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Voluntary Administration

The New Economic Climate

BUSINESS INSOLVENCY IN A PANDEMIC WORLD

There is a sense of buoyancy in the New Zealand economy. There are predictions of 4 per cent growth in GDP, and even mention of inflation.

It seems that the COVID-19 pandemic has not caused the widespread business failure that was anticipated. However, the news isn’t all good. The buoyancy in the economy has been largely the result of support in the form of government funding. Now that businesses are coming to grips with the pandemic economic climate, we are certain to see the demand for business liquidation increase.

The reality is that many countries – including New Zealand – are awash with debt that can only be dealt with by productivity gains that result in increased taxation revenue, or increased taxation rates that create a capital erosion burden on revenue earned.

However it is sought to be achieved, the economies of the world must somehow balance their books involving debt retirement. When those policies come forward it is inevitable that a correction will take place.

Lowering the economic tide will not necessarily result in broad-based business insolvency, however. External economic circumstances are most likely to impact those companies that have underlying issues that have not been resolved – or perhaps more to the point, are unresolvable. In other words, if a business had issues before the pandemic, those issues may have hastened the business’s inevitable end.

It’s also worth considering that there are issues within certain sectors that may take down otherwise robust companies. While many will adapt, some companies’ business models will be so entrenched that they cannot readjust to the new business environment unless demand is restored. To give one example, consider how a well-established supply chain provider in the food and beverage industry will be seriously impacted by the pandemic. Sector-based demand shifts will see companies able to survive only if demand returns before they run out of capital resources.

Insolvency, however, is normally associated with the shortcomings of a company’s management. The environment within which it trades is relevant; but more important are the internal dynamics. How well does the management understand critical accounting processes? Has record-keeping been subordinated to the demand of operations? Are costings analysis predicting a positive outcome? Has the company invested its scarce resource in a manner that maximises returns? Are human resources managed so that the ideal outcome of optimisation and equity are achieved? These questions – and many more that relate to the allocation of capital resource for the purpose of creating surpluses – must be considered.

Can a better outcome be achieved?

The internal dynamics of a business can certainly change. That does not mean that structural alterations can be made with ease – for example, moving away from a long-term leasehold interest – but the approach taken to a company’s issues can change as quickly as the adoption of an alternative frame of thinking by management.

The reality is that the creation of wealth is a function of applying human ingenuity to the allocation of capital resources for the purpose of earning revenue at a level greater than expenses caused. Within this triangle, the only alterable element is human ingenuity and how that is applied to use resources to achieve the purpose.

Bridging the abridgement

Government recognises that company failure takes down the capital invested and impacts on the lives of people associated with the company, including creditors.

Rehabilitation is a much better outcome for a business than failure. There is a legal process designed specifically to help businesses get back on their feet. Voluntary administration can help a struggling company transition back to full health. This is not an easy process; it requires a strong commitment from all parties involved.

To find out more about company liquidation or voluntary administration, visit BWA Insolvency or get in touch to discuss how we can help you and your business.

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Voluntary Administration

How VA Helps Companies Get Back On Their Feet

HOW VOLUNTARY ADMINISTRATION HELPS COMPANIES GET BACK ON THEIR FEET

Voluntary Administration is a process that helps businesses facing insolvency get back on their feet. Insolvency follows a well-worn pattern of value depreciation. It starts with congestion that results in inefficiency and illiquidity. When these dynamics remain unchecked, they compound and cause new cycles of congestion, inefficiency and illiquidity. Like any ill health, if not corrected the condition worsens to a point where the company cannot be saved. 

Voluntary Administration aims to stop this trend and define a new playbook for the company. It gives the failing company the best possible chance to continue to exist, and is designed to be an alternative to liquidation.

How Voluntary Administration works

When the Voluntary Administration (VA) progress begins, the effects are immediate. The first main event is that most creditors are required to stand back for a period of time so that a plan for recovery can be developed. This lifts a weight off the shoulders of the directors – even if only for a short time – and gives them a chance to consider their options. This is far more productive than constantly fighting for survival, issue by issue. 

VA is an inclusive approach. It recognises that preserving the business as a going concern provides a better chance for recovery than breaking it apart; and working with directors is likely to produce a much better outcome than grinding down upon them. The directors’ efforts to save the business will be matched by creditors if the right plan is put before them.

VA law defines what must be done and when it should occur. Not only does the scheme require everything to be done within time deadlines, it also makes sure that no one is allowed to overreach their rights. Its end goal is the continuation of the business by making sure that, wherever possible, value is preserved and viability is recreated. All of this is done in an environment of full disclosure, so that everyone who has a right in the business gets their say.

