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.

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

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.

Personal Insolvencies - Bankruptcy

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.

Moving Forward - What Might Be On The Horizon? 

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. 

If you want to have a free chat about what your business is experiencing or about any other insolvency matter, contact us on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

The directors of a company have all the powers to decide what will be done, when it will be done and how – but with that power goes the responsibility to the company and its shareholders, to the company’s creditors and last, but not least, to themselves.

The Responsibility to Others

As a director, whether that be as the sole director of a small company or one of many in a large company, you have duties imposed on you under legislation, such as the Companies Act 1993 (“the Act”), and the company’s constitution.

In any circumstances, you must firstly comply with the duties imposed by legislation, which are set out in sections 131 to 138A of the Act. Your first duty is to act in good faith and in what you believe to be the best interests of the company – not your own.

In tough times, if the company is insolvent, then the focus changes and you must act in the best interests of the company’s creditors by ensuring the company doesn’t incur debts and liabilities that it cannot pay.

If you do not fulfil your duties as a director, you could be held personally liable for those breaches and face monetary penalties or imprisonment and you could be ordered to contribute funds to the company to pay creditors.

Where you are the sole director, the thought process is simple.

• Am I complying with my duties as a director? If the answer is “yes” then carry on. If the answer is “no” change what you are doing so that you do comply.
• If the company is technically insolvent can it be rescued. If the answer is “yes”, then take the necessary actions to recover. If the answer is “no” then cease trading to avoid increasing the amount owed to creditors.

The Responsibility to Yourself

Where you are not the sole director, and your company is insolvent, then the thought process is the same but (and it’s a big but) being able to put into effect any actions you think are the correct and proper thing to do is dependent on the majority of directors agreeing with you.

If you do not get that agreement, you need to start making decisions about what is best for you personally.

"Should I Stay or Should I Go" is a song by English punk rock band the Clash and one of the verses is as follows -

Should I stay or should I go now?
Should I stay or should I go now?
If I go, there will be trouble
And if I stay it will be double
So come on and let me know

The 3rd and 4th lines of the verse highlight the issue for you, as the director holding the minority view, of what you should do.

Do you remain as a director to try and bring about the changes you think are required to get the best results for the creditors of the company or do you accept the other directors will not change their point of view.

That is a decision for you to make, based on the circumstances of your company and on any professional advice you may take but, if you do not see any way that you can stop the company failing because the other directors won’t take the course you are proposing, there is no obligation on you to “go down with the ship”.

To protect yourself, you should keep good records of the events that occurred, the proposals you put to the Board and responses you received and seek independent professional advice.

On 3 April 2020, the Government announced that it would be making changes to the Companies Act 1993 to provide insolvency relief for businesses affected by COVID-19.

Yesterday, 5 May 2020, the first reading of the COVID-19 Response (Further Management Measures) Legislation Bill) took place. That bill introduces, amongst other measures:

• Reducing the voidable transaction and voidable charge period for non-related parties to six months (Schedule 2)
• The safe harbour provisions for directors (Schedule 3)
• The COVID-19 business debt hibernation (Schedule 4)
• Extensions to the periods mortgages and rent can be in arrears before default notices can be issued and enforcement action can be taken under the Property Law Act 2007 (Schedule 14)

Both the Safe Harbour provisions and the Business Debt Hibernation scheme are intended to be used by companies who, but for COVID-19 would not be facing cash flow issues.

Safe Harbour Provisions

The safe harbour provisions allow directors to trade during the safe harbour period (initially 3 April 2020 to 30 September 2020) without breaching section 135 (reckless trading) and/or section 136 of the Companies Act 1993 if:

• The company “was able to pay its debts as they became due in the normal course of business” as at 31 December 2019 (Pre-COVID-19 Solvent); and
• In good faith, the directors are of the opinion that the company:
  
  • has or will have short term, COVID-19 related liquidity problems over the next six months; and
  • will (more likely than not) be able to pay its due debts on and after 30 September 2021.

                (Post-COVID-19 Solvency Opinion)

The bill puts the onus on the directors to show that they are entitled to the protection afforded safe harbour provisions. The bill also contemplates that the safe harbour period could be extended beyond 30 September 2020.

Business Debt Hibernation

The Business Debt Hibernation(BDH)  scheme will allow entities (including companies, partnerships, body corporates, and unincorporated bodies) to delay payment of their debts, whether in full or in part, for a period of up to seven months.

