Navigating Debt and Insolvency

Expert Insights from Caffeine & Coins with Cristina

​Welcome back to another episode of "Caffeine & Coins with Cristina," where we blend financial wisdom with your favorite cup of coffee. In our current economic climate, marked by the Covid-19 pandemic's profound impact, we're seeing a significant shift in debt collection dynamics, including a rise in winding-up proceedings, both in New Zealand and globally.

Understanding Insolvency: A Two-Pronged Approach Insolvency can be understood through two primary financial scenarios:

1. Inability to Pay Debts on Time: This happens when a business cannot meet its financial obligations as they come due, leading to an accumulation of unpaid bills and debts.
2. Debts Exceeding Asset Value: A more precarious situation arises when a company's total debt surpasses the value of its assets, indicating that liabilities outweigh assets.

Support from the Inland Revenue Department (IRD) In these challenging times, the IRD steps in to offer crucial support to businesses impacted by Covid-19 through various financial relief options:

• Instalment Arrangements: Businesses struggling with lump-sum tax payments can spread their payments over a period, easing the burden of debt repayment.
• Debt Write-Off: In certain cases, the IRD may consider writing off tax debts to alleviate "serious hardship" for the taxpayer.
• Tailored Solutions: The IRD may also combine these approaches, offering a mix of debt write-offs and instalment plans, depending on the unique situation of each business.

Additionally, the IRD holds the discretion to write off debts deemed irrecoverable, aligning with the efficient use of Inland Revenue's resources.

Remission of Penalties and Interest In certain situations, penalties and interest may be waived, particularly when circumstances are beyond control, as part of the IRD's commitment to maximizing net revenue.

Voluntary Liquidation: A Proactive Option
Faced with formal demands from the IRD, companies can opt for voluntary liquidation, allowing directors and shareholders to maintain control. However, failing to act promptly might result in the IRD appointing a liquidator, diminishing the directors' control and necessitating cooperation with a Court-appointed liquidator.
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Choosing the Right Path Forward
Deciding between involuntary and voluntary liquidation can be complex. Engaging a licensed insolvency practitioner can provide clarity and guidance in navigating these choices, minimizing impacts on the business.

Key Considerations in Debt and Insolvency

• Avoid Trading While Insolvent: Directors should be vigilant to prevent trading insolvently, reducing personal liability risks.
• Negotiate Instalment Plans: Early communication with the IRD for instalment plans can save on additional costs.
• Assess Business Viability: A thorough review and cash flow forecast are crucial in guiding strategic decisions.
• Explore Compromises: Negotiate with creditors for possible debt forgiveness or extended payment terms.
• Consider Timely Liquidation: If recovery seems unlikely, early liquidation can prevent further risks.

In financially uncertain times, proactive measures and informed decisions are key. Seeking professional advice is crucial in safeguarding your business's future.

Government Agencies for Assistance
In New Zealand, two primary agencies offer support in insolvency matters:

1. Insolvency and Trustee Service (ITS): A part of MBIE, ITS provides guidance on personal insolvency matters.
2. Inland Revenue Department (IRD): Specializing in tax-related issues, the IRD assists businesses facing financial difficulties.

Both agencies offer tailored support to help secure your business's future. For more information, visit Insolvency and Trustee Service or the Inland Revenue Department (IRD). 

Stay tuned for more in-depth analyses and clear guides on complex financial issues, helping you make well-informed decisions for your business. If you need help with this or any other tax or financial issues please get in touch.