SHUTTING DOWN BUSINESS OPERATIONS – TIPS AND PRECAUTIONS
Posted by Jesvin Boparoy on June 26 2020 in News
As we moved to Alert Level 1, many businesses rushed to re-open their stores after temporary closures during the Government mandated lockdown. Unfortunately, many of those same businesses who were forced to closed doors temporarily do not have enough cash reserve to keep them going. Businesses are now facing tough decisions whether to continue to trade in this environment or close permanently.
Closing a business is however a bit more complicated than simply walking away. There’s legal paperwork you need to complete, assets you need to distribute, and employees you need to pay and tax debts to sort out. If you walk away without fulfilling all the requirements, you risk legal disputes, a tarnished reputation, and unnecessary fees.
This article sets out some key issues, tips, and precautions you should consider before permanently shutting down.
Setting up an Exit Strategy – is it a solvent or insolvent closure?
If your business is profitable (i.e. solvent) you can close your company following the procedure in section 318(1)(d) of the Companies Act 1993 by winding up the company. This is called voluntary removal and is often followed by a sale of the business or its assets. You will need your accountant’s or lawyers help to do this.
We set out tips and processes to consider before voluntarily closing your business:
- Resolution of shareholders. One way of closing a company is by way of a shareholder resolution. You will need to have a special resolution of shareholders in writing to close your company down (i.e. 75% of shareholder voting in favour of closure). The resolution will be used as supporting evidence to the Application made to remove the company from the Companies Office Register.
- Board of Directors by Company Constitution: If your company has a constitution it may require the board of directors to agree to the company’s closure and removal from the Companies Office Register on the basis that the company has ceased to trade and has discharged its liabilities to all known creditors. If this is the case, then the board of directors can make an Application to remove the company without shareholder approval.
- Notify Employees: Employees will need to be notified about your decision to close. Part of your strategy would need to be how you will manage your communication with your employees. E.g. if you are selling the business some employee agreements may be transferred as part of the sale. If not, the employees will need to be given written notice of termination of their employment agreements and be paid their final pay and holiday pay.
- Refund surplus Wage Subsidy: If you applied for the wage subsidy scheme and are closing business before the 12 week period ends, any surplus funds at the date of closure may be required to be paid back to the Ministry of Social Development. This is because the subsidy is designed to keep the business operational rather than to shut the business down.
- Recover debts: Once you close your business, it can be much harder for you to collect accounts receivable. If you have outstanding accounts receivable, best practice is to implement a collections strategy now. Not only will this allow you to have cash in hand to prepare for closure it will also improve your overall chances of getting paid. Ideally, you should make attempts to collect debts prior to your announcement of the business closure, otherwise customers may choose to stall payments or assume that they do not need to pay at all. It may be that you need to offer some discounts to get immediate payment (especially for aged receivables). Either way, it is better to collect some funds than none.
- Notify and Pay the Inland Revenue: There is an obligation prior to closing your company to file all tax returns including the Final Tax Return and notify the IRD of your intention to close business. If you are registered for GST, you will need to deregister this for your business. You will also need to cancel your employer registration in MyIR for staff payroll and do the last payday PAYE filing for all employees. There is an additional requirement to request the IRD to give your business a “No Objection Letter” confirming that the IRD debts are all paid and that the IRD will not object to the removal of your business from the Companies Register.
- Sell your business assets: if you have surplus assets, now is the time to sell it. Selling inventory can provide you with the cash necessary to pay any outstanding debts.
- Pay your creditors and stop ‘work in progress’ jobs: If you are unable to complete work in progress jobs, you may have to refund payments made on those jobs. Or you may need to negotiate early termination. Some contracts include a cancellation provision that requires you to pay a fee if you cannot complete the project. If you can pay the fee, that will be the easiest option. Otherwise, call may need to explain your situation and request termination of the contract. Whatever you decide, communication is critical during this time. If you have to close your business due to Covid-19, you may be able to cite “impossibility of performance” as grounds for contract termination due to the Government Mandated Lockdown, but this is very contract specific.
- Complete paperwork: Making sure that all your annual returns with the Companies Office is up to date will be imperative for tidying up loose ends. It may be that business accounts will need to be closed. Examples include licenses, registration, permits, payment of utilities and rents and other membership or annual fees. Remember that you may need to file paperwork to finalise matters. And if you are done collecting accounts receivable and making payments, you can close credit cards and bank accounts.
- Distribute assets: Once you have paid all debts, taxes, employees, and loans, you can distribute the remaining funds to the owners of the company (i.e. the shareholders). You should not do so until you are positive that you have paid off all business debts. It would be best practice to double check with your lawyer to make sure that none of the assets are subject to a Hire Purchase Agreement, Lease Buy Backs or have securities attached to it under the PPSR. Otherwise these assets will not be transferred to the owners free from title.
