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A company is generally considered insolvent if it is unable to pay its debts as they fall due or is experiencing significant financial difficulty that prevents it from meeting its ongoing financial obligations.

Insolvency does not always mean a business must close. In some circumstances, restructuring or other recovery options may be available if action is taken early.

Some common warning signs include:

• Difficulty paying Inland Revenue or other creditors on time.
• Ongoing cash flow shortages.
• Creditors demanding payment or threatening legal action.
• Relying on new borrowing to meet existing debts.
• Company liabilities exceeding the value of company assets.
• Persistent trading losses.

If one or more of these warning signs applies to your business, it is important to obtain professional advice as early as possible.

The earlier financial concerns are identified, the more options are likely to be available.

Seeking advice early can help you:

• Understand your company’s financial position.
• Identify opportunities to improve cash flow.
• Explore restructuring or recovery options.
• Understand your legal responsibilities as a director.
• Make informed decisions before circumstances become more difficult.

Seeking advice is a responsible business decision and should not be viewed as an admission of failure.

Not every financially distressed business needs to be liquidated.

Where there is a viable underlying business, restructuring, refinancing, improved cash flow management or negotiated arrangements with creditors may provide a pathway forward.

Every situation is different, and the most appropriate solution depends on the individual circumstances of the business.

Directors have important legal duties when a company is experiencing financial difficulty.

Under the Companies Act 1993, directors must not allow the business to continue trading in a manner that is likely to create a substantial risk of serious loss to creditors.

Obtaining professional advice early can help directors understand their obligations, assess available options and reduce the risk of personal liability.

The appointment of a liquidator should be considered when a company is no longer able to meet its financial obligations and there is no realistic prospect of recovery or restructuring.

An independent liquidator can:

• Take control of the company’s affairs.
• Protect and realise company assets.
• Investigate the company’s financial affairs.
• Communicate with creditors and stakeholders.
• Distribute available funds in accordance with statutory priorities.
• Bring the company’s affairs to an orderly conclusion.

Depending on the circumstances, a liquidator may be appointed by:

• The company’s shareholders.
• The High Court.
• Creditors, where legislation permits.

The appropriate appointment process will depend on the circumstances of the company.

Following appointment, the liquidator assumes responsibility for administering the company’s affairs.

This typically includes:

• Securing company records and assets.
• Investigating the company’s financial affairs.
• Advising creditors and stakeholders.
• Recovering assets where appropriate.
• Reporting in accordance with legislative requirements.
• Making distributions to creditors where funds are available.
• Completing the liquidation and arranging for the company’s removal from the Companies Register.

Yes.

A solvent liquidation may be appropriate where:

• The shareholders wish to retire or close the business.
• A project or investment has been completed.
• A company is no longer required within a group structure.
• Ownership structures are being reorganised.
• Capital is to be distributed in an orderly manner.

Professional advice should always be obtained before commencing a solvent liquidation.

Many businesses first discuss financial concerns with their accountant.

However, where there are concerns about solvency, director obligations, creditor pressure or potential formal insolvency processes, advice from a Licensed Insolvency Practitioner is often appropriate.

As both a Chartered Accountant and Licensed Insolvency Practitioner, Hamish Pryde is able to assess your circumstances from both commercial and statutory perspectives, providing practical advice tailored to your situation.

If one of your customers or borrowers is experiencing financial difficulty, it is important to understand your legal rights and available recovery options.

Depending on the circumstances, you may have rights as a secured or unsecured creditor, be entitled to lodge a creditor’s claim or participate in creditor meetings during a formal insolvency process.

Independent advice can help you understand the likely outcome and protect your interests.