From bankrupt to angel investor

By Gill South

Small business failures and spiralling personal debt helped push bankruptcies to 2400 in the past eight months - an eight-year high.

Since 1996, 35,000 bankruptcies have been declared.

Ferrier Hodgson partner Grant Graham said his firm had seen a surge in receiverships in the last quarter.

"The receivership business is starting to grow again. In the first quarter of this year, we have had more than we have had in the last 18 months."

He saw the bankruptcies caused by business failure. After companies were put into liquidation, the owners' bankruptcies were a "by-product".

"The historical model in small companies is the proprietors have given guarantees supported by a house or a boat.

"That's how they get funding in the first place," said Graham.

When the company failed, the personal assets went back to the bank.

So how should people with small businesses protect themselves?

"The best provision for bankruptcy is at the front end, making sure you have got cash projections so that you know where you are going.

"Most people use an accountant to set up accounts six months after the year end, pretty much for tax. The best thing is for an accountant to prepare some projections," said Graham.

"If you are getting into trouble, you can take the steps and act quickly... You then have vastly more options."

High-profile Dragons' Den businessman Paul Webb, 32, remembered his bankruptcy seven years ago (due to the failure of CityJet) clearly.

"It was horrific and debilitating psychologically; I had no family support and I lost absolutely everything. The bank started taking things off me until there was nothing left."

He found people judgmental, although he was heartened by the support he received.

Webb said there were still awkward moments when he saw someone he had done business with, and to whom he owed money from CityJet.

"I feel quite embarrassed and a sense of guilt. There are people around town that lost money and you need to be respectful now that I've made a lot of money again."

He was unsuccessful paying back his creditors - although he tried.

Webb said laws needed to be reformed so bankrupts could try to make amends with their creditors more easily.

Nowadays Webb did everything he could to mitigate risk.

"By getting good advisers around you, taking advice from people who are smarter than you in allowing them to manage what you have got."

He rued the fact he was still labelled "former bankrupt" by the media seven years on.

"Could they not put 'Paul Webb, angel investor'?" he asked.

Webb describes himself as an entrepreneurial investor, investing with his business partner, Andrew Tauber, in companies in property. Webb took full responsibility for his bankruptcy and regretted his behaviour in the lead-up to it.

As one industry observer put it: "He thought he was bulletproof. He'd ask you something but did not want to know the answer.

"Now he has guys who do his numbers for him. He does nothing by the seat of his pants."

Said Webb: "It comes down to your make-up. '

'Five years ago I was at work at 3am until 10pm, I would work non-stop.

"What people fear is failure, but without risk there is no reward.

"If you're not prepared to risk because of fear of failure, then go and work for the Post Office," he said.

Bankruptcies tended to come in waves, as they had with the recent rise of more than 20 per cent.

Martin Hawes, wealth coach and financial author, has advised a number of bankrupts.

He was a business consultant in the 1980s after the stock market crash, when bankruptcies were common.

"There were so many business people going bankrupt, it was no longer a stigma. The stigma was when you went to jail," said Hawes.

The psychological effect was incredible, he said. He remembered a bankrupt client knocking on his door late at night and saying he was on his way to a cliff nearby, a known suicide spot. He was miserable as his business had been his life for 20 years.

"They often have a lot of esteem and their identity tied up with the success of their business,"said Hawes.

Others could be much tougher. He remembered a property developer being dismissive of the dole, saying his mates would look after him. He used his contacts to pick himself up again and is once more successful.

Cosmetics doyenne, Suzanne Paul, is a great example of one who has the personality to take bankruptcy on the chin. Paul, who has repaid her creditors, has restored her fortunes again.

"All power to her," said Hawes.

Some bankrupts do what many think about - jump ship. Hawes once advised a businessman whose business was about to go under to go away for the weekend. The client absconded to Perth and Hawes has not heard from him since.

"He had decided he was going to lose the business and wanted to make sure he would not lose his family as well," said Hawes.

One lesson small businesses should learn, he said, was not to plough all their profits back into the business, as the vast majority often did.

They should take some of the profits from the business and put it into security assets like shares, property, anything outside the company, said Hawes, who recommends offshore investments, especially now.

"If you put everything back into the business it is double or quits," warned Hawes.

He also believed small business owners should put their house into a family trust. This should be done before they set up business if possible.

Hawes said people should also avoid giving personal guarantees.

Some opt for bankruptcy too early.

On a radio show recently, Acumen financial adviser Lisa Dudson had a caller who owed the Inland Revenue Department $5000 and was considering declaring bankruptcy. Dudson advised the man to contact the IRD and figure out staggered payments. In any case like this the best idea is to sit down with the creditor and organise a payment plan, but they must commit to it, she said.

Misconceptions abound about bankruptcy.

"What people don't realise about bankruptcy is that it does not relieve you of all debts," said Dudson.

"You still have to pay for ongoing hire purchase or mortgage payments. You still have to pay for child maintenance and for any debts incurred after bankruptcy.

"You have to apply to leave the country and declare your bankrupt status at any future job interviews."

Bankruptcy is on a person's credit record for seven years and on the publicly database of the New Zealand Insolvency and Trustee Service indefinitely.

Useful website: www.insolvency.govt.nz

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