- Application to Companies Office to be struck off: You will need to speak with your lawyer or accountant to help make an application to the Companies Office to wind up the company and confirm that the company has discharged all of its assets and liabilities to known creditors. The Companies Office will advertise the removal of the company so that creditors will have an opportunity to object to the removal if they remain unpaid.
- Retain Paperwork: Remember to keep business records for at least seven years after removal. The IRD can choose to audit prior years even if the company is closed.
The second way to close a solvent business is by way of a solvent liquidation. This process is used when shareholders cannot agree on how the business assets are to be distributed. Often appointing an independent liquidator by way of Shareholder Resolution can make this process easier as the liquidator will deal with the distribution of company assets and liabilities to the shareholders according to their rights. In a solvent liquidation, the directors of the company will first need to sign a Solvency Certificate confirming that the business can pay its debts as they fall do.
Directors should be mindful that when signing a Solvency Certificate, they are essentially giving a ‘personal guarantee’ that the company is able to pay its debts. If you are unsure whether your company is solvent, do not sign a Solvency Certificate.
If your business has been operating at a loss and you do not intend to inject cash into the business prior to its closure, then the business is likely insolvent and can be closed by way of an Insolvent Voluntary Liquidation.
This requires shareholders voting on a special resolution (i.e. 75% vote) to put the business into Voluntary Liquidation. An independent liquidator will deal with distributing assets to creditors according to the strict distribution criteria for secured/unsecured creditors as set out in the Companies Act 1993. By appointing an independent liquidator to sort out company affairs it avoids directors from inadvertently paying some trade creditors over others in preference of whom may later face claw backs under the voidable transaction regime if liquidation is advanced.
Fortunately, temporary insolvency legislation now affords protection so that the period of claw back by a liquidator against a creditor is 6 months rather than 2 years for any Voidable Transactions and directors are given ‘safe harbour protections’ as a result of Covid-19 which provides a level of assurance (at least temporarily) from reckless trading actions.
What can your creditors do when you shut down?
Some creditors who have been left unpaid can take action to recover against a company which has been removed, but it will need to apply for the company to be restored to the Register first.
Your creditors may decide to do this if they are owed money. It will involve a formal application to the Registrar of Companies or otherwise an application to the High Court to restore the Company back to the Register. The latter is often used when there is some urgency such as a property settlement which cannot go ahead.
If it is an insolvent closure, creditors of the company are left to deal with the Liquidator and must prove a claim in the liquidation to get their money repaid. They will not be able to bring a court proceeding against your company without prior approval of the liquidator.
Aside from a claim against the company, you should also be mindful that creditors may have a claim against you personally if you have signed a Personal Guarantee and the debt remains unpaid. This liability will remain even if your company is closed, sold or in liquidation.
You will need to have the foresight to negotiate terms of release from a personal guarantee in advance of the business closure. But if you did not plan ahead, you may still have a chance to limit the guarantee or negotiate out of it.
Some strategic considerations include:
- Business Debt Hibernation: To avoid having to deal with personal guarantees, you should take advantage of the recently introduced Business Debt Hibernation Regime and settle creditor debts ahead of your company closure. The Regime allows a company to compromise payment of the actual debt of the business with its creditors and agree to pay those debts later or for a lesser some. These considerations should be made by the business prior to closure, so that there is no liability for the landlord/lender to enforce this debt against you personally under any Personal Guarantee.
- Creditworthy Purchaser: If you are stuck with a personal guarantee and are selling your business think about selling it to a creditworthy purchaser. Having a creditworthy purchaser take over the lease will show your landlord that the buyer would be a strong guarantor (especially in the Post Covid-19 environment). If the buyer is using the business premises for the same operations and has similar operating experience, this is another advantage to the landlord and will take away the fear of the ‘unknown.’ Landlords are much more likely to be agreeable if the new purchaser is more established or an equally established company within your industry. This will give you a better chance of negotiating your release.
- Limit Guarantee by covering other expenses: If you can convince the landlord or lender to limit your exposure to the guarantee smartly this is a win-win for all. One example is negotiating with the landlord or lender to release you from the full extent of the guarantee in return for you agreeing to pay for some of the ‘out of pocket’ expenses. Think about the big-ticket costs for the landlord and find a way to strategically limit the extent of your guarantee. Common and immediate payment concerns for landlords when dealing with new tenants is having to pay for ‘tenant improvements’, ‘agent commissions’ and other out of pocket expenses. If you agree to take on these immediate costs in the Post Covid-19 environment this is a strategic tactic to release you from the overall Personal Guarantee from your landlord.
Remember, releasing a personal guarantee is likely to be very difficult as the landlord or lender is not obligated to agree, and it may take several months before a suitable outcome is achieved. Formulating a plan early and speaking with lawyers and accountants before you decide to close shop will be imperative to navigating a smooth business closure.
If you would like to discuss the above article, please reach out to a member of our team.
Jesvin Boparoy | Associate
t +64 9 300 8758 | Jesvin.Boparoy@shieffangland.co.nz
This paper gives a general overview of the topics covered and is not intended to be relied upon as legal advice.