If you're running a struggling business, you may feel overwhelmed and unsure of what steps to take next. It's a tough situation, but it's not uncommon, and there are options available to help you get out of it.

The first step is to assess the situation and identify the root causes of your business's struggles. This may involve reviewing your financial statements, identifying your cash flow issues, and analyzing your operations to pinpoint areas of inefficiency or waste. Once you have a clear understanding of the problems, you can begin to develop a plan to address them.

One option for getting out of a struggling business is to consider restructuring. This may involve renegotiating your debts with creditors, selling assets, or downsizing your operations. A restructuring plan can help you get back on track by reducing costs and improving cash flow.

Another option is to consider a business sale. If you're unable to turn your business around on your own, selling your business to a buyer who has the resources and expertise to take it to the next level may be a good option. This can also help you avoid the stress and financial burden of continuing to operate a business that is struggling.

If restructuring or selling your business are not viable options, you may consider a formal insolvency process. This may involve liquidation or voluntary administration. A liquidation involves winding up the affairs of the business and selling its assets to pay off creditors. A voluntary administration involves appointing an administrator to manage the affairs of the business while a plan is developed to address the financial difficulties.

At McDonald Vague, we understand the challenges that come with running a struggling business. Our team of insolvency practitioners can help you navigate the process and develop a plan to get out of the situation. We can provide guidance on restructuring options, assist with the sale of your business, and provide support throughout the insolvency process.

Don't let a struggling business drag you down. Contact us today to discuss your options and find a way forward. With the right plan in place, you can get out of a struggling business and move on to better opportunities.

The country is in the process of working its way back from the economic standstill that most industries experienced as a result of the Level 4 lockdown. For those that traded at Level 3 and Level 2, they had to shift their business models to meet the COVID-19 trading requirements. Many of those requirements squeezed margins.

In the coming months, many business owners will need to look at their businesses and decide whether to continue to trade going forward. While the Government has provided some support, recovering from lockdown is just one more hurdle for businesses that have been experiencing year on year increases in operating expenses and the minimum wage, both of which have made tight margins even tighter.

How lockdown and decreases to many people’s take home pay has affected consumer spending is not yet known.

As business owners look to the future, what can they do if they find themselves in a spot of financial hardship and what options do they have available to continue to operate while the economy recovers?

Business Restructuring and Turnaround

If a business addresses the stumbling blocks that it is facing at an early stage, many are able to work through those obstacles though decision making and implementing change.

A business restructuring or turnaround can be done by the business owners, usually with the assistance of third parties. The fact that a business is going through a restructuring or turnaround is usually only known to the company’s directors, its lenders, and its key stakeholders.

The process includes:
- assessing/reviewing the business
- identifying areas of strength and weakness within the business
- determining what areas of the business need to be changed
- assessing what changes are best suited to the business and its stakeholders
- making an action plan and implementing the decided upon changes

By undertaking a financial and strategic analysis of the company, you have the tools you need to create an action plan that maximises the return on investment in the business and improves the business’ performance.

It is important to have stakeholder buy in around the timeframes for the turnaround, the KPIs being measured, and the responsibilities of those involved in the turnaround. It is also important that the key stakeholders monitor the plan to ensure that the objectives and milestones are met and that corrective action is taken to get back on track, if targets are not met.

Business Debt Hibernation (BDH)

If a business was doing well before COVID-19 hit and now needs some breathing space to get itself back on track, entering into a BDH scheme may be the right option. While BDH does not compromise any of the business’ debts, it gives the business extra time to pay those debts off.

Creditors Compromise

If a business needs the support of its creditors as well as its lenders and key stakeholders to continue and it is not in a position to pay its creditors in full, the business’ creditors may agree to a creditor compromise. The key ingredient to a successful compromise is for the business to have a credible and achievable plan that, when implemented, is likely to result in a better return to creditors than they would receive if the company was put into liquidation.

Compromises can propose that specified unencumbered assets be sold and the net proceeds of sale be paid to creditors and/or for a third party to inject funds into the business so that creditors can receive an agreed payment in satisfaction of their debts.

Voluntary Administration (VA)

The aim of entering into a VA is for the business to enlist outside assistance to provide the business with an opportunity to restructure its debt and ultimately trade out of difficulty. VA gives a business a way to maximise the chances of the business recovering or, if that is not possible, for it to be administered for a time so that creditors receive a better return than they would from immediately liquidating the company.

A voluntary administrator may be appointed to a company by the directors, a liquidator or interim liquidator, a creditor holding security over the whole or substantially the whole of the company's property, or the Court.

