Welcome to the month of double lockdowns and Americas Cup racing.

February is typically the first month of the year where we see a steep uptake in all insolvency appointments across the board after the lower months of December and January. Directors will take a hard look at their company after a quiet Christmas period and January break and make the call on whether they want to continue through another year or pack it in. Individuals will often go through a similar process after having spent up large over the Christmas period and having little to show for it and no prospects of paying off the debts they may have racked up and will need to assess their insolvency options.

So aside from staying indoors and watching boat racing what else happened in the month of February on the insolvency stats front:
• Winding up applications for the month beat all individual 2020 months.
• IRD finally began pulling the trigger on winding up applications.
• Personal insolvency figures were up to the 2020 high point levels.
• February figures were still down on prior years.

We continue to hear grumblings from businesses around the country with the upcoming minimum wage increases to $20 per hour and the additional pressure this will put on already tight margins. Banks have not eased up stringency with which they are lending to small to medium size businesses making it increasingly difficult for new businesses to get the necessary funding, while residential lending powers are forward fuelling the property market. We are also seeing increasing material and shipping/logistic costs as product shortages continue as goods cannot be brought into the country fast enough with backlogs at ports across the country.

The latest two lockdowns have done no favours for businesses with the government maintaining some level of support for those businesses negatively affected the most by the lockdowns if they manage to meet the application criteria.

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

Graphs

Corporate Insolvencies

While the February numbers are still behind the previous year’s February figures, they have begun to approach the higher points of 2020. The bulk of the 129 appointments were made up by shareholder resolution liquidations at 87 followed by court appointments making up 31. This is a reflection on the lower winding up applications figures seen over the closing months of 2020 and the slow January start where the courts remain closed for a time and people remain on holiday. This will likely flow through to later months of the year.

Personal Insolvencies

While the personal insolvency figures remain down on the past 4 years Februarys, similar to the corporate insolvency figures, they come close to the higher points of 2020 levels. Bankruptcies and No Asset Procedures continue at similar levels respectively of 73 & 72, with Debt Repayment Orders dragging up third contributing 27.

Corporate Winding Up Applications

Finally, a graph and figures showing figures higher than 2020 levels across the board. This was boosted hugely by the IRD finally chasing some overdue debts and progressing to winding up applications of 18 for the month compared to non IRD applications of 15. Given IRD had only advertised 7 total applications in the prior 6 months they were long due to pull the trigger on these delinquent debts. Will this be a sign for the remainder of 2020 and the increased winding up applications will flow through to actual appointments? Only time will tell.

McDonald Vague have a team of licenced insolvency practitioners with experience across corporate insolvencies and assisting individuals with alternative options to bankruptcy. We can assist with company compromises, voluntary administrations, receiverships, liquidations, and personal proposals.

Welcome to the 2021 statistics.

January is traditionally a quiet month for appointments across all forms of insolvency and 2021 is no exception. With the courts closed for most of January, many companies extending their Christmas close down periods well into January, and the bulk of the country holidaying at the bach or camping in the great outdoors with the children, not a lot happened on the insolvency front. Typically, appointments begin to track up from February onwards.

Many of the woes from 2020 – changes in consumer demand, shipping delays, the loss of overseas tourists, domestic tourism visiting different destinations and spending less than their overseas counterparts, lower than expected income over the summer trading period, minimum wage increases, and labour shortages – are expected to continue to affect businesses well into 2021.

January saw winding up application advertising increase compared to both January and December 2020 but none of these applications were made by the IRD. A preliminary look at February 2021 figures to date suggest that the IRD has finally begun to put some formal pressure on some companies, after months of generally being trigger shy. We will discuss this further in our February stats analysis.

February 2021 brought another lockdown but this time it was only for a week. Still, the flow on effects will be felt in the months to come, especially because many businesses rely heavily on sales over the summer trading period to carry them through the slower winter months. Now more than ever, for many businesses, every dollar counts.

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

Graphs

Corporate Insolvencies

There were fewer corporate insolvency appointments in January 2021 than in any other month going back to January 2016 (when our monthly appointment stats start) and every month of 2020 saw more than double the number of appointments when compared to January this year. As expected there were no court appointments.

Corporate and Personal Insolvencies

We continue to see both personal and corporate insolvencies tracking down over time, as has been happening over the last decade. The last big upward spike in appointments flowed from the global financial crisis.

Corporate Winding Up Applications

We found only one January 2021 number that was higher than its 2020 counterpart – the number of winding up applications advertised. Is it an omen that there will be an increase in creditor applications this year? Will more applications lead to more court appointments of liquidators? Only time will tell.

We expect that many marginal businesses that survived 2020 thanks to financial support from the government and inaction by their creditors will start to have real difficulties in 2021, as the leniency granted to debtors by many institutional, corporate, and SME creditors in 2020 in order to “be kind” starts to be withdrawn.

