Insolvencies slump, but so does IRD enforcement

Receivership filings over the past 15 years at the Companies Office show that the rate of formal business failures declined after Covid arrived. Photo / 123RF

While New Zealand businesses have proven far more resilient than feared during the early days of the pandemic, insolvency practitioners and economic commentators are warning that growing problems are only being suppressed and shocks loom on the horizon.

Business and economic forecasting over the past two years has been a fraught task. Unprecedented disruptions to supply chains, international travel and household spending left many in early 2020 wondering how bad things could get.

Predictions were made of a looming downturn on par with the Great Depression.

ANZ chief economist Sharon Zollner admits she has taken some grief over her early calls forecasting heavy weather. "I remember speaking to a group of insolvency people, and they were saying: 'Where is this recession you promised us?'"

At PwC, John Fisk says he is also now wary of making predictions about how bad it will get: "That's the question that all insolvency practitioners would love to answer - but so far we've all got it wrong."

The past two years has not seen the worst come to pass, with Unemployment and GDP results generally being much more positive than forecast by both government and private sector analysts, but there are worrying indicators that growing problems are being at least partly masked.

Sharon Zollner, ANZ chief economist. Photo / Dean Purcell

Analysis conducted by the Weekend Herald on receivership filings at the Companies Office over the past 15 years shows - counter-intuitively - that the rate of formal business failures actually declined after Covid arrived.

While individual failures in hard-hit sectors like hospitality and tourism have attracted headlines, the past two years has seen the continuation of a decade-long trend of a gentle decline in business insolvencies.

By January 2022 the number of receivers being appointed was only a third of the peak reached in 2009 in the aftermath of the global financial crisis.

But, according to those on the insolvency front lines, these figures are largely suppressed not by rosy economic conditions, but by creditors - notably the Inland Revenue Department and banks - being more lenient on debt.

Prominent licensed insolvency practitioner Damien Grant of Waterstone Insolvency in early 2020 predicted a "wall of insolvencies" but this hadn't eventuated. "I've been predicting the end of the world economically since about 2015. I haven't been wrong for just two years, I've been wrong for ages."

He said, however, that present conditions were largely the result of Inland Revenue having loosened its leash. The taxman usually accounted for the majority of liquidation action taken in the High Court, but Inland Revenue had been significantly less aggressive in recent years.

"IRD is the engine that drives insolvency, but they basically shut up shop in April 2020 and haven't really resumed," Grant said.

Iain McLennan, of insolvency firm MacDonald Vague, was a touch more nuanced - noting looser IRD enforcement activity seemed focused around certain regions during lockdowns - but the effect had been dramatic.

"In June and July last year, IRD were very active and there were a lot of liquidations. Then Covid hit in August, and it just dropped off a cliff," McLennan said.

Fisk agrees: "There was a massive change in their approach to debt collection."

Grant said the partial enforcement holiday seems to have also extended to banks: "People would often come to me saying 'banks have cancelled my overdraft' - but I haven't had a single case like that in the past two years, whereas previously I'd get one a month."

Annual reports for Inland Revenue show in the year to June 2020, 146,557 instalment arrangements were struck with overdue taxpayers - with more than half of these occurring in the last three months of that financial year when the country was experiencing its first lockdown.

Inland Revenue's report to June 2021 shows a similar number of instalment arrangements, with tax debt past due having risen to $4.4b from $3.5b two years earlier.

The percentage of debts resolved within six months of them becoming due at Inland Revenue has plummeted to just under 50 per cent in 2021, down from 71 per cent the year before. Inland Revenue notes in its annual report: "To support customers through Covid-19 ... we reduced our focus on compliance activities."

There is scepticism that this state of affairs can be continued indefinitely, particularly with recent spikes in inflation and energy prices that will increase interest rates and other costs.

"We can see from history, bad times follow good times with depressing regularity," Zollner said. Internal ANZ data showed coping with Covid had increased overdraft use and reduced working capital levels, and firms that re-emerged would find the going tough.

"Unfortunately they're going to come out of this Covid disruptions into an economy where household spending is declining."

Fisk said disruptions to supply chains over the past two years had helped build resilience, but this had come at a cost as businesses now needed significantly more working capital to keep operating and cope with future shocks.

"One of the things we've been talking about with clients are inventory systems - move from just-in-time, to just-in-case," he said.