Receivership

Receivers can be appointed by a creditor that holds security over the whole or substantially the whole of the company's property, which means that receivers are usually appointed by banks or private lenders. The aim of the receivers is always the same - to protect the interests of the secured creditor and ensure that the secured creditor’s debt is repaid as quickly as possible.

Liquidation

Both solvent and insolvent companies can be put into liquidation.

A company can be placed into liquidation by its shareholders (by shareholders’ resolution) or by the High Court (usually at the request of a creditor but can also be at the request of a shareholder or director of the company).

A solvent company might be placed into liquidation by its shareholders after the business has been sold, closed down, and/or reorganised for tax and/or management purposes.

An insolvent company can be put into liquidation by its shareholders by resolution, usually after the directors and/or shareholders have identified that the company is insolvent and that it is in all stakeholders’ best interests for there to be an orderly winding-down of the business’ affairs.

If a company owes an undisputed debt, the creditor can issue a statutory demand for that debt. If the debt is not paid within 15 workings days, the creditor can apply to the High Court for the company’s liquidation. If the High Court puts the company into liquidation, the liquidators nominated by the applicant are usually appointed.

If a company is facing liquidation by a creditor, the shareholders can put the company into liquidation themselves as long as they do so within 10 working days of being served with the liquidation proceedings. Some shareholders choose this option because they consider that liquidation is inevitable and liquidation by shareholder resolution allows them to appoint liquidators of their choosing.

Practical Considerations For Businesses Facing Tough Times

Early Intervention: The earlier issues are acknowledged and addressed, the more options a business has to tackle those issues and the easier they are to deal with. If you need outside assistance, seek it. In our experience, issues left unaddressed for too long can become insurmountable.

Personal Guarantees: While directors are not automatically liable to pay company debts, most directors will have some exposure to a company’s creditors because they have given personal guarantees. As a director, it is important to know what your personal exposure could be, if the company fails.

Have Up to Date Business Records: If your company’s financial information is not up to date, it is harder for you to make accurate financial decisions. If the information is up to date, you will be able to see where your money is going and where you might be able to make savings.

Review Your Business Model: Now is a good time to look at where your revenue comes from, who your ideal customer is, and whether you are catering to that customer’s wants/needs. If there is a mismatch, what changes can you implement to reach that market?

Landlords and Leases: For many businesses, rent is a large portion of their fixed outgoings. In response to COVID-19, the Government has made some amendments to the Property Law Act that affects landlords and tenants’ rights, including in relation to timeframes for terminating leases for non-payment of rent and introducing a fair reduction in rent term for some small businesses (this amendment has not yet been enacted). If you are concerned about steps being taken by your landlord, seek professional advice.

Our Offer of Support to You

If you are working through the effects of the lockdown on your business and you have questions about the Government support available or your recovery and restructuring options and you want some specialist advice, we are offering free 30-minute consultations with one of our recovery specialists. We can be reached on 0800 30 30 34 or at This email address is being protected from spambots. You need JavaScript enabled to view it..

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 

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.

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!

You wouldn’t pick a tradie on price alone so why would you pick an insolvency practitioner solely on this basis?

You expect your tradie to work to industry standards when working on your house or car so why wouldn’t you take the same care before you hand over control of a business to an insolvency practitioner, who will be dealing with your company, its assets, its creditors, and its stakeholders?

Not all insolvency practitioners are created equal. They have different levels of experience and qualifications, work in different size firms, and may or may not be accredited. If you appoint the wrong insolvency practitioners, it can be difficult to remove them. If it’s shortly after appointment, the company’s creditors may be able to appoint replacement insolvency practitioners at the initial creditors’ meeting. If not, it will likely involve a trip to the High Court. If the insolvency practitioner is not accredited, they will not have to answer to a disciplinary board.

You should expect your insolvency practitioner be law abiding and to deal with the company’s directors, shareholders, and creditors fairly and ethically. We have put together a handy list of what to look for, what to ask, and what to consider before engaging an insolvency practitioner.

WHAT SKILLS DO I NEED TO LOOK FOR IN AN INSOLVENCY PRACTITIONER?

Your insolvency practitioner should:

1. Have experience in the industry the business operates in

2. Have relevant insolvency experience, including in relation to the type of appointment you are considering and any steps you expect them to take after their appointment

3. Be an Accredited Insolvency Practitioner, either through RITANZ or CAANZ

4. Have sufficient resources behind them to properly carry out the appointment

5. Have a history of making distributions to creditors

HOW DO I CHOOSE THE RIGHT INSOLVENCY PRACTITIONER?