McDonald Vague have a team of licenced insolvency practitioners with experience across corporate insolvencies and assisting individuals with alternative options to bankruptcy. We can assist with company compromises, voluntary administrations, receiverships, liquidations, and personal proposals.

With one month now under our belts into 2021 it is timely to have a look back on 2020 and how the year played out when lined up to past years so we can gauge the full affect of COVID-19. January 2021 figures will be published in a separate article when they are compiled over the next few days.

I’m not sure that we need to do a full recap of the major events of 2020, the notable ones were COVID-19 lockdown #1, COVID-19 lockdown #2 for Auckland then an election.

In any normal year with two economic lockdowns for an extended period you would expect there to be an upswing in the insolvency cases for an economy. This was not to be. While the average Joe and Jane off the street were sitting at home working and getting updates via mainstream media, they expected the insolvency industry was going gangbusters during the 2020 year, this was however far from the case.

The election had a similar effect to what it normally does every 3 years, the economy and in particular new insolvency appoints move into a wait and see holding pattern.

Let’s look at some pretty graphs and see how the numbers fell over the last 12 months to give us some context.

As you can see corporate insolvency appointments started off normally in the first quarter, took a large drop at the time of the first lock down and struggled to recover for the rest of the year coming in under 2018 & 2019 levels in almost every month. 1,611 total appointments compared to 1,960 in 2019 and 2,168 in 2018.

Bankruptcy adjudications followed a similar pattern to corporate insolvency trends and across the board figures were down on the previous two years. 908 total bankruptcies compared to 1,220 in 2019 and 1,481 in 2018.

The last graph we will take a look at is the Winding Up Applications. You will note a strong start to the year with drops around both lockdowns as the courts could not open to process the applications. This was followed by a complete drop off in IRD applications from August to November also the time of the election and the new governments first 100 days.

What are the reasons behind the economic phenomenon?

We have a government that has injected massive amounts of cash into our economy to keep it propped up in the short term while we try deal with lockdowns and to support several industries and the job market.

This influx of cash has kept unemployment figures under the 6% mark, but the negative effects on the economy are beginning to creep through in other measures with the underutilisation rate slowly creeping up to 13.2% and the number of people receiving the main benefit at 12.4%.

While these figures would have been higher without the stimulus packages used by the government, households have increased both their savings and spending on big ticket items that would normally be spaced out over a 1 – 5-year period. With less overseas travel and house prices increasing across the country, homeowners are spending their paper gains on all manner of big-ticket items.

Low interest rates have made access to funds easier for individuals, along with the mortgage deferral scheme pushing out repayments into the future.

What do we have to look forward to in 2021?

1. Anyone who has been into a retail shop over January or dealing with the construction sector will know that the shelves are looking a touch empty and sourcing materials has become increasingly difficult as pre-Christmas stock remains sitting on boats in the various harbours across the country and overseas. We may see a gut of Christmas stock flowing into the market along with the previous seasons stock being discounted to assist with cashflow.
2. The lost summer of tourism. While domestic tourism may have carried us through the slower winter months, we do not have the population or spending power to make up for our summer influx of tourists along with the lost business opportunities from the Americas Cup. This will have long lasting effects for businesses that rely on this summer influx to carry them through the winter months. They were able to access this tourist cash in 2020 before the lockdowns took effect.
3. IRD are now in a new year with the election and first 100 days behind them, how long will the COVID-19 tolerance and flexibility of 2020 last until they begin to apply pressure on those businesses and individuals with significant arrears.
4. The minimum wage is set to hit $20 from 1 April 2021, despite MBIE advising it to delay/stagger this to assist businesses with the extra cost this will impose on their bottom line.
5. Labour shortages, with a lack of overseas workers coming into the country certain industries are struggling to find staff for jobs that New Zealanders are either unwilling or unable to do at that price point or are lacking the necessary skills.

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

If you/your client has closed down a business and needs some advice on what to do with the company (with creditors remaining or possibly a capital gain), we are available.

With the NZ election behind us and certainty of which party will maintain the lead in government, we move into a busy Christmas period. The wage subsidy is beginning to fall off. From September we are starting to see businesses having to stand on their own two feet once again.

From an industry standpoint of the economy what are we expecting to see for businesses over this time and into 2021?

As we all know the NZ government has injected massive amounts of cash into the NZ economy in a reasonable short time frame propping up a number of industries and supporting our job market. Because of this, unemployment figures continue to stay subdued with September quarter figures set at 5.3%. A large chunk of the unemployment is coming from a select few sectors that were heavily affected by the border closures and lockdowns (tourism, hospitality, accommodation, retail, entertainment).

