5 things you should do if you’re facing insolvency

When the crisis hits: How to navigate this transitional time

Conor McElhinney smiling and looking into the camera

Conor McElhinney, Partner at McGrathNicol


This article is contributed by Conor McElhinney, Partner at McGrathNicol, who explains some key things you should keep in mind if your business is facing insolvency. 

It is understandably distressing when the company you have built and nurtured faces an insolvency crisis. It is critical to act early and gather support around you to navigate this challenging time. Hoping the situation will resolve itself is rarely a successful strategy as restructuring options diminish over time.

These are some of the key things to consider if your company is facing an insolvency crisis.

1. Cash is critical

How much cash does the business have left and how long can it continue to trade? If you are already in the position where you cannot pay staff next week or rent next month, then it is likely to already be too late to save the business and a formal insolvency may be the only option.

Are shareholders able to inject new funds? If so, do not inject them now! This may seem counterintuitive, but it is critical to get advice before you put more money into the business, so that it can be used most effectively and can be secured (if possible).

2. Get expert restructuring advice

Seek advice as early as possible from a restructuring and insolvency expert. They can explain the options and guide you through this trying time. There are various tools to save a business, both informal and formal, such as:

  • A scheme of arrangement;
  • Creditors compromise;
  • Voluntary administration;
  • And in the right circumstances, receivership, or liquidation.

However, the options diminish over time as the business runs out of cash, so it is critical to seek advice early. Many business owners tell us they wish they had got advisors involved sooner to have had a better chance of success.

It is also important to find the right advisor. Ask yourself: are they more interested in saving your business than winding it up?

Through Covid-19, McGrathNicol helped many businesses to restructure, exit unprofitable leases, contracts, and arrangements, cut costs, and improve cash flow. For example, we saved Max Fashions from insolvency by using a creditors compromise. 

3. Control the narrative

New Zealand is a village and it is inevitable that your company’s financial distress will leak into the market. Would suppliers continue to supply you on credit if they knew the company’s situation? Would customers continue to place orders?

It is therefore important to have a PR strategy in place. Make sure you have a centralised contact person, pre-drafted proactive and reactive messaging, and a considered list of Q&As. Consider also who the critical stakeholders are and proactively contact them to reassure them.

4. Be open with staff

Your staff are likely to be more aware of the situation than you think. In order to control the narrative internally, consider updating staff proactively, ensuring they know not to discuss the matter externally, that you are working with advisors to secure the business’s future, and that their support is crucial to the success of the business. Some resignations may occur, and you may consider using retention bonuses to keep critical staff engaged through this transitory time.

5. Take legal advice

Recent case law (e.g. Mainzeal, Debut Homes) has highlighted the personal liability directors can face if they recklessly continue to trade an insolvent business. In an insolvency crisis, it is important not to risk your personal finances, career and reputation by risking being bankrupted, or worse, spending time in jail.

Not paying PAYE is a criminal offence and the Inland Revenue may pursue a criminal action if the offending is protracted or premeditated. Taking legal advice on your directors’ duties may be appropriate to ensure you are protected.

McGrathNicol has helped hundreds of companies and stakeholders navigate restructuring and insolvency. It needn’t be the end, but instead can be a catalyst for the change needed to set the business back on solid footing for many years to come.

In summary, the key is to act early and seek advice to give your company the best chance of success.

Conor has extensive experience in restructuring and transactions across New Zealand, the United Kingdom and the Middle East. Learn more about McGrathNicol and Conor by visiting their website. You can also contact Kare Johnstone or Andrew Grenfell – both are also Partners at McGrathNicol.

If you’re facing insolvency, or another business issue or crises, our other blog posts could help you as well. 

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