It's the tightrope of business in tough times: Knowing when to resolutely forge ahead versus when to seek specialist help or call time on a business, realising that to continue will prolong and possibly increase the pain. Fifty percent of all New Zealand businesses fail within 10 years of formation, rising to 75% for one-person companies, but timely and appropriate intervention can bring a healthy change in fortune.

Why do businesses fail?

Sometimes businesses fail due to bad luck or bad timing, but in truth it’s often due to bad management, says Baker Tilly Staples Rodway Auckland Specialist Services director and licensed insolvency practitioner (IP) Tony Maginness. This typically comes down to failure to manage six key risks: 

• Not adapting to change
• Failure to understand the numbers (and make a profit)
• Failure to manage risk
• Not maintaining adequate capital
• Neglecting to comply with Health & Safety laws
• Complacency and inefficiency during good times

Tony advises business owners to quickly engage an accountant or IP when warning signs arise, because early intervention provides a better chance of saving the business. They may also need advice from an HR specialist and legal professional.

“Sometimes it’s a fine line between going bust and trading on,” he says. “If your business is struggling, document decisions, take advice and don’t take on obligations there is little chance of being able to pay.”

Tony says directors can keep trading if their company becomes insolvent (can no longer pay debts owed), providing realistic forecasts show that the situation will improve. However, there are limits to the extent that directors can allow a company to trade while insolvent in the hope that the situation will improve – usually a matter of months.

Warning signs that a business is in trouble

Baker Tilly Staples Rodway Auckland Corporate Advisory Services director Tracy Hickman says there are a number of warning signs that a business is in trouble, including:

• Revenue decline
• Reduced margins
• Losses
• Unpaid taxes
• Unpaid rent
• Needing alternative sources of funding for salaries
• Inability to deliver products/services within specified timeframes
• A trend of industry difficulties
• Under-capitalisation

How accountants and insolvency practitioners can help

Tracy says accountants take an objective view of business issues and act as trusted advisors and mentors.

Armed with the details of your difficulties and relevant paperwork (including your financial position and forecasts), they’ll look at appropriate strategies and processes, taking into account things like your business model, underlying assumptions, current conditions, management effectiveness, business performance trends and whether directors are adhering to the Companies Act.

Tony and his fellow insolvency practitioners can advise on potential for turnaround, help implement a strategy and work with funders. IPs try to save businesses, but if that’s not possible, they can help with an orderly wind up and work to get the best possible result for stakeholders. Often the results are “known in advance” but there are a range of options that they can choose from, as below.

Work out

Insolvency practitioners are appointed to try and find out what is wrong with a company and how it can be turned around. Work outs, which may lead to higher asset recoveries than formal insolvency procedures, can lead to other forms of recovery action, but ideally, they save the company and mitigate director risk. The public typically isn’t aware of these cases.

Creditor compromise

Creditor compromises require agreement between a company and its creditors around company debt. The proposal must be accepted by creditors and court approval isn’t required. Compromises can work well for creditors and give the company a second life if it clearly has a future. They are usually accepted if they offer a better result than liquidation but can leave companies with excessive debt.

Liquidation

Liquidation is the winding up of an entity’s affairs and should be a last resort. Liquidators are appointed by shareholders, the high court or directors, and their appointment may prevent initiation and/or continuation of legal proceedings against the entity. They progress realisation of assets for distribution to creditors, and shareholders if there is a surplus.  

Receivership

A receiver is usually appointed by a secured creditor who holds a General Security Agreement (in some case a receiver can be appointed by the High Court to preserve and protect assets). Receivers have fewer powers than a liquidator, but their appointment can take place quickly (beneficial when assets are at risk). Their job is to act in the best interests of their appointer but they must act with reasonable regard to other creditors. A receivership can provide a structured and effective way to manage a company or property in financial distress.

Voluntary administration

Voluntary administrations provide timely options when the situation is unclear. They are under-utilised in New Zealand due to short timeframe, cost, lack of external indemnity (unless provided) and alternative processes. That said, they can be very effective. Administrators are usually appointed by directors but can also be appointed by the likes of banks or courts. They quickly review the company and decide on the best way forward, offering timely options for creditor approval.

If you relate to any of the points in this article, our teams are here to help ensure optimal business outcomes depending on the nature of your circumstances. See our Locations page for your nearest Baker Tilly Staples Rodway business advisors or scroll down to see our business recovery team.