A: First you need to work out whether it is worth staying in business.
Are you sure your cash flow will continue unabated? Can you get your customers to pay? Have you thought of using a debt collection agency, or lawyer, to get your customers to pay? Can you reduce your costs, improve your sales and reduce your company’s debts over the next few months?
If not, then as a last resort you may need to put your company into liquidation - or let one of your creditors do so which, ironically, can be cheaper.
Q: Am I personally liable for my company’s debts?
A: If you have signed personal guarantees of any company debts, then yes, you are.
If your company can’t pay its debts when they fall due (or if its debts are greater than its assets) and you are a director, you could be personally liable for those debts even if you haven’t signed a personal guarantee. Where there is no signed personal guarantee it’s not common for directors to be sued personally for debts owing by their companies, but it happens.
Directors aren’t always personally liable for their company’s debts, if they have genuine reasons to keep trading for a brief period – for example, to find a buyer for the business, or to pay off the company’s creditors. But if a business keeps trading for a few months after becoming insolvent, it often finishes in an even worse financial condition.
Q: What about my staff?
A: The support of your key staff is critical to your survival, but you need to work out how many staff you can afford to pay with your sales at their current level. You may need to consider redundancies. If you do, consult your lawyer first.
Q: Which debts should the company pay, if it can’t pay them all?
A: Ideally you should concentrate on paying any debts that you have personally guaranteed. If you pay any debts in preference to others though, the payment could be overturned if your company goes into liquidation within two years.
Q: What if my company can’t pay its GST and PAYE at the moment.
A: Any business should set aside enough money to pay its GST and PAYE when they fall due. If it’s surviving by not paying its PAYE (which, in fact, is not the company’s money at all) and GST, then it shouldn’t really be in business. The Inland Revenue Department is likely to have the company wound up.
But, talk to someone at Inland Revenue (or get your accountant to do so.) See if you can come to some arrangement, to pay it off over time. Contrary to popular belief, the IRD is generally willing to help you, if you ask.
Q: Can my company transfer its business to a new company, which can then carry on the same business?
A: Possibly, but there are a number of fish hooks. This process is sometimes called “hiving down”. If the new company is a “Phoenix Company” - that is if it has a similar name with the same individuals behind it - then it may be liable for your old company’s debt. The business probably needs to be valued and your new company should pay full market value for it. Its value may be relatively low at the moment if it has been trading unprofitably.
Q: Can anyone complain?
A: If any creditors of your old company are left unpaid, they will not be pleased to discover that you are still carrying on business, under a new company. If they can show that your hiving down has left your creditors worse off, then they could sue the directors of your present company.
Q: So is it worth hiving down my business?
A: Only if your creditors will be better off, or at least no worse off. It’s a complex area and you need legal advice. You also need to be sure that your new company won’t slowly sink under the weight of its debt. Perhaps an important question to ask is “What can you do differently, in this unforgiving economic environment, to make sure that it doesn’t have the same natural problems as your previous business?”
This article is contributed by Les Allen, a Commercial Partner with Gaze Burt, an Auckland law firm.