Ask questions, and lots of them. The more information you are able to get up front the better position you will be in when it comes time to make the decision on who you should go with.

WHAT QUESTIONS SHOULD I ASK AN INSOLVENCY PRACTITIONER?

(a) Are they members of RITANZ and Accredited Insolvency Practitioners (AIPs)? Until regulation come into force in June 2020, we recommend that you only use AIPs. AIPs are required to comply with a code of conduct that dictates the professional and ethical standards they are expected to meet. The code is enforced by Chartered Accountants Australia and New Zealand. There is a public register of AIPs on both the CAANZ and RITANZ website.

(b) What previous relevant experience do they have? There are different types of insolvency appointments (advisory, compromises, voluntary administrations, receiverships, and liquidations). If you are looking at appointing voluntary administrators, you probably do not want to appoint someone who has never done one before.

(c) What kind of qualifications and experience do they have within the firm? Depending on the type of post-appointment work that will be required, you may want to appoint AIPs that are chartered accounts, have legal knowledge, or are experienced in forensic accounting.

(d) Are they Chartered Accountants, do they have a legal background, or forensic accounting skills? The appointment may determine what kind of background you should be looking for.

(e) Do they have the resources necessary to deal with the appointment? If the business operates multiple stores across the city or the country, does the AIPs’ firm have enough staff to take on the appointment?

(f) Do they have a history of making distributions to creditors? What level of overall fees would the AIP expect to charge on the job?

FINDING THE BEST INSOLVENCY PRACTITIONER FOR YOU

It is important that the AIPs you appoint understand your personal situation and your business’ needs so they can help achieve the best result for all parties. It is important that you take your time with this decision because you will be trusting them with the business.

McDonald Vague’s directors are AIPS and Chartered Accountants. We also have three non-director AIPs and our professional staff are members of RITANZ. McDonald Vague is also a Chartered Accounting Practice and is subject to practice review.

When financial difficulties strike it can seem like everyone needs answers all at once.

If you have a company in financial trouble and need to buy some critical decision-making time to deal with your creditors, shareholders, and the IRD, you can place your company into voluntary administration.

The aim of voluntary administration is a short-term freeze on your company’s financial position while an administrator and your creditors determine the future of your business. It’s a relatively new corporate rescue measure introduced through changes to the Companies Act (1993) in 2007.

Voluntary administration: getting started

To start voluntary administration proceedings, an administrator can be appointed by the board of directors, a liquidator, or by applying to the High Court. The administrator is then given full control of the business, and acting independently of the company and creditors tries to work out a way to either save the company, or get a better return for creditors than they would have received from liquidation proceedings.

After the short voluntary administration period, control of your company is either returned to the directors, is placed in liquidation, or enters into a company arrangement to prevent liquidation proceedings.

While your company is under voluntary administration, it cannot be placed into liquidation and creditors cannot take action against you to recover debts. Your business premises or company property also cannot be seized or reclaimed. Essentially, voluntary administration grants time to find a way forward for your business.

Since 2007, very few businesses have opted for voluntary administration as it does come with some downsides. It’s an expensive process, and while the business may survive, shareholders have almost certainly lost their investment while the IRD gains preferential creditor status.

What to expect during voluntary administration

After voluntary administration is declared, the first creditors’ meeting must be called within eight working days, followed by a watershed meeting usually within 20 working days.

At the first meeting the administrator will declare any conflicts of interest, and their relationship, if any, with the company in administration. At this stage the creditors can vote to replace the administrator. The directors’ must hand over all relevant financial information, and cooperate with the administrator as they investigate the company’s activities. Depending on the number of creditors, they can choose whether to appoint a creditor’s committee to consult with the administrator in an effort to simplify the reporting process.

The administrator can make recommendations, restructure the company or make changes as they see fit if they believe it will make the business more profitable and give a better return to creditors.

The watershed meeting is for creditors to decide the future of the company. Depending on the administrator’s findings and feedback creditors can vote to:

• - Give control back to the directors and end the administration.
• - Organise a company arrangement, to ensure certain debts are repaid.
• - Appoint a liquidator.

If your company is struggling and creditors are demanding answers, your best option is to seek independent advice and learn about all your options. At McDonald Vague we can advise whether voluntary administration is right for your situation, or whether another course of action is better for you.

For more information about options if you have a company in financial trouble, download our FREE Guide for NZ Companies in Financial Difficulty.

It is an unfortunate fact that many companies experience financial difficulties at times.  Often the directors/shareholders do not realise that there are a number of options available to them.  This article provides an overview of the various options for distressed companies.  

