Putting up the insolvency umbrella as economic clouds gather

  • Publications and reports

    05 July 2023

Putting up the insolvency umbrella as economic clouds gather Desktop Image Putting up the insolvency umbrella as economic clouds gather Mobile Image

The economic clouds continue to darken alongside the incessant rainstorms outside, and people are paying closer attention to the forecasts to understand what to do to keep dry.

As interest rates continue to rise, and many commentators describe a challenging economic outlook amid an extending inflationary cycle, one only has to look at the recent company collapses in the construction sector to see the struggle that businesses are facing. Times are, and certainly will be, tough for a large number of people, and there are clearly sectors in distress. 

In this gloomy environment, MEttle asked leaders in corporate restructuring and business advisory Brendon Gibson at Calibre Partners and Kare Johnstone at McGrathNicol, how to put up an economic and financial umbrella to ward off a climate of insolvency.

Are we seeing genuine stress across the buiness community?

“There has been a lot of media noise regarding a surge of insolvencies, but it’s not necessarily correct,” says Kare Johnstone, Partner at McGrathNicol. 

“When we look at liquidation appointments, we are 20% up on the quarter on a year-on-year basis, but we are about 30% down on pre-pandemic appointment levels.

“Generally, though, as with many things, we see a lag between what happens overseas and in New Zealand. If we look offshore, the UK is at a 13-year high for insolvency appointments and the US expects a 40% increase this year. Higher inflation and interest rates that are likely to double, or more than double, for many people as they come off fixed rate periods will put people and businesses under pressure, so we can expect trouble ahead.”

As company leaders consider the extent of that trouble on their customer demand, margins and costs, Calibre Partners Brendon Gibson says that some people haven’t been through an inflationary or interest rate cycle like we are seeing now. 

“We’re going through quite a different paradigm. History shows us that when you are facing rising costs, while revenue is not rising, the cost of debt and the ability to pivot becomes 
narrower as time goes on. If you continue on the path, it becomes cumulative; if you sit there for six months and it continues, you can’t buy back that time. Then cashflow becomes the critical point, as does managing liquidity while making changes to your business or trying to weather a storm. That might involve as much as saying ‘we are going to hunker down’.


In the current environment, the breadth of scenario analysis you might need to do is different.Brendon Gibson, Calibre Partners

“In the current environment, the breadth of scenario analysis you might need to do is different. If you are borrowing money at 9% compared to 3% your optionality is narrowed because the cost of debt and the availability of liquidity can get quite expensive, which then factors into your options and their costs. So be realistic and recognise what you are facing. My common theme is if you had been more realistic nine months earlier, your options today might be different now.”

Being realistic is a key point, says Gibson. 

“This means asking yourselves: could a particular scenario happen? Planning for more pressure and what it means is necessary because monetary policy is pretty well set.

“Asset values might also come under pressure. This impacts when you need to source capital from the markets, or source liquidity from financiers. Having debates about that is necessary; no one can say they’re 100% right but being open to different ideas about how it might play out for your business is important.”

Agreeing with this analysis, Johnstone adds that the situation is going to be different for each business, although she says there is one consistent theme. 

“The deeper a business owner has their head in the sand and is in denial, the harder it is to turn a business around. We find if a business owner is in denial, is not being open to professional advice from experts who operate and specialise in assisting businesses in distress, then their business continues to decline further, and might reach a point of no return, running out of time and money. So, we say ‘get your head out of the sand, recognise if your plans are not going to work. Put your hand up and say, ‘hey I need some help’.”

What are common warning signs people should look for?

Gibson points to three key factors. 

“Firstly, what is the nature of your business? Is your risk around one customer or supplier? If so, then you need focus on that. Then look at sales, margins, debtor days or stock turn – these are key metrics. If they start to move in the wrong direction, you need to be alert. If you are running your business well, you will have timely, relevant information with dashboards to show trends. It’s about noticing these trends and saying ‘ok, we see it, and it is likely to continue like this, we should try to address it. How are we going to do that?’ 

“Information is key, that is understanding the parts of your business where you can see trends and using that information. Timely information is really important. Even small businesses should have key information available for a board or senior management to look at.”

Often the issue exists around the table rather than on a dashboard, says Johnstone. 

“I hate to say it, but pretty much every company we are involved with that does collapse, management and governance are an issue; and a lack of robust financial information, and the monitoring of progress and performance are two more. 


For financiers, another issue is understanding what the position is regarding the IRD and taxes. Insolvency can sometimes be preferable, depending on what assets are behind the business.Kare Johnstone, McGrathNicol

“Also, for financiers, another issue is understanding what the position is regarding the IRD and taxes. Insolvency can sometimes be preferable, depending on what assets are behind the business. Financiers are asking the question ‘what is your current tax status?’ but actually look at tax statements. If the company has entered into a repayment scheme, they may consider that tax to be current and that repayment scheme may relate to taxes that have been outstanding for the last 12-24 months.”

