Whether or not a business decides to transact all or part of its business by way of barter, rather than by cash payment, is a decision for the directors but, in making that decision, directors need to remember the old business adage – “Cash is King”.

There can be advantages in using the barter system to settle transactions between your business and your clients, but you will still need to have sufficient cashflow.

There are still wages and taxes, including GST on the barter transactions, which you will have to pay using money and there will be other goods and services that you require that you cannot make payment for using barter credits.

If you cannot find enough business expenses that can be settled with barter credits you can end up with a high level of credits and no simple way of converting those credits to cash at the full value.

In a case we have been involved in, the company, which provided services, used a barter system as the means of payment for some of its clients. It used some of the credits to purchase goods from other members of barter group and then tried to realise those goods for cash.

When we were appointed, the company had a large quantity of items purchased using the barter system with an estimated purchase value of about $60,000. One item alone had cost in excess of 15,800 barter dollars to purchase – it sold for just over 25% of that amount in cash at auction.

We are not advocating for or against the barter system. Whether or not your business will suit the barter system will depend on a number of factors, including the ability to use the credits for business expenses and your ability to manage the process.

But, if your business is struggling to meet its obligations to pay wages and taxes and to make payment to creditors who require payment in cash then it is better not to have a substantial amount held in goods that were purchased with barter credits and that are not the type of items your business sells, as you may have problems converting those goods to cash and anything like the purchase value.

If you are having cashflow issues or have any concerns about the solvency of your company please contact one of the team at McDonald Vague.

It is common in New Zealand for the directors and shareholders of small companies to be the same people and many are also employees of the company – executive directors.  Whether this is in the form of a family owned business or a just a small to medium sized enterprise made up of unrelated individuals this involvement on all levels can create difficulties.

The advantage of such a set up is that the individuals are motivated to make the business work and be profitable.

The downside is that the closed nature of the board can leave gaps in the knowledge and experience held by the directors and their closeness to the business can lead to subjective decision making.

Depending on the numbers on the board, this can also lead to a stalemate position if there is a difference of opinion on matters requiring board approval.

There are two other types of directors that can be brought into the board to help address these issues, non-executive directors and independent directors.

Non-executive directors vs Independent directors

Whilst both can address the lack of knowledge and experience, a non-executive director may be representing a shareholder and, therefore, may not act without some bias.

An independent director will generally have no links with the company, other than sitting on the board, and have no affiliation to any of the other directors or shareholders.

Case Study

A liquidation that we have been conducting involves a company with two directors with the shares held by entities associated with each of the directors.  One director was an executive director, employed by the company. Two further non-executive directors were appointed to the board – one nominated by each of the other directors.

The board functioned properly, and in unity, until the company faced financial issues. 

When the issues were identified, one director made a proposal to restructure the company’s business in an effort to remedy the problems. The restructure proposal was not accepted by the other executive director and, when it went to a vote, the non-executive directors voted with their appointer so there were two in favour and two against – stalemate.

As a consequence, the company continued to trade for a period and left all four directors with a potential liability for breaches of their duties as director.

The closely aligned shareholder interests did not want to change the boardroom dynamic by resigning as directors, or voting against their appointors interests and/or personal views.  In the end the directors settled with the liquidator. 

A truly independent director, with no affiliation to the other directors or the shareholding parties, could have looked at the restructure proposal in an objective way.

Conclusion

There is no way to know what decision an independent director might have made in the liquidation referred to above but at least a decision would have been made, and action taken accordingly, rather than having the company in limbo.

If you would like more information on appointment of directors and directors’ duties, please contact one of the team at McDonald Vague.