2024 saw a steady rise in corporate insolvencies across the year, driven by a number of factors including businesses shrinking margins, increased creditor action, historical debts incurred over Covid catching up with businesses, a stalled property finance market along with an increasing Official Cash Rate and a decrease in consumer spending amongst others.
A key creditor of every business in NZ the Inland Revenue Department, has awoken from its Covid induced collection policy slumber and is now vigorously pursuing its delinquent debtors with increased funding coming from the government to do so. The most recent statistics out of IRD show that they have 8 billion dollars outstanding that need to be collected from individuals ($2 billion) and businesses ($6 billion).
The effects of this large debtor’s book will be seen in 2025 with increased winding up applications being pursued through the court (roughly 70% of these end up going into liquidation). At the same time there are a number of businesses that do not wait for the IRD to take action and take the appropriate steps themselves often under the increased pressure to pay the tax arrears while at the same time attempting to keep all other obligations current as they trade on.
Aside from enforcement action we have also seen the IRD announce and begin a new focus on certain industries for audits and checks particularly those that accept cash all driven by the extra funding being provided to IRD to take enforcement action. For some business this new approach may seem overbearing having had multiple years of little enforcement action over covid and the years following as the government funded businesses through small business loans and wage subsidies, it is however more inline with pre-covid IRD recovery action levels.
From a liquidation recovery point of view we are seeing that asset prices continue to hold up, but that could negatively change as the market becomes flooded with liquidated assets, coupled with less enthusiasm to finance those assets from lenders.
We predict a continuation of the short-sighted practice of shareholders drawing funds out of businesses without declaring annual salaries. If a business entity cannot afford to pay its director/shareholder (and the tax consequences) then there are probably far more problems in the business than the tax consequences of declaring a shareholder salary.
On many occasions it is better to acknowledge the business is not sustainable and its is better to close it than try to continue with increased risks mounting up.
We are expecting to see corporate insolvency to increase in 2025, it is important to keep in mind however that this is off a particularly low base following Covid. In 2024 we only saw the corporate insolvency levels return to 2013 levels, they remain 1,000 appointments down on the GFC where we saw appointments reach 3,700 per annum.
In 2024 we saw all sectors affected by the rise in appointments and this will continue into 2025. The surprise has been the liquidation of some quite long-standing businesses.
Construction is likely to remain subdued until house prices see some upward movement while physical retail and hospitality will continue to struggle in a tight economy where consumers are hesitant to spend.
On the personal insolvency side, we expect to see the rise we saw in 2024 to personal receiverships continue to increase. This has been driven by the rise in taking General Security Agreements over individuals as lenders have sought all-encompassing loan securities providing those lenders with another collection option, rather than just relying on Personal Guarantees which can be time consuming to enforce.
During 2024 personal insolvency (bankruptcy, NAP and DRO) reached some of its lowest levels and has yet to increase in line with corporate insolvency, we are expecting to see this increase in 2025. Individuals continue to struggle from the increased cost of living, while inflation may have decreased it is deflation, so the inflation experienced over the last few years has meant that prices rose and have continued to stay high while wages have yet to catch up. While we may see the OCR will likely decrease in 2025 it can take between 12 - 18 months for this to flow through to the economy.