One of the benefits of the lockdown has been that it has allowed households to save some funds over this time that has led to a bump in spending from these savings and funds normally used for overseas travel. This spending has been focused around big ticket items for around the house and domestic travel. Unfortunately, this type of spending is something that happens every few years as the big-ticket items typically last a number of years so while there will be an initial bump with the saving, it is not something that can realistically continue year on year.

From the business perspective, the low interest rates currently on offer from the banks have made access to funds easier along with the mortgage deferral scheme for those operators in need. The lower interest rates have also led to a bumper housing market across a number of regions that has a positive affect on the economy as homeowners feel equity rich. It is expected that the interest rates will remain low for the next few years to come.

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

Graphs

Corporate Insolvencies

Corporate insolvencies remain lower than 2019 & 2018 levels, with a drop in appointments in the lead up to the election which is typical.

Total Insolvencies

Out of interest we ran the total insolvencies from the 2017 election vs the 2020 election, it seems hard to believe that from an economic standpoint there have been less insolvencies in 2020 than there were in 2017. Is the 2020 economy in a better position than the 2017 economy? Probably not, so the obvious answer is that the government assistance provided to date continues to prop up a number of businesses and individuals.

Corporate Winding Up Applications

September and October saw a lift in the number of creditors initiating winding up proceedings against debtors. Of the 199 advertised in 2020, 113 have ended up with liquidators or receivers being appointed. You will note that in August, September and October there were no winding up applications advertised by the IRD which is common in the lead up to an election, along with the increased leniency they have shown as the result of Covid-19. We expect to see that backlog get remedied in the coming months.

Personal Insolvencies

The September drop off remains at odds with the projections generated by MBIE and discussed in our last article as personal insolvency figures across the board drop off. We expect to get the October figures mid-month.

McDonald Vague have a team of licenced insolvency practitioners with experience across corporate insolvencies and assisting individuals with alternative options to bankruptcy.  We can assist with company compromises, liquidations, voluntary administration, and personal proposals.

In May 2020, non-essential services reopened for trading. New Zealand moved from Level 4 to Level 3 on 27 April 2020 and the drop down to Level 2 happened on 13 May 2020. The “new normal” at Level 1 started on 9 June 2020.

Because of the Government assistance that has been provided to businesses, we anticipate that the economic effects of the Lockdown will be seen over a longer period of time than in previous economic slowdowns. Many businesses experienced a surge in trading activity when they reopened at Level 3 and another spike in revenue at the start of Level 2 but few businesses have seen consistent revenue week on week since reopening.

The budget announcement was made on 14 May 2020 and further support measures for businesses were also announced in May 2020. Some economists are now predicting that the coming recession will be deeper, and the economic recovery will be longer, than Treasury’s current forecasts. Many SMEs that have been taking a “wait and see” approach are hoping that further Government financial support will continue to be made available and that that support will be enough to allow their revenue to return so that their businesses can survive in the medium term.

So how have New Zealand’s May 2020 company insolvency figures shaped up as the country moved down the alert levels?

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

There were 158 company insolvency appointments in May 2020, which is roughly 22% lower than the appointments in May 2019 (193) and May 2018 (204).

Insolvency appointments to May 2020 total 673, which is 17% fewer than 2019 (806) and 28% fewer than in 2018 (923).

Personal Insolvencies - Bankruptcy

The personal insolvency figures for May 2020 have not yet been released by the Government. In both May 2019 and May 2018, there was an increase in the number of personal insolvencies when compared to April and June of the same years.

Since the beginning of 2018, month on month, the proportion of people entering into the No Asset Procedure (for those with up to $50,000 in debt, no assets, and no ability to repay their debts) and those being made bankrupt has been fairly evenly split. If the corporate insolvency figures increase as predicted, we expect that bankruptcies will make up a larger proportion of the personal insolvencies going forward. We anticipate that corporate insolvency rates will increase before personal insolvency rates do, as many creditors do not call upon personal guarantees until after a company has failed.

Moving Forward – What Might Be On The Horizon?

The Government assistance for businesses announced to date has contributed to the low number of insolvencies in the year to date. Once that financial assistance has been depleted, most will feel the recession start to bite. In preparation, businesses should be evaluating their revenue forecasts and looking at reducing their overheads and streamlining their businesses so that they are in the best position they can be moving forward.

There will be opportunities ahead for those in a position to take advantage of them. Those that are not currently taking active steps to prepare for the future risk waiting too long.

In the last few weeks, we have seen an increase in the number of clients who are moving away from the “wait and see” approach and have decided to actively prepare for the months ahead. We are currently assisting clients in a number of different industries to address the vulnerabilities they are seeing in their businesses. The earlier these concerns are acknowledged and addressed, the more options businesses have to deal with these issues.

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

Are you likely to be forced to repay to a liquidator money previously received from a customer?

