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Insolvency and involuntary closure
If a business can’t pay its debts on time or owes more than it owns, it may be forced to close — but there are other options.
New support for companies impacted by COVID-19
Business debt hibernation is a new scheme for companies, trusts and other entities affected by COVID-19 to manage existing debts until they can start trading normally again. Find out if it’s a good option for your business and how to get started.
Insolvency
To be insolvent means one of two things:
- Debts can’t be paid when they’re due.
- Total debt is more than the value of all assets.
This is different to operating at a loss, particularly when a business is new or growing fast.
If you become insolvent, the road back to solvency — that is, the long-term ability to pay your debts — can seem a long and hard one. There are, however, a number of support services and actions you can take to smooth this journey.
Business debt(external link) — Insolvency and Trustee Service
If you are owed money by a business that becomes insolvent, all is not necessarily lost.
What to do if insolvency looms
Measure your debt
The first thing to do is calculate your overall debt. This helps:
- estimate how long it will take to pay it off
- know what options you have
- advisors understand your problem.
Gather all financial documents to get the most accurate figures you can.
Get advice
A problem shared will help you find the best way forward.
- Accountant or lawyer: Make this your first stop if you want to keep trading. If you don’t, you risk making the same mistakes and ending up in the same position or worse.
- Budgeting advisor: Getting budget advice can help cut your costs, slow debt growth and get an agreement with Inland Revenue to avoid penalties.
Take action
By taking prompt action, you may be able to resolve matters without going to court — which may order you to take the same actions anyway. You can:
- sell assets to repay debts
- talk to creditors about a compromise or repayment schedule.
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) — NZ Companies Office
ITS Register (external link)— Insolvency and Trustee Service
Involuntary closure
There are different types of involuntary closure — both apply to companies.
Liquidation
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, find out why it failed and sell any assets to help repay creditors.
A company can be put into liquidation by:
- its shareholders
- its board of directors
- its creditors.
What happens during liquidation(external link) — Companies Office
Receivership
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
Secured vs unsecured creditors
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.
Insolvency for employers
Some categories of unsecured creditors are given preference over others, which means they must be paid before general unsecured creditors. Preferred categories of unsecured creditors are listed in the Companies Act and the Insolvency Act. Employees are one of these preferred categories. This means if an employer owes employees unpaid wages or salaries and becomes insolvent, they must be paid out ahead of debts owed to general unsecured creditors.
There’s a maximum amount that an employee can claim as a preferential payment. From 30 September 2018, the maximum amount is $23,960. But this figure doesn’t guarantee the amount that employees will receive if an employer becomes insolvent.
If the employee is owed more than this figure, the remaining amount is treated as an unsecured claim.
Once all the secured creditors are paid, and then the preferred categories of creditors, 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
The effect of liquidation on a company(external link) — New Zealand Insolvency and Trustee Service
