The Great Liquidation: Why are so many businesses going under right now?

Saturday, 28 December 2024

More New Zealand companies went bust in the final quarter of 2024 than any three-month period since the global financial crisis.

New figures from the Ministry of Business, Innovation and Employment (MBIE) show what many experts predicted: liquidations numbers are high and getting higher. One insolvency practitioner told The Press they were expanding to cope with extra business in 2025 and knew of others doing the same.

According to MBIE, 2458 companies were liquidated in 2024 (to December 19). In mid-September, this number sat at 1671. While that three-month window sits slightly outside a calendar quarter, 787 liquidations is more than any comparable period since February-April 2011 (803).

In September, chairperson of industry body the Restructuring, Turnaround and Insolvency Association of New Zealand Kare Johnstone told The Press liquidations were going to get worse before they got better. “They are now above pre-Covid levels and they are continuing to rise,” she said. “Unfortunately I think that theme will carry through to next year as well.”

The forecast is holding firm, even as obvious culprits like high inflation and interest rates ease. Johnstone and other experts have put this down to several things, including liquidations lagging behind market conditions and Covid-19 stimulus measures delaying the economic realities of the pandemic.

Perhaps starkest, though, is the shift by Inland Revenue (IRD). Having been ordered to ease off debt work through the pandemic by the last government, Inland Revenue is now pursuing it with vigour. Liquidation numbers were largely steady between 2019 and 2023 before spiking this year.

“IRD have been ramping up their enforcement,” Damien Grant of Waterstone Insolvency said. Historically, the taxman triggered about 60% of liquidation proceedings but Grant said it was much higher than that right now. “I’d say more like 80% if you look at the Gazette. Court liquidations are a minority. [Usually] IRD issues [proceedings] and a company voluntarily liquidates. That’s where a lot of our stuff is coming from at the moment.”

This trend chimes with the change in government. National and New Zealand First’s coalition agreement last year included more money for Inland Revenue to “urgently expand [its audit] capacity, minimise taxation losses due to insufficient IRD oversight, and to ensure greater integrity and fairness in our tax system”.

Labour revenue spokesperson Deborah Russell, a former policy analyst at Inland Revenue, believed this resource was focused more on catching tax cheats than squeezing struggling companies. But in the current political and economic climate, both groups would feel the pinch.

“If [Inland Revenue] are changing that behaviour now, it’s a bit of an indicator there’s something going wrong with the economy … rather than IRD looking to put more companies into liquidation,” she said. “But I am surprised by the increased level of it. We always expect some liquidations … but the increased number is worrying. It backs up those worrying GDP figures we got that the economy is in recession.”

Inland Revenue has confirmed a shift in policy. “One of the drivers behind the upwards trend is certainly our focus on debt work and recovery,” a spokesperson told The Press in October. “The more we do, the more likely we will see higher levels of bankruptcy and liquidations because some businesses are simply not viable and are unable to meet current liabilities plus deal with historical liabilities.”

Grant foresees no immediate change to this approach. If anything, more miserable than expected numbers from Treasury in its half-year economic update last week would have reinforced the Government’s position, he said. “We are expanding to cope with a substantial increase in work and I'd say that’s going to continue over the next 24 months… I’m aware that other insolvency practices are doing the same.”

‘There are upsides’

Popular Christchurch jewellery chain Silvermoon was one such casualty of these circumstances. Founded in 2000, owner Simon Thwaites sold the business in 2017. In March this year, the new owner liquidated the company and closed 10 stores citing post-Covid challenges and rising costs that “significantly [impacted] our profit margins and working capital”. At the time, Silvermoon owed $6.2m ‒ $1.3m of it to Inland Revenue.

So Thwaites bought the business back and started again. First was a small store in Riverside Market, then one at The Hub in Hornby and a renewed focus on online sales. A third store opened at Northlands mall last month.

“It's gone so well,” Thwaites said. “Everyone says it’s a terrible time to get into retail and I hear what they’re saying but there are upsides. Landlords are realistic … some of the base rents have either reduced or have recently been very flat.”

Rates and insurance costs had risen, he said, but otherwise business was steady, even good. He was looking at one possible site for a Silvermoon in Auckland, where things were harder. “I don’t think Canterbury is in a recession,” he said. “They are struggling a little bit more in Auckland.”

The margins are fine, but the MBIE numbers tend to agree.

Since Covid, Auckland has been steady in accounting for just over half of all liquidations (53%); Canterbury, meanwhile, has trended slightly down from 13% to just over 10%. It also performed better than all other major regions over the last quarter, when liquidations surged. Auckland (31%), Wellington (35%), Waikato (40%) and Bay of Plenty (31%) all registered about a third or more of annual liquidations in that time. Canterbury was almost the lowest in the country at 28%.