The insolvency and liquidation industry has been surprisingly quiet during the pandemic, which has been blamed on the government and the Reserve Bank’s Covid-19 response.
The measures are said to have resulted in ‘zombie’ companies – companies that were on the brink of insolvency, but managed to keep their heads above water with the help of government support.
As the Covid-19 stimulus dried up, the number of bankruptcies in the hospitality industry in particular was expected to increase.
However, Chapman Tripp partner Michael Harper said the number of companies placed in bankruptcy or liquidation is still down about 50% from 2019 levels.
He said there were several factors for that.
One of the main drivers for this has been the tax authorities’ softer enforcement approach during the pandemic, as this typically applies to more liquidations than the rest of the market combined, he said.
“We understand that the IRS has entered into approximately 140,000 payment arrangements that cover approximately $3.7 billion in debt.”
“The crucial indicator, I think, for insolvency is the extent to which the IRS enforces its claims against defaulting taxpayers.”
He said IRD’s recent filing to liquidate property investment firm Propeller Property Investments may indicate that the tax authorities have returned to work after easing enforcement during the early stages of the pandemic.
The government’s corporate finance guarantee scheme had also provided sustained support to businesses, Harper said.
The arrangement gave small to medium-sized businesses access to credit of up to $5 million.
It ended a year ago and resulted in a $2.8 billion slowdown for 3,363 borrowers.
Harper said it was difficult to know when corporate insolvencies would begin to pile up.
However, he said history suggests there was a delay of about three to four years between an economic shock and a wave of liquidations and insolvencies.
Reform needed
Michael Harper said that with an increase in corporate failures and bankruptcies looming, officials had to review and reform insolvency laws to make sure the process of ending a business or starting a turnaround is as smooth as possible.
He said Australia had recently introduced laws encouraging quick and cheap small business restructuring, which New Zealand should pass.
The Australian regime opted for a “debtor-holding mode,” which meant that a company with $1 million in liabilities was eligible to keep trading under owners’ control, provided it had the approval of a restructuring expert for small companies.
The practitioner would work with and then work with business owners to develop a restructuring plan, which would then be voted on by the creditors.
“We have a hole in the [New Zealand] law in it [local] companies do not have an efficient, effective and cheap rehabilitation process.”
“For those directors, you keep trading until you fail because voluntary administration or creditor obligations are too expensive or poorly understood by your creditors.”
Harper said that after the lawsuits in Mainzeal and Debut Homes, larger companies still faced their own challenges in restructuring and rehabilitation, given the legal uncertainties surrounding director duties and insolvent trading in the Companies Act.
I joined a chorus of business groups calling for a revision of the law to clearly spell out directors’ obligations related to insolvent trading.
The rise of lawsuit financiers was also in “desperate need” for an overhaul, he said.