A compromise is an agreement between a company and its creditors.  The purpose is to enable a company to trade out of its financial difficulties and thus avoid administration, receivership or liquidation.  In this way the company can survive into the future and provide continuing business to creditors.  

There are two basic features of most compromises:  

• Creditors will be repaid in full or in part over a period.  If creditors are paid in part they write off the balance of their debt;
• During the term of the compromise the company's debts are frozen and no creditor may take any action against the company.

Usually, the directors of a company decide to allow the company to enter into a compromise, subject to creditor approval. Creditors will only approve if they believe that they will receive more money than in an administration, receivership or liquidation.  

Compromises are governed by Part 14 of the Companies Act 1993.  Each class of creditors affected must vote as a class.  Classes can include trade creditors, landlords, employees for preferential wages and holiday pay, Inland Revenue for preferential GST and PAYE, hire purchase creditors and other secured creditors.  

For a compromise to be approved, a majority in number representing 75% in value of each class of creditors must vote in favour of the proposal.  

A creditor's compromise can be a good option for businesses that are fundamentally sound, but are experiencing financial difficulty.  

Voluntary administration   

Voluntary administration is a relatively new rehabilitation mechanism that was introduced into the Companies Act 1993 about seven years ago.  An administrator may be appointed by a distressed company's directors, a secured creditor holding a charge over all or substantially all of the company's property, a liquidator or the Court.  

The aim of voluntary administration is to maximise the chances of the company (or its business) continuing in existence, or if this is not possible, for creditors to receive a better return than in a liquidation.  It is an interim measure during which creditors' rights to enforce charges, repossess assets or enforce guarantees are restricted.  A General Security Agreement ("GSA") holder may, however, appoint a receiver within 10 working days of the administration commencing.  It is therefore critical for the administrator to have the support of any GSA holders.  

Once a company enters into voluntary administration the directors can only act with the written permission of the administrator.  The administrator takes control of the company's business and has 25 working days to complete an investigation and provide an opinion on the most beneficial course of action for creditors.  This will be one of three options:  

• Have the company enter into a Deed of Company Arrangement ("DOCA") with creditors;
• Put the company into liquidation; or
• Return the company to its directors (this is very rare).

A DOCA is an agreement between the company and its creditors.  It is the responsibility of the deed administrator to ensure that the company adheres to the DOCA's terms and conditions.  

Receivership   

A receivership appointment is made by a secured creditor who has been granted a General Security Agreement ("GSA") over the company's assets.  The GSA holder is usually a financial institution or a private lender.  

The conduct of receivers is governed by the Receiverships Act 1993.  A receiver has control over the company's assets subject to the GSA under which they have been appointed.  The receiver's primary purpose is to recover funds for the secured creditor, however, the receiver also has a duty to protect the rights of other creditors.  The receiver provides reports on the conduct of the receivership to the secured creditor and files this report with the Companies Office. 

The receiver ceases to act when the secured creditor has been repaid and at this time control of the company reverts to the directors.  However, a liquidator can be appointed if there are further assets to be realised, funds still owed to unsecured creditors or matters requiring investigation.  

Liquidation   

When the directors/shareholders of an insolvent company become aware that there is no realistic ability to trade out of their financial difficulties they can resolve to appoint a Licensed Insolvency Practitioner of their choice as liquidator.  This is known as a voluntary liquidation. 

In instances where the directors/shareholders do not take any action, a creditor of the insolvent company may apply to the Court for an order requiring the company be put into liquidation.  This is known as a Court appointed liquidation and it is the Court's decision as to who will be appointed as liquidator.  If a company is served with a winding up application by a creditor, the directors/shareholders cannot appoint voluntarily unless with the consent of the applicant creditor. 

The conduct of liquidators is governed by Part 16 of the Companies Act 1993.  Once a company liquidation commences the director's powers are restricted and they must provide the company's records to the liquidator.  They must also co-operate with and support the liquidator. 

The liquidator's main duty is to realise assets belonging to the company and distribute the proceeds to creditors.  The liquidator may also investigate the reasons for the company's failure, set aside insolvent transactions and take legal action where necessary.  The liquidator must report to the company's creditors every six months and file these reports with the Companies Office. 

Upon completion of the business liquidation the company is struck off the Companies Register. 

Every situation is unique and a number of factors should be taken into consideration to determine the best course of action in the event of company insolvency.  If you wish to discuss your situation please contact one of the team at McDonald Vague.

