Businesses rarely fail suddenly. They deteriorate over months while the people running them hope trading will improve, and the options narrow the whole time. Almost every insolvency practitioner says the same thing: they were called too late.
The signals
- Consistently paying suppliers outside terms, and negotiating rather than paying.
- Tax falling behind, particularly GST and PAYE.
- The overdraft permanently drawn and never returning to zero.
- Funding operations from customer deposits.
- Key staff leaving.
- Financial reporting becoming late or stopping.
That last one is diagnostic. Owners under stress frequently stop looking at the numbers, which removes the only instrument they have.
First: find out where you actually are
Before deciding anything, establish the position honestly:
- A thirteen-week cashflow forecast, built on when customers actually pay rather than terms, including tax dates and loan principal.
- A creditor list with amounts, ages and which are secured or guaranteed.
- A solvency assessment — can you pay debts as they fall due, and do assets exceed liabilities?
- Profitability by product, service or customer, because businesses in trouble frequently have a segment losing money that subsidises nothing.
Do this before talking to anyone. You cannot negotiate with a bank or propose an arrangement to Inland Revenue without knowing the numbers.
Director duties constrain what you can do
This is the part that matters most and is understood least.
Directors must not agree to the business being carried on in a way likely to create a substantial risk of serious loss to creditors, and must not agree to the company incurring an obligation unless they reasonably believe it can be performed.
Continuing to take deposits, order stock or accept work while insolvency is realistically in view creates personal liability exposure, and liquidators do pursue it.
What protects a director is not optimism but process: current financial information, a documented and realistic assessment, a plan with dates, and evidence that you stopped when the plan failed rather than when the money ran out.
Board minutes recording what was considered and decided are the most useful thing a small company board can produce here.
The levers, roughly in order of speed
- Collect faster. Chase overdue accounts systematically, invoice immediately, ask for deposits and progress payments.
- Negotiate with creditors before due dates. A creditor who agreed to revised terms does not lodge a default; one who was ignored may.
- Contact Inland Revenue early. Instalment arrangements are considerably easier to agree before a due date than after.
- Cut costs that are not generating revenue, quickly rather than gradually. Businesses that cut in small increments repeatedly end up cutting more in total.
- Exit unprofitable lines or customers, which frequently improves cash immediately.
- Sell non-essential assets.
- Raise capital, if there is a viable business underneath.
Talk to your bank
Banks generally prefer a workable restructure to an insolvency, and they respond far better to a business that arrives with analysis and a plan than to one that goes quiet.
Going quiet is the worst option. Banks notice deteriorating account conduct, and the absence of communication is read as the absence of a plan.
The formal options
Where informal restructuring will not work:
Voluntary administration places the company in the hands of an administrator, with a moratorium on creditor action while a proposal is developed. It can produce a deed of company arrangement allowing the business to continue.
Compromise with creditors under the Companies Act allows a proposal binding creditors if approved by the requisite majorities.
Receivership is initiated by a secured creditor to realise their security.
Liquidation ends the company, with assets realised and distributed by priority.
Each has different consequences for directors, employees and creditors, and the choice should be made with advice rather than by default.
Things not to do
- Do not prefer some creditors over others as insolvency approaches. Voidable transaction rules can require repayment of payments received in the period before liquidation.
- Do not transfer assets out of the company at less than value.
- Do not start a new company to continue the same business without advice, since restrictions apply and the pattern attracts scrutiny.
- Do not stop filing returns or annual returns.
Get advice early
Insolvency practitioners and accountants advise on turnaround, and early engagement genuinely produces more options. The cost is small against the alternative, and the conversation is confidential.
The Companies Office publishes insolvency information, business.govt.nz publishes financial difficulty guidance, and Inland Revenue publishes relief material. All free.
General information only, not legal or financial advice. Take advice early if solvency is in question.
