Businesses are facing numerous and ever-changing headwinds – persistently high inflation, increasing costs and interest rates, and labour shortages may mean that some businesses feel the challenges are monumental.
Additionally, some have been impacted by the widespread disruption and damage following the recent adverse weather events including Cyclone Gabrielle and Auckland flooding.
While many will be fortunate to continue trading despite the challenges faced, others might not.
They’ll be facing challenges such as whether they can source material necessary to manufacture goods. Or if their usual roading network will support distribution channels. Which crop, if any, can be salvaged after the floods. Whether they have sufficient staffing resources available to meet the current demands of their business.
At times like these, directors and boards will find natural tensions between dealing with the operational aspects of their businesses and the adherence to fiduciary duties. If a business is facing financial difficulties, directors need to be aware of the options available to help and, at the same time, understand their legal obligations. At a minimum, ensuring financial records are accurate and up to date and proactively engaging with key stakeholders, such as banks, creditors and IRD, is key to any recovery plan.
However, there are other restructuring processes that are designed to facilitate boards in these situations.
Voluntary Administration (VA) is a formal insolvency process, whereby an independent Licensed Insolvency Practitioner is appointed to help resolve financial and operational issues. It’s a rehabilitative restructuring process, intended to create time and space for a restructure proposal to be presented to creditors, with the ultimate outcome being that a business survives and avoids liquidation.
A moratorium period, preventing creditors from taking action or enforcing securities, provides the required breathing space for boards and their advisors to take the time needed to assess all options and make recommendations for creditors. For directors, a VA provides protection from personal liability for insolvent trading.
VAs can be costly by virtue of the fact they are quite a prescriptive process with various statutory creditors meetings to be held, and a detailed proposal required for creditors. In the right circumstances, an alternative might be to undertake a formal or informal creditor compromise. A compromise is a deal with some or all creditors wherein the company pays back some or all of the debt owing over a period of time – which can be beneficial from a cash flow perspective. However, it does not provide the same level of protection as a VA for directors.
In both options, creditors should expect a better outcome than if the company simply entered liquidation. VAs and compromises are powerful tools which maximise the opportunity for businesses, or parts thereof, to return to a sustainable position and continue trading.
Ultimately the devil is in the detail, and the decision on what is best for a business needs to be carefully considered.
At PwC, we know that business restructuring is a sensitive and trying time for any owner – one in which the future of your hard-earned business is at stake. We focus on delivering what needs to be done, having those tough, realistic conversations with you, and recovering your business. It costs nothing to get to know us, and we want to play a part in keeping Kiwi companies fighting fit.