Entities will be able to enter into BDH if:

• The entity was Pre-COVID-19 Solvent;
• At least 80% of the entity’s directors vote in favour of a resolution to enter into BDH; and
• Each director who votes in favour of the BDH:
  
  • Makes a statutory declaration that:
    
    • The entity was Pre-COVID-19 Solvent
    • The director holds a Post-COVID-19 Solvency Opinion
    • Sets out the grounds for his or her Post-COVID-19 Solvency Opinion

                     (Post-COVID-19 Solvency Declaration)

• • Is acting in good faith

The entity will enter into the BDH when it delivers notice of the BDH to the Registrar (as drafted, all entities will deliver the BDH notice to the Registrar of Companies, not just companies registered on the Companies Register). Entities entering into BDH will have an initial one-month protection period during which creditors will be prevented from starting or continuing enforcement action against the entity and its assets while the entity puts forward its proposed arrangement with its creditors. If the proposed arrangement is supported by 50% of the entity’s creditors (in number and value) who vote on the proposed arrangement, the protection period will be extended for a further six months and all creditors who were sent notice of the proposed arrangement will be bound by the proposed arrangement.

During the protection period (including the extended protection period), unless the approved arrangement provides otherwise or only with the court’s permission:

• Creditors will not be able to enforce their charges over the entity’s property;
• Lessors will not be entitled to take possession of the property used or occupied by the entity;
• Creditors will not be able to begin or continue proceedings for a debt or the recovery of property from the entity;
• Creditors cannot start or continue enforcement action against the entity;
• Creditors cannot call on guarantors of BDH debts, if the guarantor is related party of the entity.

The extended protection period will come to an end if at least 80% of the entity’s directors are not prepared to make new Post-COVID-19 Solvency Declarations, if requested to do so by a creditor. Once given, each Solvency Declaration can be supplied to creditors requesting a new Solvency Declaration for a period of up to two months from the date it is given.

The following debts are excluded from BDHs:

• Employees’ remuneration (including PAYE and other deductions)
• Amounts owed to secured creditors with security over all or substantially all of the entity’s assets (after the initial one-month protection period)
• Debts incurred after the company enters BDH
• Excluded debts (the term “excluded debts” is not defined in the bill)

A BDH does not compromise any of the entity’s debts but an entity in BDH can advance a creditor compromise or be placed into voluntary administration during the protection period.

Progressing the Bill

The bill has been referred to the Epidemic Response Committee, who are due to report back to the house on 12 May 2020.

A date for the second reading of the bill has not yet been announced.

You can find a copy of the bill here: 

How We Can Help

Directors wanting to take advantage of the Safe Harbour provisions or entities considering the BDH will need to satisfy themselves that the entity was Pre-COVID-19 Solvent and that they have a good faith basis for their Post-COVID-19 Solvency Opinion. Because of these requirements, if you have any hesitation about your entity’s financial position, we strongly recommend that you take advice.

For entities that cannot meet the solvency requirements of the Safe Harbour provisions or the BDH scheme, there are a number of business restructuring options available that could help directors and shareholders navigate their way through the financial challenges brought about by COVID-19.

If you want to discuss the issues your business is facing, email us on This email address is being protected from spambots. You need JavaScript enabled to view it. to request a phone call from or Zoom meeting with one of our insolvency practitioners.

With the upheaval being caused to many SMEs by the Covid-19 lockdown and the potential for many of those SMEs to fail, the risk to people who have provided personal guarantees (PG’s) for company debts increases.

The support packages for companies being provided by the Government and the major trading banks is good news for the employees, because of the 12-week wage subsidy package, and for those businesses that can meet bank lending requirements to access the business finance guarantee scheme or possibly can use the debt hibernation and tax packages.

But the position for those companies that have other significant overheads and possibly were loss making startups or were already struggling, and for the individuals involved with those companies that have personally guaranteed some of the company obligations, the picture is not so bright.

It is expected that some creditors will make demand on individuals for payment of those company debts, pursuant to their PG’s, and, in the event the debt is not paid, proceed to bankrupt the individual concerned.

Bankruptcy:

If the holders of PG’s or sole (unincorporated) traders end up being bankrupted, or declaring bankruptcy, due to the financial impact of the lockdowns largely through circumstances and decisions outside of their control, the current repercussions are, in our opinion, too harsh.

