively new rehabilitation mechanism that was introduced into the Companies Act 1993 about seven years ago. An administrator may be appointed by a distressed company's directors, a secured creditor holding a charge over all or substantially all of the company's property, a liquidator or the Court.
The aim of voluntary administration is to maximise the chances of the company (or its business) continuing in existence, or if this is not possible, for creditors to receive a better return than in a liquidation. It is an interim measure during which creditors' rights to enforce charges, repossess assets or enforce guarantees are restricted. A General Security Agreement ("GSA") holder may, however, appoint a receiver within 10 working days of the administration commencing. It is therefore critical for the administrator to have the support of any GSA holders.
Once a company enters into voluntary administration the directors can only act with the written permission of the administrator. The administrator takes control of the company's business and has 25 working days to complete an investigation and provide an opinion on the most beneficial course of action for creditors. This will be one of three options:
A DOCA is an agreement between the company and its creditors. It is the responsibility of the deed administrator to ensure that the company adheres to the DOCA's terms and conditions.
A receivership appointment is made by a secured creditor who has been granted a General Security Agreement ("GSA") over the company's assets. The GSA holder is usually a financial institution or a private lender.
The conduct of receivers is governed by the Receiverships Act 1993. A receiver has control over the company's assets subject to the GSA under which they have been appointed. The receiver's primary purpose is to recover funds for the secured creditor, however, the receiver also has a duty to protect the rights of other creditors. The receiver provides reports on the conduct of the receivership to the secured creditor and files this report with the Companies Office.
The receiver ceases to act when the secured creditor has been repaid and at this time control of the company reverts to the directors. However, a liquidator can be appointed if there are further assets to be realised, funds still owed to unsecured creditors or matters requiring investigation.
When the directors/shareholders of an insolvent company become aware that there is no realistic ability to trade out of their financial difficulties they can resolve to appoint a Licensed Insolvency Practitioner of their choice as liquidator. This is known as a voluntary liquidation.
In instances where the directors/shareholders do not take any action, a creditor of the insolvent company may apply to the Court for an order requiring the company be put into liquidation. This is known as a Court appointed liquidation and it is the Court's decision as to who will be appointed as liquidator. If a company is served with a winding up application by a creditor, the directors/shareholders cannot appoint voluntarily unless with the consent of the applicant creditor.
The conduct of liquidators is governed by Part 16 of the Companies Act 1993. Once a company liquidation commences the director's powers are restricted and they must provide the company's records to the liquidator. They must also co-operate with and support the liquidator.
The liquidator's main duty is to realise assets belonging to the company and distribute the proceeds to creditors. The liquidator may also investigate the reasons for the company's failure, set aside insolvent transactions and take legal action where necessary. The liquidator must report to the company's creditors every six months and file these reports with the Companies Office.
Upon completion of the business liquidation the company is struck off the Companies Register.
Every situation is unique and a number of factors should be taken into consideration to determine the best course of action in the event of company insolvency. If you wish to discuss your situation please contact one of the team at McDonald Vague.
Alternatively, download our Free Guide to Insolvency Services