Alternatively, download our Free Guide to Insolvency Services

When a company fails one of four things usually happens:-

• A receiver is appointed
• An administrator is appointed
• It enters into a compromise with its creditors
• It is put into liquidation (this will be covered in Part 2)

This article seeks to explain the rights that creditors have in each of the above insolvency proceedings. It is written from the perspective of the ordinary unsecured creditor.

1 - Receivership

The purpose of receivership is to repay the debt owed to the General Security Agreement ("GSA") holder.  GSA holders tend to be banks but can also be private lenders (including directors and family members). The receiver's obligations are primarily to the GSA holder who appointed them. If a receiver holds surplus funds after repaying the GSA holder these must be returned to the company or paid to a liquidator to distribute. Receivers have no powers to make distributions to unsecured creditors. There are also no meetings of creditors in a receivership.

The main option for unsecured creditors is therefore to apply to the Court for a liquidator to be appointed (assuming the shareholders are not willing to appoint a liquidator voluntarily). Although a liquidator cannot take control of charged assets until the GSA holder has been repaid, he/she can do the following:-

• Examine the validity of the GSA and of the receiver's appointment
• Examine the receiver's acts and ensure that he/she has obtained the best possible price for the assets
• Take actions not available to a receiver, the commonest being:-

- Insolvent transactions (previously known as voidable preferences), and insolvent setoffs
- Voidable charges
- Transactions for inadequate or excessive consideration with directors

However, legal action can cost many tens of thousands of dollars and if there are no surplus funds a liquidator may well need funding to bring such actions.

2 - Voluntary administration

The voluntary administration procedure was introduced in New Zealand in November 2007. Its stated aims are to either:-

1. maximise the chances of the company continuing in existence or;
2. achieve a better return for creditors than would be achieved in a liquidation

Appointment
An administrator can theoretically be appointed by the Court on a creditor's application. However, this is unlikely in practice given the amount of knowledge that is required for the court application. The administrator is much more likely to be appointed by the company.

The right to have a first meeting of creditors
The administrator must hold a meeting of creditors within eight working days of their appointment. Creditors can vote at this meeting on whether to appoint a creditors' committee or whether to replace the administrator. A vote is passed if approved by a majority in number, representing 75% in value, of the creditors or class of creditors voting in person or by proxy/postal vote. The creditors' committee has the right to consult with the administrator and to receive and consider reports by the administrator.

The right to have a 'watershed meeting'
This meeting must be convened within 20 working days of the administrator's appointment (unless the Court extends this period) and then held within a further five working days. Voting rules are as above. Creditors have the right to vote on the following:-

1. to resolve that the company execute a Deed of Company Arrangement ("DOCA") with creditors
2. to resolve that the administration should end
3. to appoint a liquidator (which also ends the administration)

The administrator will become the deed administrator (where a DOCA is approved) or the liquidator (where creditors vote to put the company into liquidation), unless creditors specifically nominate another person for this role.

The deed administrator can later be replaced by the Court on a creditor's application. A DOCA is binding on all creditors (excluding secured creditors), whether or not they voted in favour of its execution.

The right to request amendments to or termination of a DOCA
Creditors owed a total of at least 10% of the combined amount owing to all creditors can require the deed administrator to convene a meeting to either vary or terminate the DOCA.

The right to review the administrator's accounts
The administrator is required to file receipts and payment summaries at the Companies Office every six months. Any creditor can view these accounts online.

3 - Compromises with creditors
Compromises with creditors are the one situation where power is technically in the hands of the unsecured creditors. For a compromise to succeed it must be approved by a majority in number and 75% in value of each class of creditor voting for the proposal. The same rules apply for voting as to any proposed variations to the compromise terms.

One of the difficulties with compromises is that every compromise is different and there is less integrity in some compromises than others. This is where the power to ask for amendments is invaluable. Before voting, creditors need to be satisfied that the following questions have been answered satisfactorily:-

• Will the proposal give them a greater return than they would achieve in a liquidation? To give some degree of comfort on this issue it may be necessary for an independent accountant to examine the company's books and records
• Is there a professional Compromise Manager in charge of the process? It would seem to be relying on blind faith to assume that the director, who was the architect of the company's difficulties, can independently manage the compromise arrangement
• Is there a creditors' committee to work alongside the Compromise Manager? If creditors want to be involved with the process they must be represented
• What happens if the compromise does not work out? For instance, will the Compromise Manager hold a signed resolution by the shareholders to place the company into liquidation, to be exercised if the company does not fulfil its obligations under the compromise?

Our article 'Company creditor compromises - worthwhile or not?' covers this topic in greater detail.

Note: This is an expanded and updated version of an earlier article written by John Vague and was subsequently revised by Jonathan Barrett.

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.