We would support a new personal insolvency regime that allows those bankrupted (say a Covid class) that can reasonably show the bankruptcy arose from Covid 19’s impact, be given a clean slate alongside an agreed reasonable repayment plan for the personal debts over time (potentially managed by responsible third parties) so that those people are:

- Not impacted further;
- Not consigned to the unemployment lines or pushed into the “black economy”;
- Able to access credit
- Able to open bank accounts
- Able to restart in business

Reducing the prospect of bankruptcy the below packages have been and remain available.

Wage Subsidy:

There are some companies who have applied for and received the 12-week wage subsidy for their staff that will not survive through the 12 week period and will be placed into liquidation.

The subsidy was provided so that staff could be retained to enable businesses to continue post lockdown. So, what happens if that doesn’t occur?

We understand that individual employees who received the wage subsidy payments will not be asked to pay any of those funds back, but what about the company and the directors involved who signed the declaration confirming employment for 12 weeks and best endeavours to provide ongoing employment? Will the directors be personally liable under the scheme for those funds?

MSD have advised that on liquidation, if the Liquidators cannot retain the staff, then they can use the subsidy to pay out employee entitlements (i.e. notice period) and any surplus funds should be returned to MSD. The wage subsidy cannot be used to pay out any redundancy obligations in an employee’s employment contract.

The wage subsidy, although providing some relief, doesn’t cover the other on-going expenses of the company that may be continuing whilst in lockdown such as rent, insurance, ACC payments, hire purchase payments and finance payments and interest.

Those amounts will continue to accrue, some with penalties being incurred for non-payment and many, such as rent, hire purchase and finance payments will in all likelihood, be covered by personal guarantees.

Business Finance Guarantee Scheme:

This provides for extra finance to be provided by the trading banks to eligible companies with the Government carrying 80% of the risk and the bank 20%. The bank will still be in the position of deciding whether or not a company is worth lending to but, with the bank carrying 20% of the risk it is to be expected that their lending criteria will continue to be enforced.

The loans have to be repaid in the normal manner, according to the terms agreed to and will, in all likelihood, be covered by a General Security over the company’s assets and either a pre-existing or new personal guarantee. So, what happens if the company fails before the loan is repaid?

Does the bank have to try and recover the full amount owing under the loan in the usual fashion – firstly from the company concerned and, if necessary, from the guarantors before it can call on the Government for its 80%? That appears to be the case.

An article published by Simon Thompson on Linkedin on 21 April 20 “How Does the NZ SME Loan Guarantee Scheme Measure Up To Others?” read here he comments “The simplistic property based focus will not be enough and their [the banks] blanket catch-all personal guarantees discourage applications.”

The article further suggests “An alternative model is to have a limited personal guarantee whereby the SME owners are only liable for the debt if there has been fraud or theft of funds from the business. The SMEs must pledge that the finance will be used exclusively for business purposes and that personal drawings will be no higher than in previous periods or as per a business plan.” And “The personal guarantee, if it is applied, should also be capped at 20% of the loss, as the UK model allows. The NZ Government already guarantees 80% of the risk under this scheme, while the bank takes 100% of the profit from the loans and has just 20% risk. Surely under that environment special conditions should apply.”

The following table developed by Mr Thompson compares the loan schemes in NZ, Australia and UK:

Tax:

There are a wide range of proposed tax changes including;
• Depreciation on assets for some classes of assets
• Not charging UOMI on new debt
• Temporary loss carry back scheme
• Possible Permanent Removal of loss continuity provisions for the 20/21 period – discussion later in 2020, could be enacted before March 2021.

Tax payments arrangements can be modified by agreement if the taxpayer can show they have been significantly adversely affected and “income or revenue has reduced as a consequence of Covid-19 and as a result is unable to pay taxes in full on time. The key is to interact with IR as soon as practicable to agree to an arrangement to pay at the earliest opportunity.

Conclusion:

The support packages provide somewhat of a life line for businesses that were viable before the Covid-19 lockdown and will be able to recover once “normal” (what ever that is like) trading resumes, but for those companies that were already struggling and cease operating, Covids impact and the support packages could become a millstone around the neck of the directors, and others, who have provided personal guarantees.

It is important that individuals who have provided personal guarantees and may be exposed to claims against their personal assets, seek independent advice from their professional advisors before taking any actions that might increase that risk and the level of exposure.

