A guide for accountants whose clients are running out of room to manoeuvre. 

When a client wants to borrow their way out of company financial trouble, the first question should not be whether they can get the money, but what happens if they are unable to repay it.

Accountants see this scenario earlier than most. GST arrears, PAYE slipping, and supplier emails getting sharper. You see a business that still has sales, still has customers, and may still look solvent on paper, but is starting to run out of road.

By the time a client says, “we are looking at another loan”, the warning signs are usually already there. To them, borrowing can feel like action. It can feel like discipline, commitment, and belief in the business.

But when a company is already under stress, new money does not automatically solve the problem. In some cases, it only changes who carries the loss and how much damage is done if the turnaround does not come off. That is where accountants and advisers add real value: by slowing the decision down long enough to test whether the borrowing is commercially sensible, legally safe, and genuinely capable of being repaid.

The first question is not whether the money is available

Most distressed businesses can find someone willing to advance more money for a time. A bank may extend a facility. A shareholder may inject funds. A supplier may extend more credit. Family may help. The availability of money is not, by itself, evidence of a workable plan.

The better question is whether the company has a realistic path to repay that money from trading, not simply replace it with the next loan. If repayment depends on a vague improvement in conditions, an untested assumption, or “getting through the next few months”, the adviser’s role is to ask for evidence. Where is the cash coming from? What has changed? What happens if sales come in late, margins stay thin, or creditor patience runs out?

What changes once a personal guarantee is on the table

Once a lender requires a personal guarantee, the discussion is no longer only about company debt. It is about personal exposure.

Many directors still take comfort in limited liability, but a guarantee can cut straight through that protection. If the company later fails and the guarantee is enforced, the lender can pursue the director personally. Homes, savings and family wealth can be at stake. In practice, we often see directors harmed more by the guarantee than by the company’s failure itself.

A practical test is simple: if the company fails in 12 months, can the director personally withstand enforcement of the guarantee? If the answer is unclear, the decision should not be rushed. It should be tested.

Director liability, in practical terms

Accountants do not need to give legal advice to recognise when directors are entering risky territory. Two provisions of the Companies Act 1993 are particularly relevant when a struggling company continues trading or takes on new obligations:

• Section 135 — reckless trading: directors must not allow the business to be carried on in a way likely to create a substantial risk of serious loss to creditors.
• Section 136 — incurring obligations: directors must not agree to the company taking on new obligations unless they have reasonable grounds to believe the company will be able to meet them.

What did the Mainzeal case change for directors?

The Supreme Court’s decision in Mainzeal reinforced the importance of creditor protection when companies face financial difficulty.

One key lesson from the case is that directors cannot rely on optimism or assumptions that circumstances will improve. Directors must have a rational and reasonable basis for believing the business can continue trading without creating unacceptable risk for creditors.

In practical terms, that means:

• Proper financial information
• Reliable forecasting
• Regular review of performance
• Evidence supporting key assumptions
• Active management of financial risk

 

Wishful thinking is unlikely to satisfy a court.

Referring early doesn’t mean liquidation

Clients often hear the word “insolvency” and assume liquidation. That is understandable, but it is also wrong. Early advice is not the end of the business. It is often what keeps the better options alive.

Voluntary Administration and restructuring tools need something to work with: time, cashflow, goodwill, management capability and creditor patience. Early referral can preserve those things. Late referral often arrives after the bank has lost confidence, the IRD has moved, suppliers have tightened terms, and the director has already signed personal commitments that cannot be easily unwound.

A timely referral does not diminish the accountant’s role. It strengthens it. It shows the client that their adviser is prepared to confront the risk early, while there is still room to protect value.

If you’re weighing up whether to make the call

The value is not in telling every under-pressure client to stop. The value is in helping them understand the difference between funding a recovery and funding a deeper loss. That distinction is not always obvious from the accounts alone, particularly when a business still has revenue, assets or a loyal customer base.

Before a client borrows again, advisers should be comfortable that there is a credible repayment plan, that directors understand their personal exposure, and that the decision is supported by evidence rather than pressure. If any of those things are missing, it is worth making the call early.

BWA is available for confidential, no-obligation conversations with accountants and advisers who are weighing up whether a client’s position has moved beyond normal advisory work. Bryan Williams, BWA’s principal and a Fellow of INSOL International, can be contacted at bryan@bwa.co.nz.