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Corporate insolvency is the legal definition used to describe the situation when a debtor cannot pay his or her debts when a business fails. There are two options for debtors and companies when insolvency is put on the table.
Corporate rescue is an effort to save the company by intervention through making time bound intervention plans.
Liquidation is the process of selling assets of the company to repay the creditors and to distribute the remaining assets to the cooperate debtors.
New Zealand has found that a lot of companies have been taking the liquation route in an effort to save as much of their business as possible without losing too much money.
Norling says there are a few different ways to protect your business from insolvency, but they all revolve around one foundation for all business agreements: A contract, more specifically, an explicit contract that details everything you expect and want from a business relationship.
Write it all down
“Having a good, law binding, secure contract helps to minimise the risk of having to liquidate your company if business was to come to a halt. Make sure that you have a contract that has everything necessary enclosed.”
Norling says he sees a lot of contracts being written up but in a very basic skeleton form.
“A common error I see is where businesses and their partnerships make additions to contracts after the business has started. They base everything on a handshake rather than a logical, systematic written document.”
Examples of things to include in your contracts that some businesses fail to make explicit include:
a. Liability for payment
“Liability for payment in a contract ensures that there are methods and steps put in place to assist in the obtaining of payments if and/or when income flow drastically decreases.
“These may be putting in a clause such as ‘a 90-day payment period that has to be met regardless of ‘income|outcome’ then additional steps to move forward if that portion of the contract is not met, additionally, some contacts to correspond with during this process,” Norling says.
He suggests that it’s important to put these things in writing and put these protocols in place in the initial phases of a deal rather than afterwards when you are trying to get companies to make payments to you. If it has been agreed upon in a contract, then there is no emotion, no stress, and no awkward conversations about what is owed to you and how to get it.
b. Personal guarantee
Have a contract that protects your assets regardless of the outcome.
“Make sure that you as a company are guaranteed access to the credit of your goods. So, if the debtor has already sold your goods, ensure that you have access to the proceeds of those goods.”
c. Name your price
Be explicit with payment expectations when leasing assets.
“I see many contracts that don’t put a definitive amount that is expected for leased goods – something that many companies do when a price is going to be agreed on post the signing of contract and as business moves forward.”
He suggests that business need to put a figure in there to protect themselves when it’s time to make payment, making sure that contractors don’t exploit businesses for whatever amounts of money they see fit. This keeps your payments routine and at the same rate regardless of current events.
“Put everything in writing, it’ll potentially save you and your business a whole lot of money.”
The Networking Group would like to thank Brent for sharing his views with our groups. If you would like to watch the whole session please see our YouTube Library.
Footnote due to the new Lockdown:
If you owe money to the IRD, you have two choices:
1 Put your head in the sand and avoid it; or
2 Proactively communicate and deal with it.
If you choose option 2, you will get a much better deal than if you wait. You may even be able to save your business, unlike the many who will choose option 1.
If you want help navigating this process and negotiating a great deal, reach out.
We offer a FREE 30-minute consult where we can guide you in the right direction. You can book here: https://norlinglaw.co.nz/consultation-brent/
TNG Connect NZ Online – Networking Online
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