All this sounds too good to be true! How could it be so easy to achieve such a result? In reality it is not easy. Claimants in the company are likely to lose money, which will result in disharmony and tension that may show up as opposition to the recovery plan. But that does not alter the validity of the process; opposing dynamics are an inevitable part of it. Regardless of the consequences, the company must confront its situation head-on if it is to have any chance of restoring itself back to good health. At the very least, VA will offer relief from overwhelming creditor demands and operational shortcomings so that clear heads can consider alternatives.

VA brings a much-needed structure to the company’s affairs. Under VA, set processes and rules must be followed, which force claimants and shareholders to engage in the affairs of the company as if Voluntary Administration has brought about an abrupt end to the company’s life. And in a way it has – if it is agreed that there is no going back to the way things were. It is an opportunity to define a new future for the business, one that is intended to take all that is good, leave all that is destructive and meet the company’s obligations to its creditors from the results of its new activity. When that is achieved, the company is returned back to the directors, leaving them once again in charge of the company’s destiny.

VA and a company’s employees

The law recognises that the business is built on the backs of its employees and that they should rank as a special class during the VA process. There may still be a requirement for restructuring which could impact on employees; but in those circumstances they will be preferential creditors. The end goal of VA is the continuation of the business by making sure that value is preserved – and much of a business’s value is in its employees. 

The four pillars of Voluntary Administration

The legal framework of VA comprises four pillars. These provide both freedom and barriers: freedom to create a remedial plan to put right the current circumstances, but barriers to ensure submissions are made within time limits and that rights are not exercised where they do not exist. These pillars are the cornerstone of the VA programme and create the potential for a better outcome than immediate liquidation.

The first pillar: The demands of creditors, with some exceptions, are frozen for at least 25 working days. It can be extended beyond this period. The moratorium provides vital breathing space to the administrator and the directors to assess the affairs of the company and come up with a business recovery plan. 

The second pillar: Allow the company’s creditors to have their say. This is done through meetings, which have prescribed outcomes and must be held at certain times. Although the VA programme is inclusive of all parties – creditors and shareholders – it is the creditors who decide the future of the company. Discussion of the issues that have caused the insolvency cannot be avoided. But this is a starting point for recovery – the business cannot get out of the woods unless it knows where it is within them. In addition, lack of knowledge is typically a frustration for creditors. VA  deals with that by ensuring that all the facts are on the table. 

The third pillar: Cash flow will immediately be improved. This important pillar ensures that obligations to creditors will be suspended but payments will still be received from customers. Supply lines that may have been restricted because of the insolvency are normally reopened, as suppliers can look to the administrator personally for settlement. New administrator accounts will be opened to provide the goods and services that are necessary for the recovery plan.

The fourth pillar: Guarantors are protected from action against them during the VA process. Creditors are not able to call upon guarantors as this would frustrate the recovery process. The shareholder who has put their house on the line to fund the company cannot diligently work towards the revival of the business if at the same time their home is at risk. 

Voluntary Administration law recognises that commerce is undertaken in a battleground of competing interests. Costs are driven up by supply-side providers and when sales are made, they are won from a competitor. There is economic and legal tension in every aspect of business, and that sometimes results in business failure. 

What you can expect from us

BWA is a team of five highly qualified and competent practitioners. The practice is led by Bryan Williams, a registered insolvency practitioner who has been active in the field for over 25 years. We pride ourselves on our results because results are the most important thing. The following attributes are what you can expect from us when appointed. 

  • Engagement: Voluntary Administration is immediate and demanding. We know the requirements and will meet these on time and as fully expected. We know the work is hard and demanding, and we draw on every ounce of skill and experience that we have to deal with the many requirements of the VA process. When we accept the appointment, we are in the game. 
  • Transparency: There is no substitute for honest and accurate declaration. All affected parties are entitled to know the situation and how it affects them. Trust and confidence are vital during this challenging process, and these will not happen without transparency.
  • Consideration: The company’s claimants will be considered in accordance with their rights. The ultimate end goal of Voluntary Administration is the survival of the business and the redemption of creditor obligations as a result. Parties may seek to cut across that outcome – these must be attended to as best they can, to ensure the big-picture objectives are met wherever possible.
  • Deliberation: Decisions must be made in a timely way. The criteria for any decision will reflect the best interests for the survival of the business, provided that what is best for the business is also the best outcome for the creditors.
  • Compliance: We know the law and will strictly adhere to it. We have the view that the law is enabling, not restricting. The law provides the scope for survival opportunities to be considered.
  • Empathy: Insolvency is a difficult world. Losses are likely to be experienced and attitudes are sometimes expressed in a harsh manner. Although there are tough decisions to make, we have a heart and recognise the impact that insolvency can bring. 