It has become relatively common for suppliers and others to be challenged by liquidators to repay funds that they have previously been paid.

Prior to the change of rules in late 2007, the contentious issue was determining what "the ordinary course of business" meant. The decisions surrounding liquidators' challenges did not discourage conventional or usual debt collection measures.

Since the McEntee Hire decision in August 2010 we have observed an increase in liquidators sending out letters seeking to challenge transactions.

It is disappointing that some liquidators seem to take an approach of challenging all payments made, rather than first considering whether there has been an actual preference to the creditor, any continuing business relationship (ie whether the contract was ongoing at the time of payment), industry practice (which may tolerate delays of payments), evidence and knowledge of credit concern, the nature of payments and trading history.

Consequently, we are sometimes asked to assist in reviewing Insolvent Transaction challenges taken by other liquidators.

As a result of such challenges, the Insolvent Transactions regime can be seen by suppliers in particular, to be at odds with prudent credit management. This is a conclusion that could be reached in light of the McEntee decision, but is that conclusion right?

We have also observed that suppliers are belatedly endeavouring to patch up holes in their procedures, in particular by late PPSR registrations of additional security rights to secure past indebtedness.

In our opinion, in some circumstances knowledge of a debtor's insolvency may be hard to avoid. It follows that the longer a debt goes unpaid the more likely it is that the supplier will be considered to be aware of the customer's inability to convert non-cash assets into cash, ie insolvency.

We consider that the consistent use of proper terms of trade, normal timely debt collection procedures, and asset protection mechanisms may protect a supplier from successful Insolvent Transaction challenges.

The regime therefore can be seen to encourage stricter credit terms and management, well defined trading terms and better security management. The mere fact of applying pressure to get payment does not in itself compel the conclusion that the payment is an Insolvent Transaction.

Insolvent Transactions regime

In an insolvent liquidation, unsecured creditors are treated equally and the company's assets are shared on a pro rata (or 'pari passu') basis. The term that is often used is to stop a creditor from 'stealing a march' on others. Where payments give individual creditors a preference, the regime enables a liquidator to set aside and claw back payments made within the two years before liquidation.

One feature of the current regime is the running account concept. This allows for the net effect of a series of invoices and payments in a "continuing business relationship" to be considered as one transaction. This is designed to stop liquidators challenging a series of payments to the same supplier, instead putting the focus on what the overall effect of the transactions was.

A continuing business relationship is established through a background of trading between the supplier and the customer. Factors such as the basis for the relationship, the business purpose and the character of the relationship, length of the relationship and frequency of transactions will usually be taken into account.

In McEntee Hire, it was agreed that a continuing business relationship existed, as McEntee had traded with its customer for over three years, with many sales and payments regularly in that period. However, the Court found that the continuing business relationship ended when McEntee issued a stop credit notice and referred the debt to a collection agency. It was noted that this was done four months after the last invoice for supply had been issued, and in circumstances where its policy in cases of suspected insolvency was to refer the debt to a collection agency.

McEntee argued that the stop credit notice was not the end of the continuing business relationship but more to "rebalance" and "preserve" the trading relationship, and did not reflect any concerns about the company's solvency. The liquidators successfully argued that payments were not being made to induce further supplies, and the relationship had shifted to one of pure debt collection.

We speculate that had the right to stop credit been with regard to a credit limit or other credit terms, and the referral to a debt collection agency been earlier and as a routine referral, the continuing business relationship may have endured.

Running account

An Insolvent Transaction claim is calculated in a number of ways; firstly where there is no running account, as a sum of payments, secondly when there is a running account, the net difference between the opening and closing balances and lastly, at the point of peak indebtedness - being the difference between the peak and the closing balance. This is illustrated as follows:-

Possible scenarios:-

1. No running account - sum of all payments $120,000
2. Simple running account (opening - closing) $10,000
3. Peak indebtedness (point of peak indebtedness - closing balance) $50,000

In this example, a supplier commenced trading with a customer in 2010. By November 2011, the customer owed the supplier $30,000. Six months later the customer owed $40,000. In June 2012, the company is placed into liquidation owing the supplier $20,000. Using this example, a liquidator could argue peak indebtedness and say the supplier was preferred by $50,000. The liquidator cannot cherry- pick a transaction (eg the April 2012 $60,000 payment) when there is a running account, and ignore that the creditor continued to trade with the company as a result of the payments made. Australian authorities have said, however, that liquidators ought to cherry-pick a date of peak indebtedness that best suits the general body of creditors. Section 292(4B) of the Companies Act 1993 does not limit a liquidator's ability to do so.

Summary

Insolvent Transactions will be a contentious but necessary feature of insolvency law for the foreseeable future. Creditors should review trade terms, and ensure that they have policies and debt collection processes and procedures that minimise the ability for liquidators to claw back valuable funds.

DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.