Any business owner will tell you that starting and running your own business isn’t for the faint-hearted. And recent years have proven especially challenging.

In New Zealand, only 41% of enterprises founded in 2016 were still operating in 2022. In Australia, McCrindle found that only 51% of small businesses started in 2018 were still going concerns in 2022. In 2021–2022, one in five small- and medium-sized enterprises requested a business loan or equity and, for three-quarters of those applicants, the cash injection was to keep the business afloat.

Who is struggling?

Australia and New Zealand have had their fair share of natural disasters in recent years, as well as a period of suspended animation for the corporate sector in both countries as a result of the pandemic. In some instances, the closure of national borders and restrictions on the way businesses could run has created long-term change in supplier and consumer behaviour, and some businesses have been unable to operate as freely as they did before COVID-19 struck.

Follow that with the news that New Zealand’s economy experienced its second negative quarter of growth in June – the definition of a recession – and the business environment has a further pall cast over it.

“There is always a lag between when a recession hits and peak insolvency periods,” says licensed insolvency practitioner Rees Logan CA, a partner at BDO Auckland. “Failure takes a bit of time, as people put in more money, stretch amounts owed to creditors and are given time to turn it around.

“If we look back at the global financial crisis (GFC), the peak insolvency period was two-to-four years after the GFC hit.”

Economic challenges in Australia are being viewed somewhat differently. The Reserve Bank of Australia recently examined the impact of certain economic measures during the pandemic-induced economic slowdown that meant it was easier for Australia to get out of pandemic paralysis.

“A particular focus of the fiscal policy response was to keep employees attached to their jobs, even if there was little work for them during periods of lockdown. With the benefit of hindsight, however, some argue that policymakers here and around the world took out too much insurance,” Michelle Bullock, the Reserve Bank’s deputy governor, says. “Nonetheless, it ultimately allowed us to avoid the long-term scarring effects on employment that had been a hallmark of previous recessions. It is also possible that the particular nature of the pandemic recession – driven by health restrictions and social distancing – allowed for a faster recovery than previous recessions.”

What are registered practitioners seeing?

The economic conditions might be slightly different in the two countries, but there is something that is very similar: registered liquidators in Australia and licensed insolvency practitioners in New Zealand are seeing an uptick in the number of people seeking assistance.

Registered liquidator Anne Meagher FCA, a director with Brisbane-based SV Partners and a member of CA ANZ’s Insolvency Management Committee, says her firm has seen the number of people wanting some kind of assistance increase following the end to pandemic restrictions. She says that there have been a greater number of inquiries and appointments since Easter, but some people were not acting while the pandemic was front of mind.

“During COVID they struggled, but though many sought advice they didn’t follow through with an appointment,” Meagher says. “During that time, we had multiple meetings with company directors and often did more consulting and advisory work. Now, we are seeing people are prepared to take action. The sooner they do, the more options are available to them – so we encourage this.”

Meagher says the companies that have approached her practice have largely been carrying debt owed to the Australian Taxation Office in their saddlebags, but there have been cases in which entities have been in financial difficulty for some time, but the various coronavirus pandemic assistance packages provided by the Australian Government such as JobKeeper kept them in existence.

“COVID relief was indeed critical to so many Australian businesses. Without this relief so many would have had to close their doors earlier,” Meagher says. “This relief helped keep many in business and enabled them to maintain workforces for a period when they could ultimately have had to terminate staff. Unfortunately, some of these businesses were already in financial strife, so the COVID incentives delayed the inevitable closure for some entities which potentially were already insolvent.”

There was also another problem, Worrells principal and registered liquidator Ivan Glavas CA observes, that presented itself: people were incapable of assessing which businesses were likely to make it through the COVID restriction period as a going concern.

Glavas says the current climate is still laden with uncertainty.

“Unfortunately, there are many industries which have not yet recovered from the lockdowns and change in work arrangements, and will probably not do so for several years to come,” he says. “Add to this the current climate of interest rate increases, the inability to source staff or purchase materials and the inability to borrow money at a commercially affordable rate, and we really do have the perfect storm which businesses will need to navigate – including the uncertainty surrounding AI and cybersecurity to make matters more challenging.”

“Unfortunately, there are many industries which have not yet recovered from the lockdowns and change in work arrangements, and will probably not do so for several years to come.”

Restructuring small businesses

Worrells has seen a range of circumstances in which businesses have needed assistance to help them work their way through debt problems. Glavas says that the Small Business Restructuring program, which has been in place for more than two years, has allowed business owners of viable small businesses to maintain control of their business while a registered liquidator deals with helping them manage their debt burden.

