Turning point does not herald end to trouble

Turning point does not herald end to trouble for all

Predictions that New Zealand has reached a turning point and confidence that the economy can only improve are heartening, but will not bring to an end the trouble of businesses that are on the brink of closing and do not know how to stop what now seems inevitable.

“For many businesses, emerging from a recession can be more painful than going into one, and there is no doubt that many New Zealander business owners are still doing it tough and are likely to feel the pinch for some time yet,” says Staples Rodway Corporate Advisory director Gareth Hoole.

Fortunately, he says, unlike after the 1987 crash, institutional creditors have recognised that if all the distressed assets in New Zealand were to be liquidated at once, the long term effects on the economy would be catastrophic.

But even with creditors’ more lenient approach, businesses still face the challenge of recovering from recessionary conditions, tighter profit margins and balance sheets laden with debt, says Mr Hoole.

“The sad thing is that unfortunately many suffer in silence, just scraping by day by day, and don’t seek the help they need until it’s too late and they have got themselves into such a state that the only option for them is to close.”

One option Mr Hoole is surprised that more businesses have not taken up is rehabilitation through Voluntary Administration (VA). Since 2007 New Zealand’s insolvency legislative framework has provided a moratorium period during which a distressed company can seek rehabilitation through VA.

“This is a good option as putting a business into receivership or liquidation is often the demise of it, when it is quite possible that it may have been rehabilitated. One reason people don’t opt for VA if likely the cost, although it may be money well spent given the alternative cost of the failure of the business to owners and all other stakeholders involved.”

Another option also exists that is less costly than VA, and that is the ability of a distressed debtor to compromise with their creditors by entering into a scheme of arrangement pursuant to Part XIV of the Companies Act 1993.

This involves the debtor making a proposal to their creditors whereby they may seek to repay them in full over a time-delayed period, or they may offer them partial repayment of the debts in full and final settlement thereof; or potentially some other solution.

The proposal needs to be accepted by a defined majority of creditors and the proposal then becomes binding. A similar process exists for individuals who cannot pay their debts under the Insolvency Act.

“The key to success in either a compromise with creditors or Voluntary Administration is early intervention. If the experts are called in before the business goes beyond the point of no return, there is a strong probability of a long term rescue,” Mr Hoole says.

The plight of businesses has also prompted a resurgence in the Staples Rodway Critical Point Network, which sees around 200 mostly lawyers and accountants working together to make sure businesses get the expert, targeted advice they need, when they most need it.

“Rather than being the ambulance at the bottom of the cliff, after assessing the state of a business we refer them on to people within the network with the expertise in the particular area they need.”

“As an insolvency practitioner, I would far sooner see an effort to save a business than to have to shut it down – particularly when that would mean having to tell staff that they are out of a job in these tough times, and so close to Christmas.

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