The Government is introducing legislation to change the Companies Act to help businesses facing insolvency due to COVID-19 to remain viable, with the aim of keeping New Zealanders in jobs.

The temporary changes are outlined here

A safe harbour is granted to directors of solvent companies, who in good faith consider they will more than likely be able to pay its debts that fall due within 18 months. This would rely on trading conditions improving and/or an agreed compromise with creditors. It essentially provides certainty to third parties of an exemption from the Insolvent transaction regime.

The changes allow directors to retain control and encourage directors to talk to their creditors and will if needed enable businesses which satisfy some minimum criteria to enter into a debt hibernation scheme with the consent of creditors.

The following article on the Company Law changes released by Martelli McKegg provides more detail read here 

In summary:

• Debt hibernation is binding on all creditors (we are uncertain about whether related party creditors can vote, or whether their votes are challengeable) providing that a vote of 50% by number and value is obtained
• Creditors will have 1 month from the date of proposal to vote during which time there is a moratorium on the enforcement of debts
• If passed, a further 6 months moratorium will be available
• To access debt hibernation a threshold will need to be met 
• It will not apply to Sole Traders

Warning for insolvent companies and directors

Directors considering trading on their company need to be careful and cautious and should have their decisions supported by accounts as at 31 December 2019 (as a minimum), and reliable cashflow projections. Companies that cannot satisfy the solvency test at 31 December 2019 or pre Covid-19 impacts should not be advancing a debt hibernation scheme and directors of those companies will not have protection from S135 and S136 claims.

Insolvent companies that are now facing further financial harm as a result of the lockdown should be seriously considering ceasing to trade and entering into either a formal company compromise under Part XIV of the Companies Act 1993, liquidation, or in some cases voluntary administration. The options depend on the viability of the business.

We consider directors of companies on the brink of insolvency should seek independent advice on whether the company meets the debt hibernation criteria and as a minimum we would recommend that financial accounts are being prepared now to 31 December 2019 along with forward looking cashflow projections to support the decision to trade. We expect creditors being asked to vote will require that sort of information to be available. We urge directors to get their Chartered Accountants involved.

Directors need to be aware that the safe harbour provisions may not protect you. For example, if your company has not been able to meet a statutory demand immediately pre-covid, then your company may be deemed insolvent.

McDonald Vague Consulting Support Services

The McDonald Vague team offer the following services as a cost-effective and efficient form of employer assistance in these challenging times.

• Independent Assessment of solvency to satisfy the Debt Hibernation scheme (requires financials to 31 December 2019)
• Assistance with Debt Hibernation arrangements, offers and documentation.
• Company Compromise (for insolvent companies) 
• Liquidation 
• Voluntary Administration (recommended for larger companies seeking to compromise with creditors).

CONTACT OUR TEAM 

It has been widely predicted that the effect of Covid-19 on businesses, and the individuals involved with those businesses as owners and employees, is going to be widespread. Despite the Government support rolled out to date, many are worried about possible redundancies and the predicted failure of many businesses.

In this article we look at what can be done to survive the lockdown, what effect the lockdown could have on new insolvency appointments during the lockdown period, and what the flow on effects could be, once the lockdown ends. We will also consider the opportunities available to businesses so that they survive the lockdown.

Surviving the Lockdown:

The Government and banks have provided avenues of financial support for individuals and companies to help get through this initial lockdown period.

The government packages are primarily designed to assist businesses to be able to maintain contact with staff by payment of a level of wages to staff, who would otherwise be made redundant, and keep those employees available so that the business can continue once the lockdown ends. If you are considering staff redundancies to reduce your outgoings over the lockdown period, we strongly urge you to speak to your lawyers before taking any restructuring steps, especially if the business has received the Government Wage Subsidy. The government has been very clear that it expects all of the wage subsidy to be passed to employees. The only exception is when an employee’s normal weekly wage exceeds the wage subsidy in which case the normal wage should be paid.

Other Government measures put in place include tax relief in relation to provisional tax and depreciation allowances.

The retail banks have also agreed to a six-month principal and interest payment holiday for mortgage holders and small business customers whose incomes have been affected.

The Government and banks have also put a business finance guarantee scheme in place for small and medium sized business (annual revenue between $250k and $18 million) to further protect jobs, cashflow and support the economy. The Government will take 80% of the risk on this lending and banks the other 20%. These loans are available to business that, but for the effects of Covid-19, were solvent and viable businesses. The banks retain the ability to decide who will be able to get the loans under the system.

