If your business cannot pay its debts on time, or owes more than it owns, it may be forced to close — but there are other options.
To be insolvent means one of two things:
This is different to operating at a loss, particularly when a business is new or growing fast.
If you become insolvent, make use of the support services available.
Business debt(external link) — New Zealand Insolvency and Trustee Service
The first thing to do is calculate your overall debt. This helps:
Gather all financial documents to get the most accurate figures you can.
A problem shared will help you find the best way forward.
Contact creditors – those you owe money to, eg suppliers, lenders, Inland Revenue. Explain your situation and discuss options to repay what you owe.
If you plan to negotiate with creditors to pay in instalments, it’s a good idea to get your accountant, lawyer or budgeting expert to help.
Owed money(external link) — Insolvency and Trustee Service
Companies Register(external link) — New Zealand Companies Office
ITS Register (external link)— New Zealand Insolvency and Trustee Service
There are different types of involuntary closure — both apply to companies.
If a company can’t pay its debts, it may be put into liquidation, meaning all its unsecured assets are sold to repay creditors. A liquidator — often a specialist accountancy firm or occasionally the Insolvency and Trustee Service — is appointed to investigate the company’s financial issues, and sell any assets to help repay creditors.
A company can be put into liquidation by:
What happens during liquidation(external link) — New Zealand Companies Office
The effect of liquidation on a company(external link) — New Zealand Insolvency and Trustee Service
If a company doesn’t repay debt it has secured against an asset or assets, the creditor can appoint a receiver to sell the asset to repay the loan.
Receivership — often a condition of a loan agreement — doesn’t affect assets that haven’t been used to secure a loan.
A receiver is appointed to sell assets or manage the company in order to make enough money to pay its secured creditors. The receiver is responsible for paying highest priority debts first, eg unpaid wages or tax. These are known as preferential claims.
What happens during receivership(external link) — Companies Office
There are two kinds of creditors: secured and unsecured.
Secured creditors have the right to repossess and sell a debtor’s assets they have a security over if the debtor falls behind in payments. For example, a car yard might have security over a debtor’s car they’re paying off, or a bank may have security over a home or property as part of a mortgage.
Unsecured creditors don’t have the right to repossess or sell any of the debtor’s assets if they default on payments. They can only recover money owed if the debtor goes into involuntary closure or becomes insolvent.
If you have employees and become insolvent, their wages or salaries must be paid before you pay debt owed to general unsecured creditors.
The maximum amount an employee can claim as a preferential payment is $23,960. But this figure doesn’t guarantee the amount that employees will receive if an employer becomes insolvent.
Once all the secured creditors are paid, and then the preferred categories of creditors like employees, there’s often little (if any) left over to pay the remainder of the debts to unsecured creditors.
Companies Act: Preferential claims(external link) — New Zealand Legislation
Insolvency Act: Preferential payments to employees(external link) — New Zealand Legislation