If your business faces challenges in meeting its financial obligations or finds itself in a situation where liabilities exceed assets, it may encounter insolvency and the possibility of involuntary closure. However, it’s important to remember that there are alternative solutions available. In this article, we are covering some of the insights when it comes to insolvency and involuntary closure.
Insolvency
Being insolvent can be defined in two ways:
- Inability to pay debts when they are due.
- Total debt surpasses the total value of assets. It is important to note that this is distinct from operating at a loss, especially for new or rapidly growing businesses.
If you find yourself in an insolvent situation, it is advisable to seek assistance from available support services.
Business debt — New Zealand Insolvency and Trustee Service
Warning signs of trouble ahead
Is closing your business the right choice?
Insolvency: Steps that can help
Measure your debt
The first step is to work out your total debt. This will help you:
- estimate how long it will take to pay off
- understand what options are available to you
- help advisors understand your situation better.
Gather all of your financial documents to get the most accurate figures possible.
Get advice
Sharing your problem with others can help you find the best path forward.
- Accountant or lawyer: Make them your first point of contact if you wish to continue operating your business. They can assist you in determining the next steps and provide guidance on avoiding future issues.
- Budgeting advisor: Seeking advice on budgeting can assist in reducing costs, slowing down debt accumulation, and reaching an agreement with Inland Revenue to avoid penalties.
Take action
Get in touch with your creditors – those who you owe money, like suppliers, lenders, and Inland Revenue. Explain your situation and have a discussion about the options available to repay your debt.
If you intend to arrange for payments to be made in instalments, it’s a good idea to seek the assistance of an accountant, lawyer, or budgeting expert.
Owed money — Insolvency and Trustee Service
Companies Register — New Zealand Companies Office
ITS Register — New Zealand Insolvency and Trustee Service
Tip
If a business that owes you money becomes insolvent, don’t lose hope just yet.
Involuntary closure
There are various types of involuntary closures that can affect companies in New Zealand.
Liquidation
If a company is unable to settle its debts, it may be placed into liquidation, whereby all its unsecured assets are sold to repay its creditors. A liquidator, typically a specialised accounting firm or occasionally the Insolvency and Trustee Service, is appointed to examine the company’s financial problems and facilitate the sale of assets for the purpose of repaying the creditors.
A company can be placed into liquidation by:
- Its shareholders
- Its board of directors
- Its creditors.
What happens during liquidation — New Zealand Companies Office
The effect of liquidation on a company — New Zealand Insolvency and Trustee Service
Receivership
If a company fails to repay the debt that it has secured against an asset or assets, the creditor can appoint a receiver to sell the asset in order to repay the loan.
Receivership, which is often a requirement in a loan agreement, does not impact assets that have not been used to secure a loan.
A receiver is designated to sell assets or oversee the company’s operations in order to generate sufficient funds to repay the creditors who have secured their debts. The receiver is responsible for paying the most important debts first, such as unpaid wages or taxes. These debts are referred to as preferential claims.
What happens during receivership — Companies Office
Common business assets checklist
Secured vs unsecured creditors
There are two types of creditors: secured and unsecured.
Secured creditors have the legal right to take back and sell the assets of a debtor if they have a security interest in those assets, and the debtor fails to make payments. For instance, a car dealership may have a security interest in a car that a debtor is still paying off, or a bank may have a security interest in a home or property as part of a mortgage agreement.
On the other hand, unsecured creditors do not have the right to repossess or sell any of the debtor’s assets in case of a payment default. They can only recover the money owed to them if the debtor undergoes involuntary closure or becomes insolvent.
If you have employees
If a business becomes insolvent and has employees, it must pay their wages or salaries before paying any debts owed to general unsecured creditors.
Employees can claim up to a maximum of $23,960 as a preferential payment, but this amount does not ensure the full payment of their owed wages or salaries in the event of employer insolvency.
After paying off all secured creditors and preferred categories of creditors, such as employees, there is often little or no money left to pay off the remaining debts to unsecured creditors.
Companies Act: Preferential claims — New Zealand Legislation
Insolvency Act: Preferential payments to employees — New Zealand Legislation
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