In May, company liquidations reached their highest in a decade. That’s reflected in increasingly desperate behaviour, which is seeing owners face even greater penalties than the pain of losing their business. When things are looking bleak, it’s tempting to put your head down and dig in – but whether due to shame, denial or hubris, that’s too often leading to charges for reckless trading, fines and business collapses that might otherwise have been avoided. For those who fear they may have a zombie business on their hands, it’s time to ask for help.

Recent cases of reckless trading have been in the headlines, from Mainzeal to Du Val Group, which has now been placed into statutory management by the government. However, reported cases are just the tip of the iceberg. While the Reserve Bank’s recent OCR cut will be good news for mortgagees due to refix, it represents a harsh reality for businesses – inflation is down because consumer spending is down. Anecdotally, some commercial lawyers and commercial real estate agents have never had it so quiet, as businesses batten the hatches. Shipping, electricity and materials costs have rocketed, yet these can no longer be passed on to squeezed customers. In agriculture, commodities prices have dropped as compliance costs have risen. And for many, tax debts are mounting.

All this has led to a significant rise in trading while insolvent, something that’s not only risky, but can be against the law. We’re seeing twice the usual number of insolvencies in our insolvency practice alone, and many New Zealand company directors have been engaged in practices such as avoiding tax payments, juggling which creditors they pay in any given month or trading on when it’s clear the business is terminal.

While a lot of one-man-band business owners will be unaware of all the legalities involved in reckless trading, they will know it’s not a sustainable way to operate. Some are lucky enough to trade themselves out of trouble, but the reality is more need to be seeking advice sooner – especially in the current environment. In a market downturn, fraud tends to rise as issues can no longer be swept under the rug. Fraud often starts small, but owners who get into trouble tend to double down on the risks to earn their losses back, until the debt is impossible to repay.

The penalties for directors in this situation are not only seeing their legacy disappear, but big fines or bankruptcy, jail time, loss of reputation and relationships, and needless to say, more stress and grief for their entire families. As a nation of small businesses, many directors have put their homes on the line, as well as all their personal savings. Under the recent proposed changes to the Companies Act, the clawback period for voidable transactions would be doubled to four years, meaning they could see four years’ worth of mortgage payments potentially needing to be paid to creditors if they were insolvent at the time.

What needs to happen if your business is in trouble?

It can be embarrassing to acknowledge when decisions, or years of work, haven’t worked out. Yet the mental health conversation has vastly improved in New Zealand, no longer holding the stigma it once did. We need to take the same approach to getting business advice, being willing to share when things aren’t going well and taking the shame away from failure or poor performance – which may be no reflection on directors’ strengths at all. It would be great to see more businesses seeking help earlier, before the temptation to keep trading while insolvent turns into disaster.

Some will be tempted to keep going – buoyed by the OCR announcement and government moves to cut red tape through the Companies Act and other legislation – in a belief that better times (and lower mortgage rates) are on their way. However, it took 12-18 months for the interest rate increase to affect the market, and the flow-on effects of the recent cuts will take just as long to create an improvement. Even once the economy recovers, businesses that have used up all their working capital could still fall over.

Making the decision to wind up a business is always hard, but many owners and directors tell us they wished they’d done it a year ago, or at least sought help. These days, businesses are becoming terminal quicker, with many still having unsold assets left on their books. The short answer is, the sooner they seek advice from a qualified business professional, the better off they and the economy will be – before it’s time to call in the receivers.