 

Before accepting any appointment, we want to know the objectives of the engagement so that we can provide input into how realistic they are. Not all objectives can be met. We will be honest, so that no unrealistic expectations are carried forward. 

Of vital importance is our commitment. We will be in the trenches with the directors to achieve what might be one of the most difficult things they will ever face. We take this responsibility seriously and with wholehearted adherence to the requirements of Voluntary Administration. 

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Voluntary Administration

Seeing the light in a failed business rescue plan

Seeing the light in a failed business rescue plan

When the waves keep coming, the only way to overcome their weight and turbulence is to learn how to surf. Insolvency is very much like the breaking surf, bringing noise, confusion and murkiness as claims from creditors emerge and start to close in on the business. Directors will often meet this stressful circumstance with ploy and shrewdness thinking that survival is best achieved by avoiding the very issues that should be confronted head on.

Learning to surf the dynamics of a failing business is likely to be new to the owner. Insolvency is not something encountered frequently enough for the directors to become skilled in this field. Nor is failure dwelled upon when starting out and will be the last thing that is thought of when striving to succeed in the business. The dynamics of insolvency will be a new encounter for the directors and potentially a painful one as the circumstances take on a personal slant.

The effect of insolvency is not confined to the company – both the turbulence, and the economic consequence, hits both the company and its creditors. The other side may present acrimoniously because someone else’s shortcomings have caused damage to them. Here is an important point though – the business in trouble may be failing and that means that management has failed but it does not mean that management is a failure!

To avoid that failure label, directors must conduct their business affairs in a different way than has occurred up to this point. It is highly likely after all, that it is the failing of management that is the probable cause of the condition. To have any credibility, the change in approach must demonstrate that the company’s creditors are at the heart of its future activity.

It is all very well to have such a plan, but unless there are avenues for its implementation it will not see the light of day. Intention is one thing but being able to perform is quite another. The solution to be found is how management makes such a momentous shift in its approach and have that accepted by the creditors. The reality is that there is no model answer for this situation. In this swirl of activity, the directors will need to find a way of convincing creditors that their plan for survival is better than the creditors taking action themselves. This will require the directors to submit a plan born out of one eye on the past to ensure mistakes are not repeated, and the other on the future that shows modest and credible results. The important thing is that the company is not dead yet and until it is, there is potential for its revival – the alternative is that the company becomes just another statistic.

Undying commitment for survival by itself will not be sufficient though. There must be commitment in abundance but without staircasing through some tangible objectives, commitment alone will fail for the want of achieving benchmark outcomes. Solid stepping stones need to be found so that trust and confidence can be rebuilt, and rehabilitation can become a reality.

Firstly – get to know exactly where you are in the woods. Business is about wealth creation and this is measured in money terms. Ask for assistance to prepare a statement of position – it should not take more than an hour using your assessment of value. Estimations are near enough at this stage – you just want to know roughly your whereabouts so that you can prepare a course of action showing the way out.

Secondly, define what value your business can provide. Why should customers come to you and how valuable is the good or service to them. Success in business is not a right of existence, it is a consequence of the value that is transferred to customers that are willing to engage with the business. Pulling the business out of a hole, in the long term, is about making sustainable profits from providing value. If there is no value to provide, or the costs of providing it are greater than the profit to be earned, then perhaps there is not a business to save.

Thirdly, honestly describe what has gone wrong. Get down to the nitty gritty of the matter and answer up against the issues. There is one common element that is critical to comprehend and factor into the analysis – management did not see the insolvency outcome or did not respond to it in a way to defeat it when it became apparent. Management should not engage in some self-effacing introspection and retort that they are to blame for everything that lives and breathes in the organisation – rather, management needs to understand what other decisions might have been made so that the outcome being confronted now, might have been different. Nothing that has happened can be changed, but if the cause of it is understood it is less likely to be repeated.

Fourthly, it is imperative that management plans its activity. Plans themselves are nothing but the process of planning is everything. The completion of an excel workbook full of numbers and formulas may look impressive but unless those numbers accurately represent an actual occurrence in the business, they are just numbers on the page. Plan honestly and diligently – do not be fooled by the promises of bells and whistles programs, the answers are not in IT functionality but in the thinking persons’ head that is seriously concerned about the survival of the business. Plan the future with intuition and foresight by developing a big picture view made up of moderate action steps, and then implement the plan with confidence.

Fifthly and lastly, get help. The business is in a hole and management will be held accountable for that outcome. There may be reluctance to engage someone, but the business will not only be advantaged by fresh eyes but will benefit from having an independent person between the company and its creditors.

