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.

In insolvency news we saw the first appointment of interim receivers and statutory managers since pre the GFC, both powers held by but not often used by government departments except in extreme circumstances.

You will notice this month that there is less written under corporate appointments as this is now being covered in the media each month with data from Centrix tracking changes to the Companies Register. So in an effort to continue to provide value we will focus on data that is less easily tracked as it often has no central registry, this month we will take a look at the rise of personal receiverships.

Winding Up Applications

In August we saw more winding up applications than at any time in the last 5 years. This total was once again driven by continued strong application numbers from the IRD making up 87 of the 118 applications compared to the 62 in July and 42 applications in June. We expect this drive from IRD to continue into the last 4 month of the year in a drive to collect funds prior to the Christmas closure of the courts that will see applications drop in December and January.

The High Court at Auckland has continued their dominance over the other regions courts making up 62 of the 118 applications or 53% which is expected given the bulk of insolvency appointments go to Auckland based practitioners. The next closest regions were Christchurch (12) and Hamilton with (10). The capital only saw 3 applications for the month, similar to Palmerston North (3) and Dunedin (3).

The year-to-date applications total is tracking well above of the last 4 years year to date August figures with 729 total applications as at the date of writing. Comparatively we remain above to total year winding up applications seen in 2020 (239), 2021 (562) and 2022 (623). The total applications in 2023 was 864, while I do not expect to exceed that in September unless there is a bumper month of applications.

As you can see below IRD’s dominance over all other commercial creditors continues bringing their streak to 17 months in a row where they have advertised more applications than all other creditors combined each month. For August this was considerably more applications making up 74% of the months total, where traditionally they had sat around a 50/50 split.

Personal Receiverships

The rise of the personal receiverships. It certainly looks like those business who took out lending when the going was good are now beginning to struggle to meet repayments and the security provided by the business owners is being called up in the form of personal receivership if no other recovery options are working. There has been a large jump in personal receivership appointments that can be pinpointed as starting from June 2023 that has sped up considerably in 2024.

Of the 30 appointments in 2023, 22 of these came after June 2023. To August 2024 our 8-month total is sitting on 31 appointments. With 4 months remaining in the year these will likely track up further as businesses continue to default and wind up.

The bulk of the receivership appointments have been driven by a small number of business lenders who promote themselves on providing quick and easy access to funds often at higher interest rates, with even higher penalty rates, than those available through traditional lending means.

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

August 2024 shot for and almost reached the March high appointments. This may seem like a bumper month when looking at the past few months but if we scratch a little below the surface, we find that 65 of these appointments came from one group of companies – Du Val Group. 65 entities and 2 individuals placed into interim receivership by the FMA and subsequently statutory management. While removing these appointments as an outlier would bring our monthly total down to 223, still above the last 5 years, but it is a sign of the times so will remain in the data set.

Total insolvency appointments for the year continue to track up in line with 2015/2016 figures. Month on month August had 288 total appointments, 131 appointments above the long-term average of 157 and past August’s (2023: 195, 2022: 178, 2021: 132, 2020: 154, 2019: 149, 2018: 176, 2017: 178)). With 1760 appointments in the year to date we above full year figures for 2020, 2021 and 2022. Compared to appointments as at August each year the total has exceeded the last 5 years totals. As outlined in past issues we expect the higher insolvency appointment levels will continue into 2025 at least due to a large backlog at IRD and a struggling economy in most sectors.

Now this is where the skew will really show from the large Du Val Group appointment alluded to earlier. receiverships now make up ¼ of the total appointment compared to the long-term average of 6%. Removing this group appointment, we can see that there was a lift in insolvent shareholder appointments and a comparative drop in solvent shareholder appointments likely driven by market conditions as businesses with spare cash become harder to find. Court liquidations as a percentage remain in line with the long-term average.

We expect increases across all types of appointments to continue throughout 2024 and into 2025.

Personal Insolvencies – Bankruptcy, No Asset Procedure and Debt Repayment Orders

In simple terms personal insolvency appointment figures for Bankruptcy, NAP and DRO remain low for the year to date in line with the very low levels seen over the last two years.

As bankruptcy is lagging indicator for the economy, we won’t see the lift in figures till after the fact, however the economy remains in a bit of a tough spot. From inflation, increasing costs of living (food, power, transport etc.), higher interest rates and other expenses, at some point individuals will run out of options and ways out. The latest drop in the OCR is unlikely to make a huge difference as it will take 12 – 18 months to take effect and will only drop certain costs, the price of goods we need day to day won’t go back down to pre-2020 levels.

