The number of insolvencies for the year ending June is expected to drop by 40 per cent both here and in Australia. Photo / Getty Images
The number of insolvencies for the year ending June is expected to drop by 40 per cent both here and in Australia. Photo / Getty Images
When the Covid-19 lockdown occurred in March of last year, insolvency practitioners braced themselves for a wave of receiverships and liquidations. It didn't happen.
In fact, the number of insolvencies for the year ending June is expected to drop by 40 per cent both here and in Australia, according to Michael Harper, a partner with Chapman Tripp specialising in finance, restructuring and insolvency.
There were 228 administered liquidations in New Zealand between July last year and April this year compared with 299 for the same period in 2019-20.
In June last year liquidator, receivership or voluntary administration appointments reached 120, bringing the year's total to 795. But the appointments were 150 or 23 per cent lower than in June 2019 and 188 or 54 per cent lower in June 2018.
However, more businesses have been voluntarily removing themselves from the Companies Register by choosing to pay their creditors and winding themselves up.
Voluntary removals last year were up 32 per cent on 2019.
"With the wage subsidy and other government and banks programmes, businesses felt they could get support somewhere during the lockdowns. The wage subsidy certainly sustained a number of hospitality and retail businesses," says Harper.
"At the time we spent more time advising boards and directors about the application of their duties and whether they were liable for reckless or insolvent trading if the business continued during Covid."
They needn't have worried. The Business Finance Guarantee scheme, which finishes at the end of June, enabled small and medium businesses to access loans of up to $5 million for a maximum term of five years.
The Government covered 80 per cent of the risk and the banks made loans they might not normally authorise to vulnerable businesses and enable them to recover from the impacts of Covid.
Inland Revenue, which puts more companies into liquidation than anyone else, did not chase money owing during last year, though it resumed its debt recovery operations at the start of this year.
The Ministry of Business, Innovation and Employment (MBIE) is running the Business Debt Hibernation scheme which has been extended to October 31 this year, but so far very few businesses have taken this up.
The scheme allows businesses affected by Covid disruptions to place their existing debt on hold for up to seven months and to have discussions with their creditors to establish whether there is a viable path forward.
The relief scheme was put in place to stop vulnerable businesses from being liquidated.
Between May and October last year just 41 businesses had applied to enter the debt hibernation scheme. "Although it sounds like a good idea, the scheme just hasn't been taken up," says Harper.
Partner at Chapman Tripp Michael Harper specialises in finance, restructuring and insolvency.
"A lot of firms wanted to go for it, but they didn't qualify due to pre-existing debt and they couldn't prove that they were experiencing pure Covid-related distress.
"The difficulty was it was simply a suspension (of debt) and businesses had to come back to creditors with a new proposal. They had to pay everybody in full going forward from the cut-off date.
"Instead, many companies struck individual deals with landlords and key creditors. Often landlord negotiations took a long time but ultimately a deal was done."
Harper says the business hibernation scheme was pulled together very quickly in uncertain times and that was impressive. It enabled everyone to stand still while the events played out.
"The New Zealand economy bounced back quicker than everyone expected. Businesses have been surprised about how well everything has gone; especially how active the property and equity markets have been."
Harper says the most vulnerable businesses were in retail, tourism and hospitality.
"In terms of debt recovery, creditors had to make a rational assessment about whether there was market for their (debtors) assets. If there wasn't, then it was better to work with the business than take formal action."
During the Covid lockdowns, Australia and UK switched off the reckless and insolvency laws.
New Zealand made an amendment, albeit temporary, to Directors' Duties enabling boards to develop an 18-month plan and pay off debts within that period. That change in Directors' Duties law remained in place till September 30 last year.
"The boards and directors took a lot of comfort from that amendment — (during the Covid lockdown) they no longer spent a lot of time wondering about their personal liability in regards to reckless and insolvent trading," Harper says.
The Court of Appeal decision on Mainzeal and the Supreme Court ruling for Debut Homes have, however, created less certainty for directors around reckless and insolvent trading.
"It's an area of law that needs reform. We should keep thinking about what is being used internationally and whether some initiatives should be introduced here," says Harper.
"It isn't just about fixing an uncertainty in existing law but providing best practice mechanics in the restructuring and rehabilitation of companies.
"We need to provide better certainty on the tests applied (to directors' duties and liabilities) and the method of calculating damages. In the Mainzeal case, the Court of Appeal ruled that directors are liable for the value of the debt incurred from the time the business should have ceased trading to the date of insolvency," he says.
"This is consistent with the approach commonly used prior to the Mainzeal High Court decision, which used a percentage of total losses in the liquidation. It would be helpful if the approach to determining damages for reckless or insolvent trading could be clarified in statute."
Harper favours a new test introduced in Australia. The Government there established a debtor-in-possession restructuring model which provides a safe harbour for small and medium-sized companies to continue to trade and control their business while trying to restructure their debts.
An independent and professional restructuring adviser is appointed and given 20 working days to create a plan for creditor approval, and securities and guarantees cannot be enforced. During that time the company must continue to pay tax.
Harper says companies are given time to pull together a restructuring or rehabilitation proposal and directors can't be personally liable for debts incurred during that period.
"It's still relatively new law and hasn't been particularly tested, but it does seem to be a sensible solution. It's a simpler process than voluntary administration, which is expensive.
"One of the things the court grappled with in the Mainzeal case was that the directors did not get separate independent professional advice." While the number of liquidations has fallen over the past year, Harper accepts this situation could change.
"It's inevitable there will be consequences. The insolvency impact can lag a significant and disruptive economic event such as Covid.
"What we are seeing now is that stakeholders in businesses in more vulnerable sectors such as tourism and hospitality are starting to lose confidence — it's been a year and they can't keep doing this for another year. There are some businesses reaching breaking point," he says.
"Many small businesses have debt secured by mortgages over the family homes. The property market is sustaining those businesses which continue to borrow on the increasing value of the house, or they can sell the house and release capital that way.
"At the moment government policy settings are helping reduce financial stress. If we are to see an increase in insolvencies, then it could occur through a downturn in the property market operating in tandem with the effects of Covid."
