In New Zealand, the roles of shadow directors and de facto directors hold significant importance, especially when a company faces insolvency. Both these roles can carry substantial legal responsibilities and liabilities, often surprising individuals who may not even realize they are acting as directors. This article discusses the definitions, differences, and potential risks associated with these roles.

Definitions and Differences

Shadow Directors
A shadow director is a person who is not formally appointed as a director but whose instructions or directions are typically followed by the officially appointed directors of the company. Essentially, a shadow director operates behind the scenes, influencing the company's decisions without holding an official title.

De Facto Directors
A de facto director, on the other hand, is someone who acts as a director without having been formally appointed. This individual undertakes the duties and responsibilities of a director and is involved in the company’s governance and decision-making processes. The key distinction here is their active participation in the company's affairs, which aligns with the role of a formally appointed director.

Examples to Illustrate

Shadow Director Example:
Consider a scenario where a major shareholder of a company, who is not officially listed as a director, regularly advises the board on strategic decisions, and the board typically acts on these suggestions. Even though this shareholder does not hold a formal directorial title, their influence on the board's decisions could render them a shadow director.

De Facto Director Example:
Imagine an individual who, without formal appointment, regularly attends board meetings, makes key business decisions, and represents the company in negotiations. This person functions as a director in every practical sense, despite the lack of formal appointment, thereby qualifying as a de facto director.

Risks Associated with Insolvency

When a company becomes insolvent, the risks for shadow and de facto directors are substantial. Both can be held liable for the company's debts and may face legal consequences similar to those faced by formally appointed directors. Some specific risks include:

1. Personal Liability: Shadow and de facto directors can be held personally liable for the company’s debts if it is determined that they failed to act in the best interests of the company, especially in the lead-up to insolvency.

2. Breach of Directors' Duties: Under the Companies Act 1993, directors (including shadow and de facto) have statutory duties, such as acting in good faith and in the best interests of the company. Breaches of these duties can result in significant legal penalties.

3. Voidable Transactions: Transactions entered into by the company during the period leading up to insolvency can be voided if they are deemed to have unfairly benefited certain parties, potentially implicating shadow and de facto directors who influenced these decisions.

An employee or contractor can be found to be a de facto director based on significant involvement in a company's affairs, including making critical financial decisions and dealing with creditors.   This can lead to potential liability for breaching duties as a director, demonstrating the serious consequences of assuming directorial responsibilities without formal appointment.

Conclusion

In the context of New Zealand law, the roles of shadow and de facto directors carry substantial legal responsibilities, particularly when a company faces insolvency. Understanding these roles and the associated risks is crucial for individuals who influence or manage company decisions without formal directorial titles.  It is important to clearly define and understand your role within a company.  If you are in a role that could be deemed to be a director role and have concerns that with the company's solvency gain advice.  Our team is here to help.

The impacts of global unrest and overseas bank failures can have various implications for businesses in New Zealand:

1. Financial Instability:
• Market Volatility: Global unrest can lead to financial market volatility, impacting investment portfolios and affecting businesses relying on international trade.
• Credit Availability: Overseas bank failures or financial crises may tighten credit availability, affecting businesses seeking loans or lines of credit from international financial institutions.
• Exchange Rate Fluctuations: Currency fluctuations due to global instability can impact import/export businesses, affecting profit margins and pricing strategies.

2. Supply Chain Disruptions:
• Dependency on Imports: New Zealand businesses reliant on imports may face challenges due to disruptions in global supply chains, leading to delays in raw materials or finished goods.
• Export Market Instability: Instability in international markets could reduce demand for New Zealand exports, affecting sales and revenue streams.

3. Economic Impact:
• Decreased Consumer Confidence: Global uncertainties can lead to reduced consumer confidence, impacting spending habits and local businesses' sales.
• Investment Climate: Uncertainty may lead to a cautious investment climate, affecting local businesses seeking foreign investments or partnerships.

4. Financial Security and Risk Management:
• Risk Mitigation: Businesses need to review their risk management strategies, diversify suppliers, and explore hedging options to mitigate currency and market risks.
• Reviewing Banking Relationships: Assessing banking relationships and considering local banking options for stability and security in case of global banking uncertainties.

5. Regulatory Changes:
• Impact on Regulations: International financial crises may prompt changes in global financial regulations, which could indirectly impact New Zealand businesses, especially those operating internationally.

