Liquidations rising as economy worsens and Inland Revenue cracks down on tax debtors

Thursday, 8 June 2023

Company liquidations are on the rise, but they are the tip of the iceberg when it comes to companies in trouble, and closing.

Liquidations of companies are accelerating in number as more businesses succumb to the toxic mix of a troughing property market, high inflation, spending-shy households, and a tougher stance by Inland Revenue.

In the first five months of the year, 699 companies were put into liquidation, data from credit reporting company Centrix shows.

In the same period last year, it was 539, and in the year before 597, but even so, liquidation numbers remain lower than before Covid-19 first made landfall, said Kare Johnstone, chairperson of the Restructuring, Insolvency and Turnaround Association (Ritanz), the industry body for insolvency professionals.

It reminds veteran credit reporting boss Keith McLaughlin of the time after the dust from the 1987 sharemarket crash settled, and Inland Revenue (IR) started taking a tougher line against companies with tax debts.

“After the sharemarket crash companies got put under a lot of pressure, and leeway was given to companies to come out the back end of it,” said McLaughlin, managing director of credit reporting company Centrix, which tracks the financial health of the country’s companies.

The softly, softly approach couldn’t continue indefinitely, and eventually, “the hammer came down” on companies that could not deal with their tax debts.

Reserve Bank deputy governor Christian Hawkesby sat down with Stuff senior business reporter Tom Pullar-Strecker in May to chat about the economy.

Liquidation pain is not spread evenly across sectors, data from Centrix shows.

Construction companies top the liquidation chart, with construction company liquidations up 72% in the first five months of the year compared to the same period last year.

Only one sector had a bigger percentage rise, which was retail, but while 55 retail companies went bust in the first five months of the year, 199 construction companies hit the wall.

Low levels of mortgage lending, high debt costs, and weak property prices had all fed into hard times for house and apartment builders, but there might be special factors that make them more likely to be put into the hands of liquidators.

Paying a lawyer to try to get a company put into liquidation is costly, which generally means creditors only do it when debts are large enough to be worth chasing, McLaughlin says.

“If a business owes $10,000 to you, you are probably just going to write it off. You are probably not going to the trouble of issuing winding up proceedings, and the costs associated with it,” he said.

That probably meant there were multiple company failures that did not end in a liquidation, but a company simply stopping trading, to be eventually removed from the Companies Register when the Registrar of Companies deemed it to be inactive.

The construction sector might be over-represented in liquidations because the sums of money were often large, and many companies were involved in projects, so when one fell over, many firms were left chasing debts, McLaughlin said.

The retail and hospitality sectors have been hit hard by households having to cut their discretionary spending as they cope with higher home loan repayments, and the increased cost of insurance and groceries.

The first five months of the year saw 96% more retail, and 16% more hospitality businesses being put into liquidation than in the same periods in 2021 and 2022, Centrix data shows.

Retail NZ chief executive Greg Harford says times have been hard for retailers, and many smaller ones have quietly closed their doors.

Greg Harford, chief executive of Retail NZ, said the last “retail radar” survey showed at the end of March 28% of Retail NZ members were not confident they would make it through the next 12 months.

“Through Covid it was really stressful for business owners,” Harford said.

“Lots of them took on more debt, and are finding the last six to nine months, the economy has got tighter, and some have had to close.”

Rising cost of goods, labour costs, and households having less to spend as their discretionary income was sucked up in higher supermarket bills, or paid to the bank in higher home loan repayments, were factors dragging on the sector.

“We are definitely seeing an increase in the number of business closures,” Harford said.

The H&J Smith department store in Invercargill looks set to close.

Most closures did not involve liquidations, but were orderly affairs, where the owners simply close up shop, after paying their staff and other obligations, Harford said.

Just last month, the owners of the iconic department store H&J Smith in Invercargill announced plans to close, with managing director Jason Smith saying the company would not have been acting in good faith, if it continued operating, and allowed the business to fail.

Marisa Bidois, chief executive of the Restaurant Association, said many hospitality businesses had closed their doors after three tough years, but few would have been through liquidations.

“A lot of those closures are not full closures, but a passing on of the businesses to someone else,” she says.

These involved people selling their businesses when they could continue no longer.

Marisa Bidois, chief executive of the Restaurant Association, says a survey of members shows 39% expect trading to get worse in the coming months.

There had been so many pressures on hospitality businesses, Bidois said.

Many still had debt taken on to get through Covid lockdowns, and many were struggling to get staff, and to pay rising wages.

They were also having to absorb a significant proportion of cost increases in a bid to keep prices affordable for customers.

Bidois agreed with McLaughlin that IR had got tougher on companies with tax debt.

“There was some leniency over the Covid times, but the leniency has been called back in,” she says.

IR applied for 358 liquidations in the 12 months to June 30, 2022, leading to 152 companies being put into liquidation.

But in the nine months from July 1, 2022 to March 31, the Inland Revenue applied for 461 liquidations.

And in April, May and the start of June, the Gazette shows 93 more applications for liquidations by Inland Revenue, taking the actual number just over 550.

Not all of those applications led to insolvencies, as some companies found ways to deal with their tax debts, including by agreeing to instalment plans with IR, which describes applying for liquidations as a “last resort”.

Centrix managing director Keith McLaughlin says the tick-up in insolvencies reminds him of the time after the 1987 sharemarket crash.

It isn’t only the IR that asks courts to liquidate companies over unpaid debts. Councils, body corporates, law firms, and government agencies like Waka Kotahi do so too, though much less frequently.

In the building industry it is often service and equipment providers like window makers, scaffolding companies, or plant hire companies, heading to court to ask companies that haven’t paid them be liquidated.

Not all liquidations are insolvent liquidations, however, said Johnstone. Some are the result of groups of companies restructuring.

And, she said, liquidation is not the only insolvency option. Receiverships were also increasing, Ritanz numbers show.

No sector of the economy has been spared liquidations, but some sectors like agriculture, electricity, safety and administration, have got off with only minor levels of pain.

Johnstone said the “sugar rush” of government stimulus support that saw companies through the Covid period was now over.

“There’s been a lot of government stimulus that’s propped up a lot of entities,” she said..

The result is that liquidators and receivers are getting plenty of work.

“The inquiries from businesses in distress has increased, however, we are going off a very low base.”

Though they were rising, liquidations remain below pre-Covid levels, she said.

“We are still around 20% to 30% down on insolvency appointments compared to pre-Covid levels.”

That includes receiverships as well as liquidations.