Business owners also need to talk to their bankers and financial advisors to see what options are available to them, both in relation to taking out new loans and taking advantage of refinancing options and repayment holidays on existing business and personal lending.

Now is the important time for business owners to look closely at cashflow and the on-going costs their business faces during the lockdown period to see what, if any, reductions can be made. For example, some leases include “no access” provisions, which provide for the tenant to pay a fair proportion of the rent and outgoings during the no access period. We have also seen instances where landlords have agreed to reduced rental payments in leases without a “no access” clause. If your business cannot use its premises and have not already spoken to your landlord, we suggest that you speak to your landlord. The Government signalled on 1 April 2020 it was considering intervening, and that an announcement could be a couple of days away.

We have noted that many debtors and creditors and contracting parties have between themselves been reaching pragmatic arrangements around payments. Negotiating these sorts of arrangements is encouraged. Please be sure that when they are being negotiated that you allow yourselves enough time and money after the lockdown to be able to meet critical obligations and to start up, as it could easily be months after lockdown before business returns to normal. The arrangements agreed need to be documented.

Please also be certain that you haven’t overcommitted, or, committed the same money to many parties.

Now more than ever working with your advisers around cashflow and any other issues is important.

Try also to use this time to try to resolve the disputes and niggly issues that sit around (sometimes in the background) in all businesses. Having those out of the way will assist you with focussing on the restart when it occurs.

And look after yourselves. Talk things through. Get some advice. You could find you remove some stress from this very difficult period. Get some rest. Smile once in a while.

If You Can’t Survive:

If, despite the support available, you doubt your business will survive, or restart, give your adviser, or us a call to discuss your options.

If what you need is time to pay your creditors, a formal compromise or putting the company into Voluntary Administration (VA) might help your business make it through the lockdown.

Compromises with company creditors allows creditors to agree to accept payment of their outstanding debt in part or in full, usually over a period of time, on the basis that they will receive more under the compromise than they would if the company was liquidated.

For some businesses, Voluntary Administration (VA) might be a better option. The aim of the VA is to maximise the chances of the company, or its business, continuing in existence with the help of the administrators and so provide a better return to creditors and shareholders than from an immediate liquidation.

If a compromise or VA are not realistic options for your company, we can talk to you about putting your company into liquidation by shareholder resolution. If your business does not carry out an essential service, appointing liquidators could help alleviate your immediate stress. While some steps can be taken by the liquidators immediately, we anticipate that any asset recoveries will not occur until after the lockdown restrictions are eased.

Personal Obligations

These need to be managed along with business obligations. For many small businesses the two go hand in hand.

Just as company compromises are possible, personal compromises are also an option for those that have the ability to pay their creditors over time but need some immediate breathing room. If your company is struggling, you are personally exposed if your company fails because you have given personal guarantees, and you have funds or access to funds that would not be available if you were made bankrupt, you can put forward a compromise to creditors under Part 5 Subpart 2 of the Insolvency Act 2006. This is an alternative to bankruptcy that aims to provide your creditors with a better result than bankruptcy and, if the proposal succeeds, you and your creditors will be bound by the proposal.

At McDonald Vague, we hope that the message of “we are all in it together” will send that message of providing support and kindness in this difficult time.

Court Appointments and Process

We do not expect that there will be Court appointed liquidations during the lockdown period, except in exceptional circumstances, as the Courts are now restricted in the types of cases they can hear to those that affect the liberty of the individual, the personal safety and wellbeing of citizens, and/or where resolution of issues raised by proceedings is time critical.

We anticipate that some unpaid suppliers may feel obliged to put pressure on customers during the lockdown because they are under pressure (the domino effect). If you are under pressure and are considering issuing a statutory demand to a customer, we urge you to speak to your lawyers, as validly serving the statutory demand may be an issue. As the Court Registry is still open, we expect that creditors will still be able to file liquidation proceedings relying on statutory demands served prior to the lockdown (provided those proceedings are filed within 30 working days of the statutory demand expiring).

Meetings During Lockdown

The Companies Act 1993 provides that creditors’ meetings can be held by audio, or audio visual communication, as long as all creditors participating can simultaneously hear each other throughout the meeting. While the Act requires written notice of the meeting to be given to creditors, we anticipate that, in most instances, all creditors will be able to be notified of any creditors’ meeting by email. In most cases, we anticipate that, with some additional effort, creditors’ meetings could still be notified to creditors and held during the lockdown period.