6. Government Interventions:
• Policy Changes: Government interventions or policy adjustments may occur to counteract the effects of global instability, affecting businesses through changes in taxation, trade policies, or economic stimulus packages.

In summary, global unrest and overseas bank failures can create ripple effects on New Zealand businesses through financial instability, supply chain disruptions, economic impacts, and changes in regulations. To mitigate these effects, businesses should focus on diversification, risk management, reviewing financial strategies, and staying informed about global developments impacting their operations. Additionally, maintaining flexibility and agility in responding to changing market conditions is crucial for business resilience in uncertain times.

If your company has been significantly impacted and is struggling contact one of the MVP team to discuss the options.

Running a business successfully is a complex and challenging task that requires careful planning, strategic thinking, and effective management.  Sometimes it can feel like you're barely keeping your head above water.

One of the key challenges that business owners and managers face is ensuring that the company remains financially stable and solvent over the long term. Unfortunately, many businesses fail to recognize the warning signs of financial trouble until it's too late.

One common mistake that many businesses make is overlooking warning signs or failing to address them in a timely and effective manner. For example, a company may continue to invest in an unprofitable product line or market, or delay making necessary cost-cutting measures until it's too late. In some cases, business owners may also ignore the advice of financial experts or fail to seek out professional help until it's too late.

As the saying goes, "barring a major disaster, a business doesn't go from being perfectly fine to insolvent overnight." This means that there are usually warning signs or "precipitating events" that lead to financial trouble. These events may include declining sales, increased competition, rising costs, poor management decisions, or other factors that impact the company's bottom line.  If you're experiencing any of the following warning signs, your business could already be in trouble and it's time to take action:

• Struggling to fulfill orders because you don't have the funds to buy raw materials.
• Being cut off by creditors for not paying on time.
• Unable to accept new orders.
• Being threatened with legal action.
• Under review by the IRD.
• Your accountant looks concerned.
• Fighting with the bank over your overdraft facility.
• Forced to undergo a review by your bank or creditors.

Don't wait until it's too late to save your business. Start by negotiating compromises with your creditors and working towards paying off your business debt. It's also important to speak with a qualified professional, like the team at McDonald Vague, who can provide advice on how to avoid insolvency and improve your cash flow.

Remember, your business doesn't have to fail. By taking action now and seeking professional advice, you can turn things around and set your business on a path to success.

In conclusion, running a financially stable and successful business requires careful planning, effective management, and proactive risk management. To avoid business failure, it's essential for business owners and managers to stay vigilant and proactive in managing their finances. This means regularly reviewing financial statements and performance metrics, identifying potential risks and challenges, and taking steps to address them before they become major problems. It also means seeking out the advice and expertise of financial professionals, such as accountants or financial advisors, who can help identify potential issues and provide guidance on how to address them.

By staying vigilant and addressing warning signs and potential problems in a timely and strategic manner, businesses can avoid the pitfalls of financial instability and position themselves for long-term success.

Key Performance Indicators (KPIs) are quantifiable measurements you can make that help you understand how your company is performing. An effective KPI has to be:

- measurable and well-defined.
- crucial to achieving your goals.
- applicable to your particular business.

When you think about the main reasons for company failure, they often come back to not being able to track how the company is performing. Without a defined method for measuring success and spotting issues, you might not see problems until they are critical. These financial performance indicators can help you monitor your results and gain a better overview of your company.

There are literally thousands of KPIs you could track and monitor. There are scientific calculators that are proven to predict insolvency. Which financial performance indicators should you be monitoring to ensure your company remains solvent? Does your company meet the Zscore test?

DEBT TO EQUITY RATIO

Formula: Liabilities / shareholder equity

This KPI measures the amount of equity in a business relative to its debts. It’s one of the most important financial performance indicators to consider when looking at your company.

CURRENT RATIO

Formula: Current assets / current liabilities

What ability do you have to pay out current obligations? Your current or “cash asset” ratio shows you in one simple formula – the higher the ratio, the more easily you can cover your current obligations. (As a guide, 2:1 is considered a desirable level, with current assets being more than double liabilities.)

While a high ratio is usually desirable, there are some factors that can mean it’s actually a detriment (namely, slow-moving stocks piling up, cash balances remaining idle). Any conclusions drawn from your current ratio need to take into account the nature of your business, your products, and seasonal fluctuations that may impact the result.