While we are expecting to see corporate insolvencies continuing to grow into next year, I don’t believe we will see a lift in personal insolvencies till early 2025. There is traditionally a slow down over Christmas and January, then as people return to work and have to deal with the Christmas overspend, this may be when we see a lift in personal insolvency figures.

Where to from here?

The signs continue to point to the NZ economy being in for continued pain for the foreseeable future, it is likely to get worse before it gets better regardless of the most recent OCR decrease. We foresee continued rising appointments when compared to prior years. Inflation continues to be above the target of 1-3% and may be for some time with non-tradable inflation refusing to come under control.

If you want to have a chat about any points raised or an issue you may have you can call on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

When you pay a deposit for a service or product and the company fails to communicate, it's a frustrating and concerning situation. This article explores how/when to use a statutory demand to recover your funds if you suspect the company may be insolvent. We also discuss steps for smaller disputed debts within the Disputes tribunal, recovery of larger deposits, and specific considerations for building agreements in New Zealand. Additionally, we will cover the possible costs and time involved in pursuing legal action, and why such cases are often not pursued due to economic reasons.

Scenario: Unresponsive Company Holding Your Deposit

Imagine you paid a significant deposit to a company for a building project. The company has since ceased all communication, and you fear losing your funds. This scenario can be distressing, but there are steps you can take to help recover your money.

Step 1: Determine the Debt Amount and the Default

First, ascertain the amount owed to you and how the supplier is in default (refer to the terms of the contract). If the debt is disputed and within the jurisdiction of the Disputes Tribunal (disputes up to $30,000), you can consider lodging a claim:
If the debt is undisputed then contact a debt collector for assistance or your lawyer considering a formal demand or statutory demand.
For larger deposits, especially in the context of a building agreement, you may need to take more substantial legal action.

Step 2: Assess the Company's Solvency

Before proceeding, determine whether the company is insolvent. Signs of insolvency include:

• Ceased trading activities
• Unpaid debts to multiple creditors
• Ignored communications from creditors

Step 3: Legal Options for Debt Recovery

Disputes Tribunal

For debts within the Disputes Tribunal's jurisdiction (small claims up to $30,000):

1. File a Claim: Complete the necessary forms and submit your claim to the Tribunal.
2. Mediation: The Referee will work towards a mediation to resolve the dispute.
3. Hearing: a hearing will be scheduled between the applicant and the respondent where both parties present their case.

The referee is not a judge but their decision is binding.

Statutory Demand for Undisputed and Larger Debts

For larger debts (not disputed) or when dealing with potentially insolvent companies, a statutory demand can be an effective tool.  A statutory demand is a formal, legal notice issued to a debtor company, requiring the payment of a debt within 15 working days. A statutory demand is used when a debt is undisputed and overdue to prompt payment. It is not suitable for cases where there is an argument about the amount that is due.

1. Prepare the Statutory Demand: A statutory demand must include:

o The amount owed
o The basis of the debt (e.g., unpaid invoice, breached contract)
o A demand for payment within 15 working days

It is advisable to gain advice on preparing the statutory demand and/or engaging a professional to prepare this to ensure it is valid.

2. Serve the Statutory Demand: Serve the demand to the company's registered office or principal place of business. Service can be done in person, by courier, or registered mail.

3. Wait for a Response: The company has 15 working days to respond (or 10 days to file a notice to set aside). If they fail to pay or dispute the debt, you can apply to the High court to liquidate the company. This involves a lawyer issuing a winding up notice followed by an application putting the company into liquidation. There are costs involved for the applicant creditor however the costs have some priority in the event of liquidation.

If there is no suspicion of insolvency or the debt is disputed and you have a civil dispute for between $30,000 and $350,000, you’ll usually go to the District Court. For larger or more complex disputes you’ll usually go to the High Court.

Building Agreement Considerations

In the case of a building agreement:

1. Review the Contract: Ensure you have a clear understanding of the terms and conditions.
2. Document Communication: Keep records of all communications with the company.
3. Consult a Lawyer: Given the complexities of building agreements, seeking legal advice is recommended.

Costs and Time Involved

Costs

• Disputes tribunal: Filing fees range from $45 to $180, depending on the claim amount.
• Statutory Demand: Legal fees/Debt collector fees for preparing and serving a statutory demand can range from $500 to $1,500 or more.
• Court Action: If the company disputes the debt, court proceedings can be expensive, with legal fees potentially reaching thousands of dollars.
• Winding Up proceeding putting a company into liquidation: will incur legal fees which are a claim in the liquidation and hold a preferential status.