Risks to Directors

In the event of a company failure, regardless of when it occurs, the actions of the directors are reviewed by the company’s liquidators. Directors who breach their directors’ duties, including in relation to insolvent or reckless trading, could face claims against them if the company’s directors ignored the company’s dire financial position or they did not act quickly enough to stop the company’s indebtedness to creditors increasing after the company became insolvent.

We consider that any review of a director’s recent actions, taken since Covid-19 impacted the business, would need to be taken into account but directors could still be held accountable for breaching their duties if they have not exercised the care, diligence and skill that a reasonable director would exercise in the same circumstances.

 
When Lockdown is Over:

The initial Level 4 lockdown period of 4 weeks could be extended further. When the lockdown level decreases, it is unlikely that business will return to our previous “normal” quickly. Some economic consultants are suggesting that it could take 18 to 24 months to recover but it could be quicker or slower than that depending on the success or otherwise of the lockdown action.

As we emerge to our “new normal”, there will be new challenges. We are here to assist, as and where we can.

Starting Again

The start-up period could be as difficult as the close down. Cash flow is almost certainly going to be tight for the first weeks and months after restart. The ability to meet rent and employee obligations is going to be tested in many businesses unless you have used the time and options to get cashflow in order.

If you don’t think your pre-Covid-19 business can survive the effects of Covid-19, give us a call to discuss your options. There may steps you can take now that will allow you to reinvent your business after the lockdown ends.

As always, there will also be new business opportunities that come out of the lockdown. If you are looking at starting a new business, talk to us. We can suggest a few simple steps that you can take when setting up your new business to protect your investment into the future.

Conclusion:

Covid-19 means that business owners and employees are facing unprecedented challenges at the moment.

The Government and retail banks are providing a range of financial assistance packages to try to ease the current burden and allow businesses to survive and, hopefully, prosper when things get back to normal. Unfortunately, even with those packages and, hopefully, the goodwill of New Zealanders, significant business failures and job losses are still predicted.

Business owners need to be reviewing their business models, talking to their banks, industry organisations, key debtors and creditors, and trusted advisors about how they can best survive the turmoil or, if they do not believe that they have the ability to carry on, to an Accredited Insolvency Practitioner about the options available to them. If you need help, call us on 0800 30 30 34 or 027 359 0823 or reach out to one of our team.

It is an unfortunate truth that, generally speaking, business owners only approach an Insolvency Practitioner about the financial plight of their company when the problem is terminal, and the only viable option is liquidation.

The approach often happens when the pressure on the directors of the company gets unbearable and it starts to effect their health. With a large number of New Zealand companies having directors and shareholders who have personally guaranteed the company’s debts to financial institutions and suppliers, the pressure that comes with running a struggling company is intensified by the fact their personal assets could also be at risk.

It isn’t unusual, when first meeting with directors and shareholders in this position, for them to tell us that they “can’t afford” to stop trading the business because they could lose their house. The reality is that by carrying on they are only digging the hole deeper and the light that they think they can see at the end of the tunnel is a train coming their way.

As soon as concerns arise around the solvency of a business, the best decision that can be made is to consult an experienced Accredited Insolvency Practitioner (AIP). If you do that soon enough, there are more options available to recover the position, without putting personal assets at risk, such as restructuring or compromises with creditors.

If, however, the damage has already been done, you may not be able to recover the position but, by contacting an AIP immediately, you can limit how deep the hole is and reduce the risk to your personal assets.

Regardless of the stage at which you contact the AIP and initiate a course of action, you will find that the pressure will ease. The AIP will take over dealing with the creditors who have been hounding you and will put in motion a process for the orderly winding up of your business.

Depending on your circumstances, there may still be issues for you to face over personal guarantees but, with insolvency process started, you will at least know the size of the problem and it won’t be getting any bigger.

If you would like advice in relation to the solvency of your company and the best way to deal with any issues, please contact one of the team at McDonald Vague.

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.

Businesses Under Stress

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.

Calls For Compensation

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.

What Is Being Done To Help Affected Businesses?

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.

Common Sense Actions To Continue In Business Without Trading While Insolvent

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.

Common Pitfalls

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.

Options For Insolvent Companies

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.

The Case For Infrastructure Development

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.

Final Observation

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!