ACID TEST RATIO

Formula: (Current assets – Inventories) / Current liabilities

Also known as the “quick” or “quick assets” ratio, this KPI measures the short term liquidity of your firm. The higher the ratio, the better situation your business is in.

NET PROFIT MARGIN

Formula: Net profit / net sales

How efficient is your business’ cost control? The net profit margin reveals the amount of your revenue that is in actual profit. The net profit KPI can be a great tool to measure your profitability against other businesses in the same industry.

DEBT SERVICE RATIO

Formula: Earnings before interest and taxes (EBIT) / Fixed interest charges

What capability does your business have to service your long-term loans? The “debt service ratio” (also known as “interest coverage ratio”) shows how many times the interest charges can be covered by your company’s earnings.

DEBT TO TOTAL FUNDS RATIO

Formula: Total assets / total liabilities.

As a business, you have responsibilities under the Companies Act to remain solvent. This KPI can help you measure your solvency and ensure you’re not in trouble. It’s similar to the current ratio, but takes into account all assets and liabilities, not just those that are current.

Z SCORE CALCULATOR

Your Z Score is a formula that incorporates five key KPIs into a single score, in order to give a good indication of financial health.

- The Z Score is a scientifically based formula that measures how closely a firm resembles other firms that have faced insolvency and failure. It is not intended to predict insolvency, but rather uses probability in determining a company's financial state.
- The model uses five financial ratios combined in a specific way to produce a single number. This number, called the Z Score, is a general measure of corporate financial health.
- Discover your Z Score: Click here to take the test.

USEFUL TOOLS FOR BUSINESS PERFORMANCE INDICATORS

You can use these tools to help you set your own KPIs.

- Industry benchmarking: This tool from the IRD allows you to benchmark different KPIs against other businesses in your industry across the country. It allows you to zero in on problem areas.
- ANZ financial benchmarking tools: Simple tools to assist you in benchmarking your company’s performance against your industry and your competitors.
- ANZ Truckometer: This tool incorporates a set of economic indicators using traffic data around the country, and operates on a principle that demonstrates the correlation between traffic flow and economic activity.
- Data for business: From Statistics NZ, Data for Business pulls together business statistics to help you make decisions about your company.
- Break even point calculator: Handy tool to help you figure out how much you need to sell in order to break even and meet your overheads.
There are many other KPIs that may be valuable for your business to track – talk to your accountant or financial team about which might be most beneficial for your company.

Are you worried your business is heading for financial trouble? Contact us now to discuss your situation.

August 2021 has been a story of two halves. Between 1 and 17 August 2021, the outlook for economic growth was continuing to look positive. On 17 August 2021, the government called a press conference and, at 6:00 pm that evening, Jacinda Ardern told New Zealand that the country would be moving to alert Level 4 from 11:59 om that night. From 18 August 2021, most businesses were again forced to shut their premises as we returned to Level 4 lockdown and our home bubbles. Those of us that could, readjusted to working from home but Level 4 left many businesses unable to operate. The short notice also meant that many businesses – including those in hospitality, agriculture (who do not supply to the supermarkets), and floriculture – suffered huge losses of product as a result of the lockdown announcement.

Since the COVID-19 pandemic began, at least part of New Zealand has been in an Alert Level 3 or Level 4 lockdown for a total of 91 days to the end of August 2021. All of September and at least part of October will add to this total.

According to Statistics New Zealand, electronic card transactions in August 2021 was $6.433 billion, down $1.257 billion when compared to July 2021. Spending on consumables was up by $216 million but spending in all other categories were down:

The increase in the OCR that was being anticipated in the first half of August 2021 did not eventuate at the 18 August 2021 OCR announcement, a decision made off the back of the just re-introduced Level 4 lockdown. The Reserve Bank confirmed that the OCR is below the neutral interest rate, estimated to be around 2 percent, and said that its economic projections imply OCR increases are coming. The language used at the OCR review in August 2021 strongly suggested that the OCR could increase as early as 6 October 2021, when the OCR is next reviewed. We will know shortly whether the Level 4 and Level 3 lockdowns, especially in Auckland, have caused further delays to the anticipated OCR increases. Further increases to mortgage lending rates by the banks in September 2021 indicate that expect the answer to be no.

