NZ Landscaper Magazine
NAVIGATING FINANCIAL DIFFICULTY
Lawyer Geoff Hardy provides some sage advice on what the law expects of company directors when it all gets too hard
If you’re doing anything more complex than gardener-type jobs, then landscaping is a risky business. If you have to commit to a fixed price on bigger projects, then you run the risk of having under-priced the job. If you are doing it on a cost reimbursement basis then you run the risk of major budget blowouts. Either of these can result in tensions with your client and ultimately unpaid invoices and expensive disputes. Sometimes these make such a big hole in your cash flow that you can’t pay your bills as they fall due. And when you get to that stage, technically you are insolvent.
If you are technically insolvent, there are expectations and limitations around what you can and can’t do. Read on to find out what the law expects of company directors at this point.
When you become insolvent, several things typically happen. Your subbies withdraw their labour, your suppliers put you on stop credit, and both of them hound you for payment. Your bank and landlord get twitchy. You can’t progress the build as promptly as you need to, which causes your client to stop paying. You use deposits and progress payments from newer projects to pay the suppliers and subcontractors on the problematic ones. And your more aggressive creditors serve statutory demands on you.
What is a Statutory Demand? It is a form that your creditors can give you under the Companies Act that gives you 15 working days to pay their debt, otherwise your company is deemed to be insolvent. Failure to pay in time enables the creditor to apply to the court to put your company into liquidation. That takes a few months to achieve, and there are various defences you can raise, but the application to liquidate your company becomes public knowledge at a very early stage. You can take comfort in the fact that statutory demands can only be used for undisputed debts, so unless you have conceded that the debt is payable, then you can always dispute it.
But in the meantime, if you want to stop the word getting out then you only get 10 working days to apply to the court to shut the whole thing down, and that costs a lot.
What else can happen to you when you become insolvent? When your bank learns of your difficulties it can put your company in receivership. That means that all your company’s income is syphoned off until the bank’s debt is paid, and usually liquidation follows after that.
Your bank, your landlord and some suppliers will hold personal guarantees from you, and they will call those up if your company
of a recent judgment from our Court of Appeal. This is what we can learn from them.
DEBUT HOMES V COOPER
Debut Homes was a residential developer, and Mr. Cooper was a shareholder and the sole director. By October 2012 he knew it was in trouble, and the shortfall to the IRD was likely to be $300,000. Notwithstanding this, he elected to complete all current projects that the company was engaged in. To be fair to him, he tried very hard to salvage the company, but it was all to no avail. 17 months later the
IRD got the company placed into liquidation, and by that time it was owed $450,000 in GST.
Debut had completed and sold various homes, but Mr. Cooper decided where the proceeds went. He favoured the secured creditors who were holding personal guarantees from him, as well as his family trust, at the expense of the IRD.
As a result, and because he had breached three of the directors’ duties under the Companies Act, he was ordered to pay $280,000 into the company, and $280,000 of the secured debt owed to the family trustees became unsecured instead. This was on top of the court costs and legal fees he had already incurred.
The Court said that once he knew Debut had no hope of returning to solvency and there would inevitably be a shortfall to one or more creditors, Mr. Cooper should not have decided to continue to complete the developments. He could have put the company into liquidation. He could have invited the BNZ to put it into receivership. Or he could have gone for a creditors’ compromise, a scheme of arrangement, or a voluntary administration.