The continuing spread of Covid-19 and government measures in response means an economic downturn with increasing business failures.
What should business owners consider in these circumstances?
Dealing with your debtors
With debtors, businesses should consider:
- tightening credit terms;
- putting in place security arrangements;
- continual follow-up.
When companies go under, certain payments made to creditors can later be clawed back by liquidators. These are called voidable payments. The safest way to avoid voidable payments is to ask for money in advance of providing goods or services.
Unsecured creditors are worst-off in any insolvency scenario. Consider whether there are security arrangements that you can put in place or enhance, including retention of title clauses and registration of interests on the Personal Property Securities Register.
Dealing with your creditors
If your business is facing a cash crunch, then consider talking to your creditors sooner rather than later.
Consider being up-front with your creditors and trying to find a mutually agreeable way forward such as a payment plan or a reduction in the amount due. That might be a better alternative than no payment at all to your creditors if the business goes under.
Monitoring your own business
Company directors have an obligation when a company runs into trouble not to trade recklessly. That means not running the business in a way that creates a substantial risk of serious loss to creditors.
There are two ways that substantial risk arises:
- the company becomes cash-flow insolvent with no obvious significant injection of cash on the horizon; or
- the company becomes balance-sheet insolvent with no obvious significant injection of capital on the horizon.
This means directors should be continually monitoring the company's ability to meet its payment obligations as they fall due as well as closely monitoring its balance sheet position. Importantly, all decisions relating to the company's solvency position should be carefully documented.
Although companies are not required to cease trading the moment they become insolvent, there are limits to the extent to which directors can keep a company trading in such circumstances.
If a company's financial situation continues to worsen, directors may need to consider whether it is appropriate to take formal steps to restructure or indeed cease trading and wind up the company all together.
There are options short of a liquidation – such as voluntary administration or a restructure of staff – that might work.
If your business is suffering a downturn, the government's recently announced financial assistance package – including changes to tax payments and wage subsidies – might be available. More information is available in the Government's Business Cashflow and Tax Measures Factsheet.
Consider whether your business and your debtors can benefit from the government assistance package, and whether this should form part of any discussion with your creditors.
The Australian government has announced that it is putting in place temporary measures to prevent businesses and individuals temporarily facing financial distress as a result of Covid 19 from being forced into liquidation. A summary of the Australian relief package can be found here ( https://treasury.gov.au/sites/default/files/2020-03/Fact_sheet-Providing_temporary_relief_for_financially_distressed_businesses.pdf).
Given New Zealand's insolvency laws are closely aligned with Australia we expect that in the coming days our Government will follow suit with a similar package. We have summarised what temporary measures we are likely to see announced here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.