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 are overdue.

Managing cash flow during this period is critical, and proactive steps can make a significant difference. We explore strategies to handle the cash crunch, options for arranging instalment plans with Inland Revenue, and the point at which seeking professional advice from a Licensed Insolvency Practitioner becomes necessary.

1. Assess Your Cash Flow: Begin by conducting a thorough assessment of your cash flow. Understand your current financial position, taking into account outstanding invoices, upcoming expenses, and the various tax obligations due in January and February. This knowledge forms the basis for creating a realistic plan to navigate through the financial challenges.

2. Prioritize Expenses: Identify and prioritize essential expenses. This may involve distinguishing between critical operational costs and discretionary spending. By focusing on what's necessary for day-to-day operations, you can allocate funds strategically and ensure that vital aspects of your business are not compromised.

3. Communicate with Creditors: Open and honest communication with creditors is key. If you foresee difficulties meeting payment deadlines, approach your creditors early to discuss your situation. Some may be willing to negotiate payment terms or provide temporary relief. Establishing transparent communication builds trust and can lead to more favourable arrangements.

4. Explore Inland Revenue Instalment Plans: Inland Revenue understands the challenges businesses face, especially during the post-holiday period. If you're struggling to meet your tax obligations, consider reaching out to them to discuss instalment plans. Inland Revenue is often open to working with businesses to find a manageable repayment schedule.

5. Seek Professional Financial Advice: For some businesses, the financial strain may become overwhelming, and navigating complex tax obligations may seem daunting. In such cases, seeking professional financial advice is crucial. Engage with a financial advisor who can provide personalized guidance tailored to your business's unique circumstances.

6. When to Contact a Licensed Insolvency Practitioner: If your financial situation continues to worsen, and you find it impossible to meet your obligations, it may be time to consult a Licensed Insolvency Practitioner. Insolvency specialists can assess your business's viability, explore restructuring options, or guide you through the insolvency process if necessary. Early intervention increases the likelihood of finding a viable solution and reduces the prospects of being held liable for trading insolvently.

Starting the year on a financially sound note is essential for the success of any business. By proactively managing cash flow, communicating with creditors, and exploring available options with Inland Revenue, business owners can navigate the post-holiday cash crunch successfully. When faced with insurmountable challenges, seeking professional advice from a Licensed Insolvency Practitioner is a responsible and strategic decision to protect the long-term interests of your business. Remember, there are resources and professionals available to help you weather the storm and emerge stronger on the other side. Contact This email address is being protected from spambots. You need JavaScript enabled to view it. for more information.

Legitimate business risk is the potential risk that a business faces in pursuing its legitimate objectives. When trading a company that has cash flow problems in New Zealand, there are several legitimate business risks that investors or directors need to consider. These risks include:

1. Credit Risk: If a company is experiencing cash flow problems, it may be at risk of defaulting on its debt obligations, which could harm its credit rating and affect its ability to obtain financing in the future.

2. Operational Risk: Cash flow problems can also affect a company's ability to operate effectively, leading to disruptions in production, delivery, or customer service. This can harm the company's reputation and lead to loss of market share.

3. Market Risk: A company that is struggling with cash flow problems may be at risk of losing market share to competitors who have stronger financial positions. This can lead to a decline in revenue and profitability.

4. Legal Risk: If a company continues to trade while insolvent or engages in fraudulent activities, it may face legal action from creditors, regulators, or other stakeholders. This can result in fines, penalties, or other legal consequences that can harm the company's reputation and financial position.

5. Reputational Risk: Cash flow problems can also harm a company's reputation if it is seen as financially unstable or unreliable. This can affect its relationships with customers, suppliers, and other stakeholders, leading to a decline in revenue and profitability.

In summary, legitimate business risks when trading a company that has cash flow problems in New Zealand include credit risk, operational risk, market risk, legal risk, and reputational risk. It is important for investors or directors to assess these risks carefully and take appropriate measures to mitigate them before making any investment decisions.

Under New Zealand law, a director can be held liable for trading recklessly or insolvently if they allow the company to continue trading while it is insolvent or likely to become insolvent, and their actions cause a loss to the company's creditors.

The determinants for finding a director liable for trading recklessly or insolvently include:

1. Awareness of Insolvency: A director may be held liable if they continue to trade while the company is insolvent or if they become aware or should have been aware of the company's insolvency and failed to take appropriate action to address it.

2. Breach of Directors' Duties: Directors have a duty to act in the best interests of the company, exercise due care and diligence, and avoid reckless or imprudent decisions. If a director breaches these duties and causes losses to creditors, they may be held personally liable.

