If your business is insolvent, it means you can’t pay your debts when they’re due (your outgoings are more than your income) or you owe more than you own (your liabilities are more than your assets).
As a last resort, your creditors can apply in court to have you declared bankrupt (if you’re personally liable for the debts) or to liquidate the business (if it’s a limited liability company that owes the outstanding debt).
However, even at this stage, there are actions you can take to prevent being involuntarily closed.
Involuntary closure is the court-ordered dissolving of a business to sell its assets and repay its creditors. It can take place in different ways, depending on the structure of your business.
A sole trader personally owns the assets of his or her business and is personally liable for its debts. So if you’re a sole trader and you become insolvent, a creditor can apply to the High Court to have you declared bankrupt. All your personal assets then vest in the Official Assignee (a statutory position upheld by the Insolvency and Trustee Service) before being sold to repay your creditors.
The same applies to partners, sole traders in their own right who’ve pooled their assets to form a partnership.
Each partner is equally responsible for the partnership’s debts and can be bankrupted, but if you’re the only partner who can be located, you run the risk of being made liable for the partnership’s entire debts.
You can declare yourself bankrupt to give yourself some breathing room from your creditors, who are ordered to cease all debt collection activities while your assets are put in order for sale by the Official Assignee.
However, bankruptcy is always a last resort because it places significant restrictions on you.
For example, while you are bankrupt:
- You can’t incur more than $1,000 in credit without disclosing that you are bankrupt.
- You can’t become (or continue to be) a director of a limited liability company.
- You can’t take part in the management or control of a business without the Official Assignee’s consent.
- You can’t leave the country without the Official Assignee’s consent.
- Your credit rating may be affected around the world for seven years.
If you’re a director of a limited liability company, you don’t own the business’s assets and aren’t liable for its debts unless you’ve given a personal guarantee to your creditors. So rather than bankrupting you, your creditors must effectively ‘bankrupt’ the company by applying in court to have it liquidated.
Once a creditor makes a successful application to the High Court to have a liquidator (a private liquidator or the Official Assignee) assigned to a company, the liquidator:
- Sells the company’s assets to pay its creditors.
- Investigates the company’s financial affairs.
- Establishes the reason why the company failed.
- Investigates possible offences (such as continuing to trade while concealing insolvency).
Just as with bankruptcy proceedings, the individuals involved – in this case, the company’s board of directors or shareholders – can voluntarily opt for liquidation.
Liquidation is often confused with receivership, which is the (sometimes court-ordered) sale of assets used as security by a company that’s defaulted on a loan repayment. Lenders who obtain security against a loan are known as secured creditors.
The best solution for avoiding involuntary closure and giving your business breathing room to return to solvency depends entirely on your situation. Factors such as the amount of debt you owe, your own debt history and the legal structure of your business all play a part.
However, before you start your search for a solution, you should always take the two following steps.
Establish the debt figure
It’s vitally important to gather together all your financial documents and establish a total debt figure before you take any action.
This is because:
- The size of the debt can determine your options. If your personal debts are less than $40,000, for example, a summary instalment order could be an option instead of bankruptcy.
- The total debt can be disputed, and if you don’t have accurate figures supported by documentation, the Official Assignee might have to rely on your creditors’ invoices to determine your debt.
Seek professional advice
After establishing your total debt figure, seek out professional business turnaround and insolvency management advice.
Sole traders and partnerships
There are many resources you can call on to help improve cash flow and resolve personal insolvency issues, but they should only be tapped after consulting your accountant or bank manager:
- Citizens Advice Bureau (call 0800 367 222).
- Ministry of Consumer Affairs (0800 LOAN STRESS), if you think a loan company has acted irresponsibly or illegally.
- Inland Revenue (call 0800 227 774), if you have tax debts you’re struggling to pay.
- Business Mentors New Zealand (0800 209 209) can pair you with a mentor to help you avoid closure for a membership fee of $100. An experienced mentor can be a valuable source of long-term advice and strategic turnaround knowledge.
Limited liability companies
Companies often improve their financial positions through:
- Asset sales
- Widespread efficiency improvements
- Outsourcing of existing and future contracts
- Compromise or payment arrangement with creditors
- Ceasing to trade temporarily.
These options often require independent professional advice to manage and execute effectively.
Find out more with INSOL New Zealand, an organisation for accountants and lawyers who specialise in business turnarounds and insolvency, which is affiliated with the New Zealand Institute of Chartered Accountants (0800 469 422).
Companies can also find support and advice from:
- Inland Revenue (call 0800 227 774)
- Companies Office (call 0508 266 726)
- Business Mentors New Zealand (0800 209 209).
After seeking professional advice, sole traders and partners often pick the following options when tackling personal insolvency to prevent involuntary closure. Always seek independent legal advice and assistance before considering any of the following options.
A compromise agreement is an arrangement made outside of court in which you agree to pay some – if not all – the money you owe to your creditors. While such arrangements don’t involve the courts or the Insolvency and Trustee Service, they should still be overseen by a professional such as a lawyer or an accountant.
This can be the preferred option because it avoids any court-ordered actions that could place obstacles in the way of carrying out future business.
A proposal is an agreement with creditors drafted by a lawyer or accountant that needs to be approved in court.
Creditors need to first approve the terms of the procedure, which can include things like paying back debt in fixed instalments or having your property placed under a trustee to pay back creditors (much like a bankruptcy procedure).
If both your creditors and the court give their approval, the proposal becomes a legally binding agreement, and while it’s in place your creditors can’t pursue you for debts without the court’s permission.
Summary instalment order (SIO)
If your total unsecured debts (excluding student loans, fines, penalties and reparation orders) are less than $40,000 and you’re unable to pay them back immediately, you or your creditors could apply to the Insolvency and Trustee Service for a SIO.
A SIO is a formal agreement to pay back your creditors in fixed instalments over a period of usually three years (or five years in some circumstances).
You negotiate the size of your repayments with your creditors, and as long as you stick to the plan, they can’t take any further legal action against you.
Find out more with the Insolvency and Trustee Service.
No asset procedure (NAP)
A NAP is like a one-year bankruptcy without the conditions imposed by the real thing. This means that, unlike being declared bankrupt, you can still be a director of a company or go overseas without first gaining permission from the Official Assignee.
It’s called a no asset procedure because it’s only available to those with no realisable assets to sell to pay their creditors back.
However, there are many conditions to qualifying for a NAP. For example, a NAP can only be granted if your creditors don’t object and only if a formal bankruptcy procedure would not be in their best interests.
A NAP can only be granted once by the Insolvency and Trustee Service.
Declaring yourself bankrupt gives you breathing room from your creditors if you’re personally liable for your business’s debts, but it should only ever be considered as a last resort to bring forward closure.
There is no difference to the conditions of a bankruptcy declaration if you make the application instead of your creditors.
Find out more with the Insolvency and Trustee Service Personal bankruptcy toolkit.
A company’s board of directors can freeze its financial position and place it in the control of an appointed administrator to steer it away from liquidation.
The administrator takes control, notifies Companies Office (the Registrar of Companies in New Zealand), advertises the voluntary administration in a local newspaper, examines the company’s position and negotiates with creditors for possible rescue plans.
This is called voluntary administration.
If the company can’t be saved from liquidation by the administrator, their next priority is to wrap up the company in a way that results in a better return for its creditors.
Access the following personal insolvency support resources on the Insolvency and Trustee Service website.
- Budget tool - An interactive tool for finding out where money is being spent in your business and compiling a budget.
- Personal insolvency information brochure [592 Kb PDF] - A guide to managing personal insolvency.
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