For our 45th Insolvency by the Numbers, we once again visit our 2024 data set and review how August has tracked compared to earlier months and years. It has been a long time coming and surprised a number of pundits given the earlier language used by the Reserve Bank in its prior announcements, but they have dropped the OCR 0.25 basis points at their August 2024 announcement. As mentioned in out last issue this was expected for November 2024 but was brought forward perhaps yielding to the pressure, they were under from commentators and the media. No doubt they will be holding their breath in the hope that inflation continues to track down to their 1% – 3 % target.…

When a business encounters cash flow difficulties and an excessive debt burden, it is important to navigate these challenges carefully. Trading while insolvent not only jeopardises the future of your business but also exposes you to legal exposure. Here are several actions to avoid and some proactive solutions to consider. What Not to Do: 1. Preferential Treatment of Suppliers with Personal Guarantees: o Avoid prioritizing payments to unsecured creditors and suppliers who have personal guarantees. This practice can be deemed as giving unfair preference, which can deemed voidable and can be reversed by a liquidator and/or court if the company enters liquidation. It is essential to treat all suppliers fairly and equally to avoid legal repercussions. 2. Increasing Exposure to…

In New Zealand, the roles of shadow directors and de facto directors hold significant importance, especially when a company faces insolvency. Both these roles can carry substantial legal responsibilities and liabilities, often surprising individuals who may not even realize they are acting as directors. This article discusses the definitions, differences, and potential risks associated with these roles. Definitions and Differences Shadow DirectorsA shadow director is a person who is not formally appointed as a director but whose instructions or directions are typically followed by the officially appointed directors of the company. Essentially, a shadow director operates behind the scenes, influencing the company's decisions without holding an official title. De Facto DirectorsA de facto director, on the other hand, is someone…

Limited liability is a foundational concept in corporate law that protects the personal assets of shareholders, including directors, from being used to satisfy the debts and obligations of the company. This principle means that a company's liabilities are limited to its assets, and shareholders' risk is confined to the amount they have invested in the company. A Painting Company in Financial Difficulty Imagine you own a painting company, are the sole employee and director, and the company faces liquidation due to financial difficulties. You owe customers prepaid deposits and have incomplete work. Here's how limited liability and potential personal liability play out in this scenario: Limited Liability Protection As the sole director and employee of the company, you are generally…

As we navigate the choppy waters of economic downturns, the prospect of insolvency looms larger for many businesses. In these challenging times, it is imperative for directors to be acutely aware of insolvency risks and to implement robust risk management strategies to safeguard their companies. The recent economic climate has accentuated the need for prudent financial oversight and strategic decision-making, making it more important than ever to ensure that directors are fulfilling their duties diligently. Understanding Insolvency Risk Insolvency occurs when a company is unable to meet its financial obligations as they fall due or when its liabilities exceed its assets. The Companies Act 1993 provides a solvency test that directors must adhere to, which includes both a liquidity test…

In the current economic climate, businesses are being advised to keep a close eye on costs. Certain sectors are experiencing heightened financial distress, posing significant risks to lenders, customers, and suppliers. Understanding these risks and taking appropriate precautions can mitigate potential losses and ensure more stable business relationships. Below, we outline the top 10 sectors in critical financial distress and provide strategies to protect your interests. Top 10 Sectors Facing Financial Distress Retail: The retail sector is grappling with reduced consumer spending, a big drop in consumer confidence, people working from home affecting foot traffic, the rise in crime / safety issues and high operational costs. E-commerce has also intensified competition, putting additional strain on traditional retailers. The recent announcement…

Understanding the options available for struggling companies is important for all company directors in businesses facing financial challenges. The choice between receivership, voluntary administration, a company compromise or liquidation depends on the specific circumstances and the desired outcome for the company's stakeholders. Legal and professional advice is recommended to navigate these processes effectively.What are the options? Please refer to our other articles for more detailed explanation of each option.1. Receivership:• Definition: Receivership is initiated when a secured creditor appoints a receiver to manage the secured assets of a company. It's important to note that a company can simultaneously be in receivership and undergo liquidation or voluntary administration.• Process: The appointed receiver takes control of and deals with the assets that…

Many NZ companies are currently affected by cash flow issues and are facing insolvency. To be insolvent means one of two things: Debts can’t be paid when they’re due. Total debt is more than the value of all assets. The Commissioner of Inland Revenue ("CIR") will take debt recovery action where debts are in arrears. The CIR is able to issue a statutory demand as a step necessary to advance a proceeding against a company. Ignorance Isn't Bliss It is recommended for any business struggling to meet tax arrears that negotiations are entered into promptly to avoid a potential winding up proceeding. Taxpayers are required to pay their tax in full and on time. Failure to do so leads to…

The start of the year can be a challenging time for many business owners, especially after the extended break over the Christmas and New Year period. The pressure is compounded by the need to settle various financial obligations, from employee holiday pay to tax payments. Many businesses are facing the strain from having paid employees holiday pay entitlements, a period where income has not been generated due to closure and then obligations such as November GST due 15 January, Paye due on 22 January, Oct to Dec FBT due on 22 January, provisional tax due on 15 January and for the larger employers more PAYE due on 5th of February. Some are now struggling with the reality that these obligations…

When a customer communicates delays in raising finance that is affecting payment, it's important to handle the situation with understanding while safeguarding your interests. Here's a comprehensive approach: Acknowledge and Understand: Express understanding for their situation and emphasize the importance of resolving the outstanding payment. Encourage open communication to gain insights into the delay's specifics. Set Clear Expectations: While being empathetic, clearly communicate the importance of timely payment and the impact the delay may have on your business. Request a specific timeline or updates regarding the finance application's progress. Alternatives and Solutions: Explore alternative payment options or negotiate a temporary solution. This might include accepting partial payments, offering an extended grace period, or restructuring the payment schedule to accommodate their…

Managing cash flow during the Christmas close-down period is crucial for businesses, as it often involves reduced operations and potential disruptions. Implementing proactive measures can help mitigate cash flow challenges during this time: 1. Forecast Cash Flow:• Prepare in Advance: Anticipate the impact of reduced sales or operations during the holiday period. Review historical data to estimate income and expenses accurately.• Create a Cash Flow Forecast: Develop a detailed cash flow forecast covering the close-down period. This forecast should include expected revenues, expenses, and any planned payments. 2. Adjust Payment Schedules:• Invoice and Payment Timing: Expedite invoicing before the close-down period to ensure prompt receipt of payments. Request early payments from clients or customers to improve cash flow before the…

The impacts of global unrest and overseas bank failures can have various implications for businesses in New Zealand: 1. Financial Instability:• Market Volatility: Global unrest can lead to financial market volatility, impacting investment portfolios and affecting businesses relying on international trade.• Credit Availability: Overseas bank failures or financial crises may tighten credit availability, affecting businesses seeking loans or lines of credit from international financial institutions.• Exchange Rate Fluctuations: Currency fluctuations due to global instability can impact import/export businesses, affecting profit margins and pricing strategies. 2. Supply Chain Disruptions:• Dependency on Imports: New Zealand businesses reliant on imports may face challenges due to disruptions in global supply chains, leading to delays in raw materials or finished goods.• Export Market Instability: Instability…