3. Cash Flow and Financial Projections: Directors have a responsibility to monitor the company's cash flow and financial projections regularly. If they ignore warnings of impending insolvency or rely on unrealistic projections, they may be held liable for reckleAss or insolvent trading.

4. Transactions at Undervalue: Directors who engage in transactions that benefit themselves or related parties at the expense of creditors may be held liable for trading recklessly or insolvently.

5. Failure to Seek Professional Advice: If a director fails to seek professional advice or act on advice received from accountants, lawyers, or other experts regarding the company's financial situation, they may be held liable for trading recklessly or insolvently

In summary, a director can be held liable for trading recklessly or insolvently if they fail to take appropriate action when the company is insolvent or likely to become insolvent, breach their duties as a director, fail to monitor the company's financial position, engage in transactions that benefit themselves or related parties at the expense of creditors, or fail to seek professional advice.

Dealing with insolvency is a stressful process. As a director, you have to worry about risk on multiple fronts: corporate survivability, personal liability and how to satisfy the needs of creditors. But perhaps above all, it is critical to ensure your company does not continue to trade if it becomes insolvent. 

RESPONSIBILITIES OF THE DIRECTOR DURING INSOLVENCY

As director, you must ensure that you and your company uphold the provisions and obligations of the Companies Act 1993. The duty imposed by Section 135 of the Act is owed by the directors to the company.  The legislation states that minimum requirements for a director to do so adequately include:

• Making decisions in good faith and for the best interests of the company.
• Only using your power as director responsibly.
• Never putting the business at substantial risk of serious loss to the company's creditors.
• Ensuring you take care, diligence and skill that a reasonable director would take in the same circumstances.
• Making sure the company is able to pay its debts and has greater assets than liabilities.

When trading as an insolvent company, there are also important risks to keep in mind as the director.

RISKS WHEN TRADING AS AN INSOLVENT COMPANY

Liability for civil penalties

If your company is entering insolvency, you could be held liable for reckless or negligent trading. Reckless or wrongful trading is any trading that is likely to create a substantial risk of serious loss to your company's creditors. As the company's director, you are under a duty to not engage in any form of reckless trading.  The Companies Office may also pursue legal action should this occur. 

Insolvent trading can be as simple as assuring creditors that the company is in good shape, while knowing that the opposite is true. This could make you liable under the tort of deceit. To avoid reckless trading you should ensure your company is solvent and able to pay debts when they fall due (and that total debts including contingent liabilities are less than total assets).

If you claim that you did not know about the bad financial situation, however, that could be considered careless and you could be held liable for negligence.  A company director can be found personally liable for losses caused to creditors.

If you fail to disclose that your listed company is unable to pay debts to its investors, you may have a criminal charge brought against you by FMA.  A director will be criminally liable if they know that conduct in breach of directors' duties is either seriously detrimental to the interests of the company, or will result in serious loss to the company's creditors.

If directors of a listed company fail to disclose that the company is unable to pay debts to its investors, the directors may have criminal charges brought against them by FMA and/or the Serious Fraud Office under the Crimes Act 1961.

The FMA will monitor and take enforcement action where it sees conduct that could harm investors or damage the reputation of New Zealand's financial markets.

Theft by a person in a special relationship (such as a director) or deception under section 240 of the Crimes Act 1961 or acting dishonestly by taking or using a document under section 228 of the Crimes Act 1961 all carry maximum penalties of seven years imprisonment per charge.

Loss of director role

Remember that when your company enters voluntary administration or liquidation, you will lose control of management of the company.  If you have acted proactively and in the interests of the creditors and you have not defrauded the company, you will have a stronger legal defence and creditors with personal guarantees may be more willing to negotiate with you.

You will have statutory obligations, such as providing records and to attend creditor meetings and meetings with the external administrator. 

If you act promptly, you may not need a formal insolvency process and may (with the help of a turnaround professional) be able to restructure the business, compromise with creditors and continue as a director.

How to act as a director of an insolvent company

Because of personal risks, directors should take immediate action and gain professional advice on the options for their struggling businesses. There are many options available, such as ceasing to trade (which is best practice) and a sale of business, a hive down action, a company compromise or a voluntary administrator taking control. In more extreme circumstances, you may have to begin an immediate liquidation or a receivership process.  

If the company can no longer pay its debts and the likelihood of continuing to trade will increase creditor and personal exposure, take action. In addition, it's important to always be honest, act with integrity and have the best interests of the business in mind.

If you are concerned that your company is close to entering insolvency and want to reduce stress and uncertainty, get in touch with our team at McDonald Vague to discuss our business turnaround solutions.   It is important to check you have the appropriate mechanisms in place and are aware of the financial position of the company and the risks it faces.