If you want to have a free chat about any issues 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..

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

In August 2021, New Zealand spent 14 days in Alert Level 3 or higher. While the total number of corporate insolvency appointments in August was only down by 11.4 percent when compared to July 2021, the appointments over the lockdown period account for just 29.5 percent of the month’s total appointments.

There were four receiverships in August 2021, all of which started before the country went into Alert Level 4 lockdown. Four companies that entered voluntary administration earlier this year were put into liquidation at their watershed meetings this month. Of the two voluntary administrations in August 2021, one of the companies is now in liquidation and in receivership and the other has not yet reported on the outcome of its watershed meeting.

If the country had not gone into lockdown in the middle of August 2021, we expect that the appointment numbers would have been closer to the August 2019 (149) and August 2020 (154) appointments and the year to date appointments would have continued to approach the level of appointments in the year to date in 2019 and 2020.

 Notable insolvency appointments in August:
- Three of the Sacred Hill Vineyard entities have been placed into liquidation. These companies have been in receivership since May 2021.
- WNMC Limited (Wellington Night Market Cuba) is no longer trading and has been put into liquidation.
- Diners Club (NZ) Limited, who used to provide credit card services through The Warehouse, is going through a solvent liquidation.

Personal Insolvencies - Bankruptcy

The personal insolvency numbers have been fairly consistent since April 2021. The number of bankruptcies in August 2021 were lower than in July but the number of Debt Repayment Orders was higher.

As the cost of living continues to increase and businesses are put under more pressure, we expect that there will be more payment defaults and demands made on guarantors. Personal insolvencies are likely to increase as a result.

Winding Up Applications

The number of liquidation applications was the lowest year to date in August 2021, with only 41 advertisements appearing. By way of comparison, there were 75 advertisements in July 2021 and 83 advertisements in June 2021. The IRD advertised half as many applications in August 2021 as it did in July 2021.

We expect that the inability to serve documents at Alert Level 4 has affected the August advertising figures. The extension of Alert Level 4 into September and Alert Level 3 into October 2021, together with the IRD and many other businesses putting debt enforcement on hold while businesses are affected by lockdowns, will mean that advertising of winding up applications will be affected by the lockdowns for some time.

Many businesses are suffering from lower turnover because of lockdown why still incurring fixed overheads and operating expenses, which means many businesses have been operating at a loss for some time now. A number of Auckland retail businesses also lost out on potential sales when Auckland was in Alert Level 4 so could not operate but the rest of New Zealand was at Alert Level 2 and able to dispatch goods to Auckland customers.

While everyone understands that most businesses are doing it tough, the situation is precarious. For every business that closes its doors, employees will lose their jobs. While a company’s suppliers may be able to provide some breathing space in the short term in the hopes that the business’ cash flow will recover, that supplier will also have to deal with its own creditors. To date, we have not seen very many iconic businesses fail in New Zealand as a result of COVID-19.

When Mainzeal collapsed, there was a domino effect through the market, the effects of which are still at play. It remains to be seen whether, when (or if) the first large New Zealand business fails because of the COVID-19 pandemic, the house of cards will come tumbling down.

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.

• a six month principal and interest payment holiday for mortgage holders and small and medium sized enterprises (SMEs) businesses whose incomes have been affected by the economic disruption from COVID-19, and 
• a $6.25b Business Finance Guarantee Scheme for SMEs, to protect jobs and support the economy through this unprecedented time.  

• the business was not or stopped being entitled to the Wage Subsidy, 
• the application contained false or misleading information, or 
• the business receives business interruption insurance.  

We are all responding to the various impacts of Covid-19 containment measures over the past days. The Government has ordered wide ranging travel and event restrictions although it is important to note the restrictions apply to people and not goods and services.

NZ is in the early stages of the coronavirus outbreak but many small and medium-sized businesses are already feeling its effects on cashflow to which will be added impending cost increases such as the 1 April increase in the minimum wage.

From the commentary we have seen it is possible that our summer has insulated us from the worst of the virus to date, however that could change as we move into colder temperatures. It is also likely that spending across all sectors (except perhaps government) is down as families and individuals react to the uncertainty that is emerging. Certainly hospitality, events, and tourism are taking a big hit. In some areas, industries such as logging have not worked for 5 weeks or so.

