Helping customers to survive
This article first appeared in MG Business in April 2009
You might wonder if an article on April 1, 2009 in the Melbourne newspaper, the Age, was an April Fool's joke. It wasn't. Firstly it's real, and secondly, it's not funny. It explains how in 2007, Land of Leather was a conservatively-run, debt-free British chain of furniture stores. It had profits of 16 million pounds after exceptional items. By August of last year, things weren't looking so good, with a loss of 400,000 pounds after exceptional items. However, it still had 15 million pounds sitting in the bank and no debt, so it looked pretty safe.
"In the four months to the end of November, turnover was down to 40 million pounds - about half the running rate of the two previous years - and the company lost 5.3 million. In January the administrators moved in, all the cash had gone, no one could be found to buy the business and all the stores are being closed.
"Remember that this was a profitable, debt-free business with plenty of cash in the bank. Demand crashed and it couldn't reduce its fixed costs [particularly the rents on its 109 stores] fast enough to match that fall." (http://business.theage.com.au/business/landlords-do-deals-as-sales-dive-20090401-9j1c.html)
Of course, you should also remember that this is a UK chain, and the UK has been hit much harder that New Zealand because its financial sector is a huge part of its economy and because UK banks took on a lot more risk than ours did. But even so, scary to see how fast a good business can fail when sales dry up.
The article in the Age was explaining why Australian landlords should be, and are, offering big rent reductions to tenants, to help them survive. This is not just an issue for landlords, it's an issue for creditors of all sorts.
Readers of MG Business may recall a cover story I wrote in October last year, looking at how businesses can keep the support of their bankers. The main message was that businesses which were in trouble should to go to their bank early, while there was still hope, and to go with a viable plan. Part of that plan, for many businesses, would include the renegotiation of leases to cope with the changing circumstances. New Zealand commercial landlords must surely be able to see that it's in their interests to help tenants to survive, even if that means a lower rent.
The second matter I want to cover in this article relates to an email I received from the clerk of Parliament's Commerce Committee:
"Dear Peter
"The Commerce Committee would like to invite you to make a submission on the Insolvency Amendment Bill. Copies can be ... viewed online at www.legislation.govt.nz.
"Please forward two copies of your submission by Thursday, 16 April 2009. ..."
Alert readers will recall that in December 2007, major changes to New Zealand bankruptcy law came into force. The no asset procedure (NAP) allows debtors with no worthwhile assets and no worthwhile income to enter a simple form of bankruptcy procedure, which doesn't involve an. They emerge 12 months later with all their debts (except fines and other government penalties) cancelled. Their debts have to total less than $40,000. The theory is that they wouldn't contribute anything to paying their creditors, so there's no point in wasting time and energy on them. Instead, let's get it over with and get them back into society with minimal stigma.
They can only use the process once, and once it's over, no record of the NAP is saved for creditors to view on the Insolvency and Trustee Service's free, online bankruptcy database.
So what are the proposed changes?
1. Fraudulent debts become enforceable again after discharge from the NAP. I think this is just correcting a drafting error in the 2006 Act. In theory, a debtor who has committed fraud shouldn't be admitted into the NAP, but OA's decision admit a debtor is based on the information provided by the debtor which is unlikely to highlight any fraud.
2. Allow the OA to extend the time period that a debtor is in the NAP process. The problem this tries to avoid is that the debtor enters the NAP, but a creditor doesn't find out about it immediately. When it does find out, it asks the OA to cancel the NAP because of fraud, or debts over $40,000, or some other ground. However, before the OA can look into the matter properly, the 12-month period ends and the debtor is out and off the hook.
3. Make it easier for the OA to cancel gifts made by a debtor in the period leading up to his or her bankruptcy. Under the old 1967 Insolvency Act, the OA could claw back any gifts by the debtor (for example, to a spouse or a family trust) made up to two years before the bankruptcy. Between two and fives years prior to the bankruptcy, if the debtor couldn't prove he or she was solvent at the time, the recipient of the gift had to give it back. The 2006 Act made it harder for the OA to recover the gifts. The proposed amendments will take us back to the 1967 law. These rules do not apply to persons in a NAP. However, a person is disqualified from the NAP if the OA is satisfied, on reasonable grounds, that the debtor has concealed assets with the intention of defrauding his or her creditors, for example, by transferring property to a trust.
4. Keep NAP information for each person using the process on the public insolvency register for 4 years after he or she is discharged. At the moment, NAP information is deleted from the register as soon as the debtor is discharged. The new rules won't apply to people admitted to the NAP before the Insolvency Amendment Act is passed.
5. Also, a debtor who has a NAP, then goes bankrupt, will find that both events are recorded permanently on the Insolvency database. What a remarkably sensible idea!
So the Commerce Committee wants me to comment on these things. I'd like some feedback from readers. Give me your stories on "Napsters" and I'll pass them on to the lawmakers.
Peter Hattaway - www.hattaways.com - is a director of Hattaways, specialists in credit management training and consulting.