NZ insolvencies set to rise as tax-debt leniency ends

The number of insolvencies in New Zealand is expected to rise following the most recent COVID lockdown, while an increase in interest rates – currently being discussed – will likely exacerbate the situation.

As with other countries, the number of insolvencies in New Zealand has been lower than expected, with many businesses being kept afloat by the NZ government’s Covid-19 assistance packages and the Internal Revenue Department’s (IRD) leniency around pursuing tax debts. But that’s likely to change, according to McDonald Vague, the country’s leading specialist business recovery and insolvency practice.

IRD takes stronger stance on collections

Boris van Delden, Peri Finnigan, Iain McLennan
Boris van Delden, Peri Finnigan, Iain McLennan

The firm was recently announced as an inaugural member of the Asia-Pacific arm of the Global Restructuring & Insolvency Professionals (GRIP) network. Director Peri Finnigan says over the past five years, the number of company liquidations and receiverships in New Zealand has fallen but this is set to change.

“The New Zealand economy was doing well until COVID hit and then the government provided packages aimed at keeping people employed and businesses running, which has allowed many businesses to survive,” she says. “However, we expect this to change with significant supply chain disruptions, large increases in freight costs on imports, the talk of increasing interest rates and this latest COVID lockdown.  We are starting to hear that businesses cannot afford to place orders or have ordered goods imported.”

Finnigan says the insolvency downward trend ended around April this year, when the IRD took a stronger stance on tax collection. “While the August lockdown will have a further impact and we expect there will be another post-lockdown grace period from the IRD, some companies won’t survive or simply won’t have the ability to take on further debt,” she says.

Finnigan, a licensed insolvency practitioner, says the pandemic has impacted many of the firm’s clients but this is not flowing through to formal appointments. “Many businesses are simply closing up shop and walking away. There are many empty shops, and we suspect numerous dormant companies,” she says.

The sectors most affected include hospitality, tourism, travel, transport, education providers, forestry, seafood and manufactured imported goods. “More recently, construction has been impacted by materials supply and labour shortage issues,” Finnigan says. “Our most recent appointments have been in entertainment, construction, IT and forestry.”

Finnigan adds the McDonald Vague team is spending more time with potential clients as appointment decisions take longer while people wait to see if the government will provide more assistance. “Sometimes the pre-appointment discussion involves not only consideration of the business but also the people,” says Finnigan. “In assessing recovery prospects, we are probably a bit more sympathetic to those whose businesses have failed through no fault of their own.”

While the NZ government provided relief packages during the pandemic, unlike in Australia, its insolvency legislation has not been amended. “There is, however, discussion underway around Safe Harbour and ipso facto clauses and how they can be dealt with, along with a wider discussion around amending directors’ duties,” says Finnigan. “There was a short Safe Harbour given in 2020 after the pandemic was declared but that has been withdrawn.”

GRIP’s newest member: NZ-based, global reach

Established in 1992, McDonald Vague specialises in insolvency and business recovery formal appointments and advisory clients across a range of sectors including hospitality, retail, construction, finance, forestry, travel/tourism entertainment, manufacturing, transport, import/expert, software development – even bitcoin. It has three partners and five staff members.

“We handle a few cross-border matters every year, usually involving large liquidations,” says Iain McLennan. “We operate from NZ and engage specialists offshore. We currently have engagements in Rarotonga, Japan, China, Russia, Lithuania, Singapore, South Africa and the US.”

McLennan and his colleague Colin Sanderson, a former police officer, work closely on complex offshore work. They have also used the United Nations Commission on International Trade Law (UNICTRAL) model to become recognised in Singapore as liquidators.

“We previously played a role with an overseas-based liquidator engaged in the liquidation of a New Zealand LP with assets in Central/South America, including Mexico, and have had assets to recover worldwide,” says McLennan.

He adds being a member of GRIP will enable the firm to “more easily identify connections and referrals of trusted global insolvency practitioners to utilise, thus reducing delays and costs in dealing with matters offshore”.

In addition to the pandemic, businesses in the region are faced with a myriad of other challenges, McLennan says. “Both businesses and consumers are starting to face the effects of increased freight costs, shipping delays and supply shortages, which is leading to capacity, inflationary pressures and possibly even lower productivity” he says.

“Labour shortages are also an issue, particularly in the construction and primary sectors. In addition, low productivity and the government’s legislative pathway could impact many independent providers of services across a range of sectors.”

Checking in for mental health

Like Jirsch Sutherland, McDonald Vague is closely connected to the community, and supports a range of charities and causes including the Auckland Rescue Helicopter Trust, Rotary Club, Lions Club and the Auckland Special Children’s Christmas Party.

Mental health is also a focus for the firm. “Being a small team, we keep an eye on each other and have discussions when pressures looking to be building up or someone seems to be struggling,” says Finnigan. “Each of us has someone to talk to in confidence within the firm for when we’re not quite ‘with it’. We are part of the NZCA group of independent chartered accounting firms in NZ who provide further support with webinars and provide resources in mental health and wellbeing.”


At a glance: New Zealand Government stimulus measures

  • COVID-19 Business Debt Hibernation scheme, which runs until October 31, 2021, allows businesses to get one month’s protection while they talk to their creditors. During this period, most creditors cannot take legal action to enforce their debts (e.g., apply for a business to be liquidated. If a business’s creditors agree, business owners can get a further six months’ protection.
  • Wage subsidy scheme: where businesses and the self-employed expect a 40 per cent drop in revenue over a two-week period due to COVID restrictions. The wage subsidy is paid in two-weekly cycles as lump sums of $600 per week for each full-time employee and $359 per week for each part-time employee.
  • Business resurgence scheme: the business must have experienced at least a 30 per cent drop in revenue or a 30 per cent decline in capital-raising ability over a seven-day period, due to an increase in Covid Alert Levels. The entitlement is paid three-weekly at the rate of $1,500 per business, plus $400 per full-time employee (for up to 50 full-time employees). The maximum payment is $21,500 per resurgence payment.
  • One-off, five-year cash-flow loan if a business employs 50 or fewer staff. Businesses can borrow a maximum of $10,000 plus $1,800 per full-time-equivalent employee.

Jirsch Sutherland