Discussion has been that a 30% drop in revenue is forecast. If that becomes reality many businesses large and small will struggle. The message to support businesses is for consumers to try to live as normally as possible and that includes maintaining your spending habits as best and as safely as you can, and to look after yourself and those around you. In other words “Support your local”. This could reduce the harm that enforced isolation has on the country and its communities and businesses.

The first option to assist you and/or your business is to check what insurances you have to cover your business and personal issues. Read Here - Chapman Tripp - COVID-19 business protection check list

Banks and financiers may also be able assist. The RB measures to reduce the interest rate will probably have a small impact. The larger impact will be from the RB deferring the increase in capital that banks hold, and will support any increase in the banks’ ability but not necessarily willingness to lend further or to reschedule repayments, as we expect that the fundamental rules around lending will continue to apply. So a sound underlying business with good history and prospects, security and cashflow will be required.

The government support package announced yesterday is aimed to inject money into the economy to support job retention. The sick leave and one off 12 week wage subsidy packages look to be available to every business that has experienced or expects to experience a 30% or more drop in revenue due to Covid 19. There are limits to how much each of the packages will assist for example the wages subsidy is capped at $7,029.60 per employee working 20 hours or more per week and $150,000 per employer. Assuming a 40 hour week the subsidy will assist business payroll funding by paying $14.62 per hour per employee up to a maximum of $150,000. As the subsidy does not abate, the per hour impact of the subsidy increases if employees work less hours until the minimum subsidy per employee of $350.00 per week for employees working less than 20 hours per week kicks in.

Some steps toward mitigation need to have been taken such as discussions with your bank, and you have a best endeavours obligation to maintain employment levels and to pay each employee at least 80% of their normal income for the subsidy period.

While property owners receive some other income tax support with cashflow impacts into the years ahead, unfortunately for those who lease there is no other support than the wages subsidy.

For businesses which have lost large percentages of revenue and support either a large number of employees, or have high fixed overheads the government measures will make some difference but probably not enough to trade without running the risk of breaching directors duties, if the company trades while insolvent.

So despite the support package it seems inevitable that some businesses will close, and possibly never re open unless arrangements can be made with their creditors.

If maintaining your business is too hard – there are a range of options

If your business was facing difficult times pre coronavirus and the impact of coronavirus is the last straw, then we can provide a number of options to wind up your company. If you think you can trade out and it is time that is needed to pay suppliers, then a formal or informal compromise with creditors may be an answer.

It is our business to help struggling businesses and to provide stress free advice. We seek to bring an end to messy situations and we are here to support you/your business. We may not always have the answer you want to hear, but we can offer options.

Some early advice is:
* If you are having difficulties or concerns about meeting your normal tax obligations due to the effects of COVID-19, Inland Revenue has a range of ways to help depending on your circumstances.
* Get in contact with your bank if you’re experiencing cash flow issues, especially in regards to loans repayments or lack of funding. They might be able to help or put you in touch with someone who can.
* Support local business
* Be health conscious
* Get advice if by trading you could be creating serous loss to suppliers/creditors
* Seek advice from your Chartered Accountant or Trusted advisor

Options for insolvent/struggling companies are:
* Company Compromises
* Voluntary Administration
* Liquidation
* Receivership

We assist companies and individuals facing financial difficulties through a range of insolvency services including liquidations, company compromises and receiverships. Our specialist advisors will guide you through your options.

Benjamin Franklin said, “There are only two certainties in life – death and taxes”. Whilst failure to pay the second shouldn’t lead to the first, it can cause significant problems for individuals, as outlined in a recent Court decision.

Nicola Joy Dargie was sentenced to two years six months imprisonment for failing to pay PAYE deducted from employees’ salary to the IRD.

Ms Dargie’s explanation for the non-payment of $740,000, which occurred over a period of 10 years, was that she had withheld the tax payments from the IRD to keep her employees in a job.

It is a practice that we encounter on a reasonably regular basis in liquidations - directors using the amounts they have deducted from their employees’ wages for things such as PAYE, Kiwisaver, Child Support and Student Loans, to boost the cashflow of their business. Their priority being to keep suppliers paid so they can continue to employ staff.

There are several problems with this course of action.

First and foremost, the funds are not the directors, or the company’s, to spend. They are the employees’ funds deducted from their wage entitlement for specific purposes and should be held in trust.