Time

• Disputes tribunal: Resolution typically takes a few months.
• Statutory Demand: The initial demand process takes 15 working days, but court proceedings can extend the timeline to several months or more simply due to availability for a court hearing.

Why Such Cases Are Not Often Pursued

Pursuing legal action for debt recovery can be time-consuming and costly. Small claims may not justify the expense, and even larger claims can result in prolonged litigation with uncertain outcomes. For these reasons, many individuals opt for alternative dispute resolution methods or write off the loss as a bad debt.

Conclusion

Using a statutory demand is a powerful tool for recovering debts, particularly from unresponsive or insolvent companies. Understanding the process, costs, and time involved is crucial for making informed decisions. Whether dealing with a small claim or a significant deposit under a building agreement, seeking legal advice and carefully considering your options can help you navigate the complexities of debt recovery in New Zealand. An insolvency practitioner can provide advice on the options – contact our team.

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 Creditors:

o Do not increase your debt burden by taking on more credit card debt or extending your trade accounts. This can worsen your financial situation and create a false sense of security. Instead, focus on reducing expenses and finding ways to increase revenue without accruing additional debt.

3. Accepting Deposits for Services/Orders You Cannot Fulfil:

o Refrain from taking deposits from customers if you know you cannot meet the commitment. This can be found to be a breach of a directors duties. This practice is considered fraudulent trading and can lead to severe legal consequences. Always be transparent with your customers about your capacity to deliver.

4. Repaying and Preferring Intercompany Debt and Unsecured Shareholder Loans:

o Avoid repaying intercompany debts, related party debt or unsecured shareholder loans over other creditors. This can be seen as preferential treatment and can be challenged by liquidators and in court during insolvency proceedings. Ensure all creditor payments are handled impartially and consider the entitlement of creditors (secured/preferential/unsecured).

5. Ignoring Creditor Entitlements:

o Do not disregard the entitlements of creditors. Secured, unsecured, and preferential creditors have specific rights under the seventh schedule of the Companies Act 1993 that need to be respected. Ignoring these entitlements can lead to legal actions and further financial complications.

Risks of Trading Insolvently:

Trading while insolvent can have serious implications:

• Legal Risks: Directors may face personal liability for the company's debts if found guilty of wrongful or fraudulent trading.

• Reputational Damage: Insolvency proceedings can harm your business's reputation, making it harder to rebuild trust with suppliers, customers, and investors.

• Financial Penalties: Insolvent trading can result in seeking contributions from directors and in severe cases or repeat cases, disqualification from acting as a director.

Proactive Solutions to consider:

1. Debt Management:

o Negotiate with Creditors: Open lines of communication with your creditors to renegotiate payment terms. Many creditors would prefer to work out a repayment plan than see your business go under. Consider a company compromise under the Companies Act 1993 to gain time to pay and possibly some relief (with requisite creditor approval).

o Debt Restructuring: Consider restructuring your debt to extend payment periods, reduce interest rates, or convert debt into equity.

2. Inventory Control:

o Optimize Inventory Levels: Implement inventory management systems to avoid overstocking or stockouts (short on key stock items). This can free up cash tied in inventory and reduce storage costs.

o Just-In-Time (JIT) Inventory: consider adopting JIT inventory practices to minimize holding costs and reduce waste.

3. Invoice Management:

o Speed Up Collections: Implement strict credit control policies to ensure timely collection of receivables. Consider offering early payment discounts to encourage quicker payments from customers.

o Factoring and Invoice Financing: Use factoring or invoice financing to get immediate cash flow by selling your receivables to a third party.

o Issue your invoices in a timely manner

4. Cost Reduction:

o Cut Non-Essential Expenses: Review your expenses and cut non-essential costs. Focus on maintaining expenditures that directly contribute to revenue generation.

o Outsource Non-Core Functions: Consider outsourcing non-core business functions to reduce overhead costs.

5. Increase Revenue:

o Diversify Income Streams: Explore new markets, products, or services to increase revenue. Diversifying can help cushion against downturns in specific areas of your business.

o Boost Marketing Efforts: Increase your marketing efforts to attract new customers and retain existing ones. A targeted marketing strategy can lead to higher sales and improved cash flow.

Conclusion

Facing cash flow difficulties and an excessive debt burden can be overwhelming. However, by avoiding the pitfalls of preferential payments, increasing debt exposure, and trading insolvently, you can protect your business from legal and financial troubles. Implementing proactive solutions such as debt management, inventory control, and invoice management can help stabilize your business and pave the way for recovery. There are also options to discuss with an insolvency practitioner that can help save a viable business such as voluntary administration and company compromise. Always seek professional advice to navigate these challenges effectively and ensure compliance with legal obligations.