Failed businesses down 50% on pre-Covid levels

Closures were most prominent in sectors most affected by the Covid-19 pandemic, including...
File photo. Photo: Getty Images
The number of business failures continues to track below pre-pandemic levels, despite the end of Covid-19 support measures and stiffening economic headwinds.

The insolvency and liquidation industry has been surprisingly quiet during the pandemic, which has been put down to the government and the Reserve Bank's Covid-19 response.

The measures were said to have given rise to "zombie" companies - businesses that were on the verge of insolvency but had managed to stay afloat with the help of government support.

As Covid-19 stimulus dried up there was an expectation that insolvencies in the hospitality industry in particular would rise. 

However, Chapman Tripp partner Michael Harper said the number of companies placed into bankruptcy or liquidation was still down by about 50% on levels seen in 2019.

He said there were several factors for this.

One of the key drivers of this was the softer enforcement approach taken by Inland Revenue during the pandemic, as it typically applies for more liquidation's than the rest of the market put together, he said.

"We understand that the Inland Revenue has entered into something like 140,000 payment arrangements that covers about $3.7 billion in debt."

"The crucial indicator, I think, for insolvencies is the extent to which Inland Revenue enforces its claims against defaulting tax payers."

He said IRD's recent application to put the property investment firm Propeller Property Investments into liquidation may hint that the tax department was getting back to business as usual, after relaxing its enforcement during the early stages of the pandemic.

The government's business finance guarantee scheme had also provided lasting support to firms, Harper said.

The scheme allowed small-to-medium-sized firms to access up to $5m in credit.

It ended a year ago and resulted in $2.8b being lent to 3363 borrowers.

Harper said it was difficult to know when company failures would begin to pick up.

However, he said history suggests that there was a lag time of about three to four years between an economic shock and a wave of liquidations and insolvencies.

Reform Needed

Michael Harper said with a surge in business insolvencies and bankruptcies looming, officials needed to review and reform insolvency law to make the sure the process of winding down a business or beginning a turnaround runs as smoothly as possible.

He said Australia had recently put in place laws that encourage quick and inexpensive restructurings of small businesses, which New Zealand should adopt.

The Australian regime took a "debtor in possession mode" approach, which meant that a business with a million dollars in liabilities was eligible to keep trading under the control of its owners, provided it had the approval of a small business restructuring practitioner.

The practitioner would work with then work with business owners to develop a restructuring plan, which would then be voted on by the creditors.

"We've got a gap in the [New Zealand] law in that [local] companies do not have an efficient, effective and inexpensive rehabilitation process."

"For those directors, you keep trading until you fail because voluntary administration or creditors compromises are too expensive or are poorly understood by your creditors."

Harper said following the Mainzeal and Debut Homes court cases, larger corporates still faced their own challenges around restructuring and rehabilitation, given the legal uncertainties surrounding directors' duties and insolvent trading in the Companies Act.

He joined a chorus of business groups calling for a review of the law to clearly set out director's obligations around insolvent trading.

The rise of litigation funders was also in "desperate need" of a review, he said.

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