Secondly, there can be severe penalties imposed on directors who follow this course, as evidenced by the sentence imposed on Ms Dargie.

Thirdly, even if the intention was that the payments would be withheld for only a short time, to get through a tough trading period for example, the penalties and interest charged by the IRD for non-payment are at such a level that it does not make economic sense to do it. It would be better (and safer) to go to the bank for a short-term loan.

By continuing to operate a business that is not able to pay its debts, including taxes, as they fall due, directors expose themselves to potential claims against them personally that they have breached their duties as directors by trading whilst insolvent.

The amounts deducted from employees’ wages, and, to a similar degree, the GST collected on sales, are not funds available to a company to cover operating expenses and pay trade suppliers. These funds should be put into a separate account and only accessed to pay to the IRD as they fall due.

If directors find themselves in the position of having to dip into those funds to pay other expenses, then they need to review the financial position of the company to assess its on-going viability.

If you are in arrears with PAYE you are in a far better position if you consult with IRD and reach an instalment plan on arrears. If hardship applies, then notify IRD early on. If the company is insolvent, consult an accredited insolvency practitioner.

If you would like more information or advice on managing tax payments and the solvency of your business, please contact one of the team at McDonald Vague.

In our previous article, Internal Fraud – The Threat from Within (April 2017), we gave a broad outline of the basic steps that can be taken to help reduce the chances of internal fraud and increase the chances of fraud being identified if it is happening.

This article sets out in a bit more detail some of the policies and procedures you should consider implementing in your business, if they are not already in place. The size of your business, and the number of employees involved, will have a bearing on what can be done.

EMPLOYING STAFF:

The employees of a company can be its greatest asset or its greatest liability. Employing the wrong person can have a devastating effect on the well-being of the company if they are able to cause financial or reputational damage.

There are no employment policies or procedures that will guarantee that an employee will not cause problems but having a good, robust process in place when employing a new person will give you the best chance of identifying issues before the candidate starts work.

• Do due diligence and make a proper assessment of the applicants who are applying for the position. Are there any gaps in their CV that need explanation?

• Establish the relationship between the applicant and the named referees and make personal contact with each referee. Are they independent enough that you can rely on their assessment of the applicant?

• Make any offer of employment conditional on getting a clear reference from the applicant’s current employer if they have asked you not to contact them until a position is offered. If the applicant won’t accept that condition you would want to know why.

• Take your time to assess the trustworthiness of the new employee before handing over access to bank accounts etc.

ACCOUNTING POLICIES & PROCEDURES:

As with the employment process, there are no accounting policies and procedures, other than doing everything yourself, that will absolutely prevent any form of fraud being committed by an employee but having the right ones in place should lessen the chances of it happening and increase the chances of you finding it quickly if it does.

• As far as possible, separate the duties of staff so that no individual can control all aspects of a transaction – from ordering of stock or issuing purchase orders, to receiving the supplier’s invoice, to making payment of that invoice and reconciling the bank accounts;

• If your business is a small one and there is only one person responsible for the office administration, then you personally should be the one who clears and checks the mail and the one who carries out final checks on creditor batch payments and authorises the payments to be made.

• Have set systems and procedures in place for making payments that all staff are aware of and follow;

• Conduct stock reconciliations;

• Carry out spot checks, at irregular times, to ensure policies and procedures are being followed. Remember that the higher up the management hierarchy an employee is the greater the damage they can do to the business.

• Have a “whistle blower” policy in place and ensure that all staff have the confidence to report any activity by other employees that is in breach of the systems and procedures.

• As director, ensure that you understand the company’s financial performance and position, by monitoring transactions through the company’s bank accounts and regularly obtaining and reviewing profit and loss and cashflow information for the business;

• If there is any change in the financial performance or position that is not able to be explained by the trading conditions, investigate.

CONCLUSION:

When you, as director of the company, are heavily involved in doing the work of your business, it is very easy to allow staff to look after the administration with little or no oversight, but the risks of doing so are high and the consequences, if an employee is defrauding your company, can be catastrophic.

If, from the beginning, all staff are aware of the policies and procedures that are in place and know that you will be checking on what they are doing, for their protection as much as for the business, this should reduce the chances of fraud occurring and increase the chances of identifying the fraud if it is.

If you would like more information or advice on your business systems and procedures, please contact McDonald Vague.

Colin Sanderson