Slow recovery means rise in insolvencies

Increasing numbers of New Zealand companies are likely to become insolvent as the economy moves slowly out of recession, says a local expert.

Mike Whale, a consultant with law firm Lowndes Associates, who chaired an Auckland insolvency conference this week, said the number of non-finance-sector collapses had so far failed to reach the levels expected when the recession began.

But he said a slow recovery was likely to see insolvencies increasing as businesses lacking cashflow and credit became unable to keep up with the pace of growth in the economy.

Insolvency occurs when a business no longer has the ability to pay its debts and can result in proceedings such as receivership and liquidation.

Whale's comments were echoed in a recent Massey University study that indicated this year was likely to be the toughest since the downturn began for many small-to-medium companies.

The study found credit difficulties had forced many business owners to rely on personal savings to keep their businesses running during the downturn.

While this might prove effective in the short term, the report said "self financing" placed firms in a vulnerable position if their personal resources began to run dry during a drawn-out economic recovery.

Peter Sherwin, a partner and chairman of Grant Thornton's Wellington office, said the high number of receiverships and insolvencies he had expected at the recession's outset had failed to materialise.

This was partly a result of banks taking a less aggressive, more collaborative approach to companies facing difficulties, he said.

Like Whale, however, Sherwin said the number of insolvencies was likely to increase in the near future.

"There's going to be some businesses that just won't be able to make it," he said. "In the next six months we're going to potentially see a growth in the number of formal appointments."

Meanwhile, the Government's Insolvency Practitioners Bill was a hot topic of debate at this week's Corporate Insolvency Conference in Auckland.

In April Commerce Minister Simon Power said the new law would safeguard against sub-standard insolvency practitioners.

If practitioners did not meet the required standards set out in the bill they would either be banned or placed under the supervision of an experienced supervisor, Power said.

Whale said the consensus at the conference was that insolvency practitioners would wait and see how the new law worked.

There was a concern that the Registrar of Companies, who would be given greater powers through the bill, would not be resourced to the extent it required, Whale said.

"There was also a concern that unwarranted complaints would result in insolvency practitioners having to spend a lot of time and cost responding."