Johnstone adds that warning signs can also come from a financier’s point of view. 

“If there are temporary overdraft excesses, financiers should investigate if the facility should in fact be a term loan and why those temporary excesses are being required. Particularly as overdrafts by nature should be used to assist businesses with seasonal cashflow cycles rather than a more fixed term loan.”

Working capital is also something to monitor closely in the present climate, Johnstone adds.

“A lot of businesses think they understand their working capital requirements, but in these particularly challenging times it is vital to ensure you are on top of your working capital and understand the key drivers to your working capital. There are many components to a business’s working capital cycle, including such things as purchasing strategy, budgeting and forecasting, creditor, debtor and inventory cycles and supply chain. Often we see debtors on balance sheets that should have been written off some time ago, or over stated inventory due to ageing, which distorts the balance sheet and financial position of the company.”

Arrangements with your suppliers and customers are also worth looking at and regularly reviewing. 

“Is there an opportunity to renegotiate terms with your key suppliers? Or what about your customers; when did you last perform a profitability analysis by business unit or SKU or product type. We often look at profitability on a customerby-customer basis, or by product, to understand whether that product offering is profitable. If not, we can work alongside companies to renegotiate those customer contracts.”

Another area that Johnstone says McGrathNicol sees some appointments is around shareholder disputes. 

Deal with it and get involved; it is far better to do that than to let insolvency happen to you.Brendon Gibson, Calibre Partners

“Over the past 5 years we have seen more disputes between shareholders, often the founder and the funder. Sometimes the best way to resolve these disputes is by a formal appointment, appointing an administrator, receiver, or liquidator to run a full sale process to get the best price out of it and to enable the business to continue as a going concern. Succession issues are also increasing where businesses thought they had a decent succession plan in place, often quite late into the game, at a time when an owner wants to step down or retire, they find out that the son or daughter doesn't want to take over the 

If your business is under financial pressure, what steps should you take?

“If anyone is in any form of financial distress, they should reach out to someone for professional guidance,” says Johnstone. 

“Financiers don’t like surprises; it is always best to forewarn your financiers rather than give them a shock when they receive financial information and become aware that there’s a covenant breach. If that is the case, come forward with a plan and timetable to get the business back into profitability and meeting covenants, which may involve engaging an independent adviser to help navigate the process.

Financiers don’t like surprises; it is always best to forewarn your financiers rather than give them a shock when they receive financial information and become aware that there’s a covenant breach.Kare Johnstone, McGrathNicol

“Relationships with your key stakeholders are really critical, and it is important to maintain these relationships, especially in times of distress. You need to understand whether your accountant or lawyer has the expertise to help a business in distress, because it is a unique skillset. A restructuring adviser is not there to take over the role of the accountant; we’re very results-driven and work to get the business out of crisis and to turn it around.”

Gibson is in complete agreement. 

“The business’ accountant is an important person to go to. If a professional accountant recognises that a brief is outside their sphere, they should say ‘we should go and talk to someone else to discuss what our options are, get the consultancy or restructuring tools to manage the situation’.”

However, Gibson is also clear that you shouldn’t rely totally on the consultants or financiers to be the architect of the solution. Owners, directors and management are needed to be part of the solution.

“For anything that involves going to an external stakeholder, you should have a plan, a document that enables a discussion about a solution – not a list of problems. You need a clear plan that talks about the issues the business faces, the options available and a ‘we’d like your support on how to structure it’ request. 

“In a difficult cycle, you must manage your stakeholders, whether they are boards, staff, banks, creditors, customers, or suppliers. You need to consider them all carefully, because they will behave differently compared to a buoyant business cycle. It is about looking at your customers and suppliers and considering how they are impacted. 

“People are a very important part of managing through difficult times. Everyone likes to be open, but in challenging times you can’t always be completely open. However, you have to be professional and honest with people, and be prepared to have the hard conversations.”

Final guidance?

“My message would be ‘don’t be afraid’,” says Gibson.

“Deal with it and get involved; it is far better to do that than to let insolvency happen to you. You won’t always have control of the situation, but you’ll have far more input the earlier you face into it. And there are good people out there with solutions, so don’t be afraid to ask someone for advice.”

The final word goes to Johnstone. 

“Cash is king. Make sure you have sufficient cash, provisions, and resources for times of stress. The reality is that when you go through distress it hits the P&L first, balance sheet and then cash. By the time it filters down that process and hits cash you have very limited options. It’s important to always have a plan. What’s your plan for these inflationary times?


Comment from MinterEllisonRuddWatts

One thing to keep in mind is that it is usually only the restructuring deals that end in formal insolvency processes (like receivership, voluntary administration and liquidation) that make the press. What you don’t hear about are the many successful restructuring deals that utilise the expertise of insolvency practitioners and specialist lawyers who deal with distress on a daily basis. Those deals are more common than you think and often result in distressed businesses being “turned around” through confidential consensual restructuring processes. The key to success usually comes down to early engagement of the experts.

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