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Get Help Before Dropping Off Insolvency Cliff

Key points:

  • Some businesses that would have closed their doors under normal circumstances are hanging on thanks to COVID measures.
  • These businesses should get financial advice immediately or risk a bigger crash when the support measures end
  • A new insolvency regulatory regime came into force on 1 September, reinforcing best practice.

Kiwi businesses surviving on Government COVID-19 support – and that may otherwise have fallen into liquidation or receivership in normal times – should get professional advice immediately with a national insolvency cliff looming, says Chartered Accountants Australia and New Zealand (CA ANZ).

Figures from RITANZ show liquidation appointments in August 2020 are down compared to the same month in both 2019 and 2018. There were 122 new liquidation appointments in August, down 14 percent on the same month in 2019. In July 2020 there were 117 new liquidation appointments, down 28 percent on a year earlier. The Restructuring Insolvency and Turnaround Association New Zealand (RITANZ) is the professional body for insolvency practitioners and for those working in the field of business reconstruction and turnaround, and corporate and personal insolvency in New Zealand.

“These liquidation statistics, backed up by reports of looming large-scale closures in certain sectors such as hospitality, represent a significant problem not only for those immediately involved in these businesses, but for the economy as a whole,” said CA ANZ Business Reform Leader Karen McWilliams.

She said the wage subsidies, various tax relief measures and a ‘safe harbour’ from insolvent trading for directors had achieved their overall aim of keeping COVID-hit businesses “at least ticking over.

“But they have had the unintended consequence of also propping up some businesses which would have failed in the natural course of events.

“A reality check will be coming for some once the various forms of Government business support are turned off,” she said.

Applications for the two-week resurgence wage subsidy remain open until 10 September while final applications for the wage subsidy extension closed on 1 September.

“Struggling businesses should take a hard look at their situation now, and not just the financial one. Small business owners should also consider the impact on the mental health not only of themselves, but also of their families,” McWilliams said.

“Many businesses, even though they may be in hibernation mode, will still be accumulating debt, which may have been deferred but not waived – and is likely to be compounding interest. They may also be progressively eating into the value of assets provided as security, which for small businesses could include the family home.

“Therefore, it is important for businesses to seek help early as, the longer they wait, the bigger their problems may become. Such problems are unlikely to go away quickly in this COVID-constrained economy which, sadly, is likely to be with us for some time to come,” McWilliams said.

“The risk is that by not acting early, when these businesses fail, they will do so more spectacularly, possibly bringing other businesses down with them.

“These are incredibly tough decisions as very personal hopes and pride are at stake, something insolvency practitioners know and feel all too well.”

She said new insolvency legislation requiring insolvency practitioners to hold a licence issued by an accredited body, which came into force on 1 September, helps assure businesses that they will get appropriate expert advice on their specific situation and the options available to them.

“The sooner this advice is sought, the more options there will be.”

Signs of trouble

Early warning signs that businesses (and those that advise them) should be watching for include:

  • loss of a significant customer or supplier
  • forecast targets consistently missed
  • uninsured or unexpected disasters
  • time spent on a financial crisis is more than time spent managing the business
  • missed payments to landlords or banks
  • urgent requests for bank funding
  • increased intervention/pressure/oversight from banks or other financiers
  • accounts payable days stretching over 45 days
  • overdue tax lodgements
  • financials are not up to date or accurate

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