“Unlike other insolvency processes, it allows small businesses to continue operating while their creditors consider an offer to do a deal – usually less than 100% of the debt owing,” Glavas says. “In a nutshell, it’s a deal-making process that has been designed to keep businesses operating while the deal is considered.”

Chartered Accountants Australia and New Zealand’s senior policy advocate Jill Lawrence says there has been an increase in the uptake of the small business restructuring option, and this means that more directors of companies and their accountants are aware of the benefits of engaging with a registered liquidator early.

That does not mean that everyone is prepared to refer a client to a registered practitioner to have a free conversation about the client’s finances and whether there is a business to be saved. Lawrence says some accountants may be reluctant to refer their clients because they mistakenly believe that the liquidator might pinch the client from them. Nothing could be further from the truth, Lawrence adds, because a registered practitioner is not interested in doing routine accounting work.

“They may also be accountants and then specialise in insolvency work, needing at least 4000 hours to apply for registration as a liquidator in Australia,” she adds.

Says Logan: “I liken it to getting referred by the GP to a specialist. Accountants generally have a good feel for what the issues are, but they may not understand the scale of the problem, unless they’re dealing with those issues on a day-to-day basis. We can help diagnose the problem and give advice on how to fix it. We can also negotiate with key stakeholders, such as creditors or financiers.”

A fresh perspective

Not every conversation with a registered practitioner will end up with them grappling with your client’s business problems. A recent case seen by registered liquidator Alice Ruhe FCA, a partner at SMB Advisory and CA ANZ Insolvency Management Committee member, resulted in her referring somebody to a lawyer.

“I have had a matter recently that was referred to me as a company in distress for options, however I thought they needed legal advice instead of coming to me,” Ruhe says. “I’ve referred them to the lawyer to have that chat and they haven’t come back to me, so I am assuming everything went well.”

With more tough times ahead, it makes sense for chartered accountants to bring in the expertise their struggling clients need – and as early as possible in order to keep multiple options open for the business owner.

“Accountants need to ask their clients the hard questions,” says Logan. “Don’t sugarcoat the problem. It’s really important to diagnose the full extent of the issues the business owner is facing, otherwise you might waste a whole lot of time, effort and resources.”

He adds that when accountants are doing forecasts for clients in financial difficulty, they need to be realistic – not optimistic – and really challenge the client on their underlying assumptions.

“You also need to ensure clients are aware of the ongoing risks around continuing to trade while in financial difficulty, such as directors’ duties.”

Says Lawrence: “Registered practitioners know the law and specialise in negotiating with creditors. They aim to keep viable businesses going and efficiently close those that are not. For viable businesses, once their job is done, it’s back to business as usual for you and your client.”

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New Zealand insolvency data

New Zealand liquidation data suggests that insolvencies may be picking up again, as businesses experience cost-of-living pressures including costlier materials, higher inflation, and interrupted supply chains.

Year	Company liquidations
2013	2586
2014	2550
2015	2296
2016	2114
2017	1930
2018	1993
2019	1772
2020	1448
2021	1380
2022	1556

Source: New Zealand Companies Office

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Case studies: small business restructuring

A registered liquidator in the firm at Worrells has dealt with varying small business cases in which owners of businesses were attempting to find ways to keep their operations afloat.

One case involved a cafe that was thriving prior to the pandemic. The restrictions imposed by the Victorian Government meant the cafe had to scale back its operations to fit in with the restricted trade conditions.

“The business owners pivoted the business as best they could; they catered for takeaway-only service, increased their reliance on food-delivery platforms and leveraged government support,” a Worrells spokesperson explains.

“However, sales reduced, cost of goods increased and staff wage pressures strained the cash flow and meant the business was facing insolvency.”

A registered liquidator in the firm was appointed to support the cafe through a small business restructuring and negotiated a return of 25 cents in the dollar for existing creditors, including the Australian Taxation Office (ATO).

An electrical contracting business also found itself in financial distress as a result of COVID-19 impacts, with multiple creditors that included a sizeable debt to the ATO and an entity known as the Queensland Rural and Industry Development Authority.

The contractor struggled to collect debts during the pandemic, staff were either crook or in isolation to comply with health orders, sales were declining and it was hard to get supplies because of shortages. Aware of the many challenges it was facing, this particular contractor appointed external professionals, such as a chief financial officer and a bookkeeper, to ensure things were being run properly.

This led to the contractor completing a small business restructuring and the electrical contractor ended up paying creditors 20 cents in the dollar.

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