SMEs make up a large part of the insolvency work that we at McDonald Vague handle and the reasons for those insolvencies range from events beyond the control of the company officers to a complete lack of knowledge and understanding by the company officers of what is required of them.

• What led to those companies failing?
• What were some of the red flags that might have been seen along the way?

CAUSES OF FAILURE:

The causes of company failures, as reported to us by the directors, are many and varied and the real reason is not always identified correctly by the directors.

There are, however, common themes that come through in the reasons for company failures.

All the Eggs in one Basket:

It is not uncommon in insolvencies to find that the failure of the company has come about because they have all, or at least most, of their eggs in one basket. The sudden failure of their major client or the decision by that client to go elsewhere leaves a yawning gap in their cash flow.

In tight economic times there is not always the ability to find new business in a short period of time to enable the business to continue to operate. They can also be left holding stock that is particular to that client and have no ability to move it on.

Company directors don’t always have the marketing skills to get out and promote their business nor the financial understanding to see ways to restructure their business to take account of the sudden loss of a major client.

The unexpected loss of a vital staff member can have the same effect, leaving the business unable to operate to its potential while another suitable employee is hired or trained up.

The Economic Climate:

Often directors will point to a particular period and claim that this was when orders dried up.

A sudden down turn can sometimes lead to the company cutting its prices in an endeavour to obtain work but without giving enough thought to what it actually costs them to do that work. So they continue to operate but have no margin or insufficient margin to enable them to meet their costs and catch up on old debt.

Lack of Knowledge:

A number of the small companies that we manage the liquidation of are companies incorporated by a tradesman to charge out their services. Many of these are tradesmen who have moved from employee status to company director and employer because they have been advised that they will be better off working for themselves through a company structure.

While they may all be very capable plumbers, builders, electricians etc many know next to nothing about the requirements of running a company and managing the finances.

They often start with a few tools and a vehicle, no operating capital and no administration systems in place.

They fall behind in filing their PAYE and GST returns, they fall behind in invoicing out the work that they have done. They fail to differentiate between what is the company’s and what are their own personal assets and the company bank account is used for everything, including buying the groceries.

They do not keep accurate records of the income and expenses and fail to carry out even basic functions like checking off bank statements. They have no prepared budgets or cash flow forecasts and, essentially, exist day to day. If there is money in the bank account they can spend it without giving any thought to things like GST & PAYE that may be falling due in the next month.

The cumulative effect of these failings is the downward spiral of the business until a creditor, generally the Inland Revenue Department, puts the brakes on them by threatening to wind them up unless payment is made.

Related Party Loans:

This can include loans to shareholders, family and friends, as well as related companies. The temptation is there, if one company is flush with cash at any stage, to lend the funds to related parties.

Problems arise when there is no clear documentation of the loans and no specific requirement on the related party to make repayments.

While the related entities are still in existence and the loan sits on the company’s statement of financial position as an asset – giving a semblance of solvency – the truth of the matter is that there is no substance to the asset with no likelihood of the loan being repaid.

Allied to this is the giving by the company of guarantees for related entities leading to claims made on the company in the event of default by the related party.

RED FLAGS:

What are the red flags, or danger signs, that the company’s directors or professional advisors might note along the way that indicate all is not well with the business?

• Notifications that PAYE or GST returns haven’t been filed

• GST refunds for 2 or 3 periods in a row. If the company is consistently spending more than it earns, what are the reasons.

• Failure to pay PAYE and GST. PAYE, in particular, is “trust” money deducted from employees’ wages. It should not be available for operational purposes.

• A steady increase in the outstanding creditors and increased age of the debt.

• A constant need for the shareholders to support the company with funds without any light at the end of the tunnel. How long can the shareholders continue to fund the company?

• A sudden change by creditors to expecting COD for supplies rather than place the amount on credit.

CONCLUSION:

The vast majority of company directors and shareholders don’t deliberately set up their company to fail but sometimes, through a combination of matters beyond their control and a lack of skills and understanding of the requirements, that is what happens.

Good advice at the outset and continued support and assistance during the operation of the business from accounting and legal professionals could go a long way to reducing the likelihood of failure.

If you would like more information about the causes and symptoms of company insolvency, please contact one of the team at McDonald Vague.

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.

Insolvency Lawyer:

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.

Insolvency Accountant:

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 Protection:

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.

You can check the accreditation status of a particular IP or look for an accredited IP by following the links to the RITANZ or CAANZ websites 

Conclusion:

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.