Businesses fail every day. The important point though is whether or not all reasonable chances of recovery were considered. Voluntary Administration is the legal regime designed specifically to see whether or not the business can continue in existence. Its implementation is intended to be an alternative to liquidation.

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Voluntary Administration

The VA Model

The VA Model

Expectations from model law require the people involved to make it successful. Typically, model law enables and seeks to provide a good mix between the perception of what lawmakers would like to see occur and the skills of the person striving to achieve the outcome desired by the appointer.

There is no just-add-water framework able to be devised in a legal framework. Human interaction is required to provide the light and colour behind the lawmakers’ endeavours that are sought to be achieved.

There are more skills required when attempting to turnaround a failing business than in any other commercial circumstance. Lack of resources, broken connections and thwarted goals are the normal landscape for the Practitioner engaged and from this canvas, a revitalised and viable business is to be remade.

The objective of the Voluntary Administration model is defined as being able to see whether, or not, the Company, or the business, can continue in existence. The framework is comprised of four entwined dynamics:

  • The assigning of power and control to an independent Administrator
  • The existence of a moratorium, preventing the withdrawing of property and termination of contracts (does not apply to some secured creditors)
  • The requirement of the Administrator to investigate, report and recommend
  • The devolving of the ultimate decision of the Companies future to the Creditors by means of voting within a meeting of the general body of creditors

All this is to be achieved in 25 working days. Day one is the date of appointment and day 20 is the date on which the Administrator’s report is to be provided to creditors. The report provides information material to creditors so they can make an informed decision about the future of the Company. The Administrator is required to provide an opinion on those same facts and to make a recommendation regarding the company and its future. The recommendation is framed by the resolution that creditors will consider in general meeting. These later steps are to take place in the Watershed Meeting that is required to take place no later than day 25 from the commencement of the Administration.

Court extensions and adjournments can add further time to the process, but even if that does occur it will be time limited and not really change the fact that the Voluntary Administration is a pressure cooker event designed to provide some breathing space so that options can be considered, and a decision made in respect of the proposal.

Amidst the turmoil that results from a formal state of insolvency, the Administrator adopts the obligation to hold the form and shape of the business, preserve its inherent value, consider elements of viability, conduct formal processes and report to creditors in a way that enables a decision to be made. It’s a short and focussed process with the single-minded objective of preventing the demise of the business – and that’s a far better outcome than the misery of liquidation will ever be.

VOLUNTARY ADMINISTRATION IS THE LEGAL ALTERNATIVE TO LIQUIDATION.

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Voluntary Administration

The Case for Voluntary Administration

The Case for Voluntary Administration

The first in a series of eight blog posts.

From January 2014 up to the end of March 2018 there have been 216,157 new companies incorporated. Over the same time there have been 11,155 companies that have gone into liquidation. In earlier years the statistics were much more in balance.

The corporate personality is the entity of choice for those persons that want separate legal distinction. Incorporating is the thing to do to manage risk while ring fencing different commercial activities. The ease with which one can legally clone themselves and be distant from the risk is attractive, inexpensive and, until recent times, has been wholly effective.

There is sophisticated intent in this pursuit. A consciousness to express the incorporators commercial aspirations through an entity that distances the risk from the person that may caused the exposure. For low cost of incorporation, under $300, and investment of shareholder capital of normally $100.00 (which is rarely paid) the new Director is free to engage with creditors while quarantining the shareholders from exposure. The company is less now a mechanism for collection of capital, spreading risk and limitation of liability than it is a device of commercial expediency around one person.

Suppliers and providers have their answer though and often look to sureties (bond providers, guarantors and indemnifiers) to meet the obligation of the company when it cannot. This leaves the Company as an entity that is trying ring fence risk but at the same time destroying that very feature by the making of enforceable agreements against third parties.

So how does Voluntary Administration fit into the picture? Well regardless of how the parties deal with their risk exposure it is very clear that there is minimal reliance in the handshake promises and assurances that underpinned commerce 20 and 30 years ago. Parties are becoming increasingly more sophisticated in their dealings with others and the blunt instrumentality of liquidation or receivership is simply not up to the mark when it comes to recovery or rehabilitation.

The core objective of Voluntary Administration is to reorganise those elements of the business activity that have the potential to survive and take the rehabilitative steps required to bring them back into viability. That’s better for everyone, debtor, creditor and the economy. In subsequent blogs I will discuss the VA model and show how it can be very effective to manage failing businesses and restore them to viability.

If you’d like to learn about Voluntary Administration in more detail, click here to watch my latest video and get in touch.

Bryan Williams, Principal, BWA Insolvency