What to do if your business is financially distressed

27 February 2022

We are seeing an increase in businesses in financial distress. There are many reasons for this which are often outside a business owners’ control. A few reasons include inflationary pressure both in relation to materials and labour, shortages of staff, stock and materials, inability to pass on price increases, lending facilities being cut off and regulatory compliance requirements increasing. These factors can often put a strain on cashflow and resulting in the business not being able to pay bills as they fall due.

This is often an incredibly stressful time for business owners. Often, they don’t know where to turn, and do everything in their power to keep trading, hoping for conditions to improve. This can result in action being taken which results in breaches of Companies Act duties or improperly preferencing some creditors over others.

In our experience, the best way to approach these issues is to obtain advice from professionals experienced in dealing with these matters. This advice will allow you to put a plan in place to either put the business back on track, or to start a process to wind the business up. Having a plan will help to reduce the stress and help the business owner to establish what risks they (and their assets) face in a personal capacity.

If you find yourself in a position where you cannot pay your bills as they fall due, we suggest that you consider the following options:

  1. Accountant – we suggest you meet with your accountant as soon as possible and have them review your financial position. The key assessment will be whether the business is solvent. Solvency is key to understanding whether a business can carry on trading or whether there is a duty for it to be wound up.
  2. Insolvency Practitioners – there are a number of licensed insolvency practitioners available who, in most cases, will happily have a no obligation conversation regarding your financial position, and where a business is to be wound up, outline the options available.
  3. Lawyer – a lawyer with experience in insolvency matters will be able to provide advice as to the options available, and more broader risks, such as a breach of directors duties, personal liability under guarantees, any statutory or Court processes that have been commenced (for example a statutory demand or debt collection action). Lawyers can also advise regarding managing employees through the process.

Once advice has been sought, plans can be put in place to deal with the myriad of issues that are likely to arise, including banks, creditors, IRD, staff and contractors etc.

Norris Ward McKinnon regularly deal with the issues outlined above, and welcome the opportunity to discuss these with you.

Chris Steenstra is part of our Corporate & Commercial team at Norris Ward McKinnon.

Corporate & Commercial Team