When a company cannot pay its bills, it's defined as being insolvent.
This can be a serious situation for many small business owners which leads to creditors being able to have a receiver or a liquidator appointed and can lead to personal liability for directors in relation to the Company's costs.
In the past few months alone, popular Auckland eatery Toto Pizza, Christchurch construction company Maven Interiors and Auckland palm nursery, Oceanic Palms, have all been placed into liquidation.
Regardless of the size of your company, there are a number of options that you should review if you suspect insolvency.
Obtain objective external advice
SME owners typically have an in-depth understanding of their business and its operations, which can be both a blessing and a curse. This is because they invest so much of their lives in their ventures that they are often the last to recognise the appropriate response to a dismal situation. If your business is unable to meet its debts as they become due, it's important you seek out professional advice from trusted and accredited insolvency practitioners to understand what your options are.
An independent advisor, preferably one who is an accredited insolvency practitioner and a member of industry body RITANZ, can advise on how to tackle insolvency.
What is vitally important to understand, is that if you are, or suspect that you are, trading under insolvent conditions and don't have a sound plan to deal with it in a way that protects your creditors, you have a responsibility to immediately cease incurring further company debt.
In insolvent circumstances, the director's duties are expanded to include those of the company's creditors and there are a number of duties on directors to act in good faith and in the interest of the creditors. Disregarding these duties can potentially lead to litigation against the directors for reckless and insolvent trading, penalties being imposed and in more serious cases, even imprisonment. Obtaining independent, objective advice on your company's financial position and options is a critical first step to protecting yourself as a director and your creditors.
Assess your options
Once you have consulted with your accredited insolvency practitioner or lawyer, you will likely be faced with the decision on which option to take that best meets the individual circumstances you are facing.
In New Zealand, the most common remedies available will either be to enter into a standstill or a compromise with your creditors; place the company into voluntary administration or proceed with the liquidation of the company. There are other options available to you, including injecting new capital or asking your financier to appoint a receiver.
Liquidating your company effectively means the end of that company's life and once a liquidator is appointed, they will have total control of the company. Directors will remain as directors but will have no power. Any legal proceedings against the company, unless agreed to by the liquidator or the courts, will cease upon liquidation.
Don't put your head in the sand
While the causes of insolvency can be numerous, what is clear is that it needs to be handled quickly and with purpose - especially as the decisions you make now could significantly impact on your ability to pursue other business ventures in the future and can have far-reaching effects on you as the director if not dealt with in accordance with your duties and obligations.
Understanding exactly what your responsibilities are and the options available to you will go a long way to reduce some of the stress that this situation inevitably holds for you (and your employees).
- Nikki Kruger is executive director at the Restructuring Insolvency & Turnaround Association of New Zealand (RITANZ).