Business failure is a term used to describe businesses – sole traders, partnerships and companies – that cease trading because of unfavourable market conditions, losses, inability to pay creditors, or – in rare cases – fraud.
Bankruptcy is a legal proceeding that allows people who cannot pay their debts to get a fresh financial start. An official assignee takes over the bankrupt’s property and assets for distribution to the creditors. Without permission, a bankrupt cannot:
- incur credit of more than $1,000
- leave New Zealand
- manage a business
- be employed by a relative.
When a person is discharged from bankruptcy (normally after three years) they are discharged from the debts.
In New Zealand, only individuals can file for bankruptcy – unlike in some other countries, where businesses can also be declared bankrupt and prohibited from trading.
Since the 1960s many individuals have got into financial difficulty through excessive spending and use of credit, rather than through a personal business failure. By the 1980s over half of bankrupts were wage workers or unemployed, rather than employers or self-employed.
In the 1990s and 2000s there were 2,000 to 3,000 bankruptcies each year.
Insolvency Act 2006
Under the Insolvency Act 2006 there are two alternatives to bankruptcy for individuals who have become insolvent and owe less than $40,000:
- a summary instalment order – an arrangement to pay back debtors by instalments
- a no asset procedure, which allows people with no assets to have their debts cancelled after 12 months.
Companies are separate legal entities from the people who control or own them. Historically there has been a very high level of failure among small traders. In the early 1990s there were over 1,000 companies liquidated each year, although from 2002 to 2008 the number dropped to less than 200 annually.
Administration, receivership and liquidation
In New Zealand under the Companies Act 1993 there are legal processes for winding up companies, distinct from the bankruptcy of individuals.
When a company gets into financial trouble, there are several possible courses of action.
- Voluntary administration. A professional such as a chartered accountant is appointed as an administrator to examine the company’s books and negotiate with creditors. This provides time and is designed to benefit all creditors, secured and unsecured.
- Receivership. Companies offer security in the form of their assets in order to obtain loans. A receiver is appointed when the secured creditors wish to recover their securities.
- Liquidation. If receivership or voluntary administration do not revive the company’s fortunes, it may go into formal liquidation and be wound up. This may be initiated either by shareholders or by the courts on the initiative of creditors. The company’s assets will be sold and the proceeds paid to the creditors.
Sometimes failure stems from fraudulent behaviour. New Zealanders have long believed that the country is relatively free from ‘white collar’ or ‘corporate’ crime, but there have been some striking examples in the nation’s history.