Questions to ask any insolvency practitioner before you sign anything

Why this checklist exists

Business owners in trouble often find their way to insolvency practitioners through a search engine or an accountant’s referral. Many practitioners offer a free first meeting. That’s useful, and the people you’ll meet are licensed professionals doing necessary work.

But the meeting happens at a moment when you’re stressed, tired and probably feeling responsible for staff, suppliers and family. It’s easy to leave having agreed to something you didn’t fully understand. This checklist is designed to slow the conversation down just enough for the decision to be yours.

It isn’t legal advice, and it isn’t a criticism of practitioners. It’s a set of fair questions any professional should be comfortable answering.

First, check who you’re talking to

• Are you a licensed insolvency practitioner? Since 1 September 2020, anyone acting as a liquidator, administrator or in certain other formal roles must be licensed under the Insolvency Practitioners Regulation Act 2019. You can check the Companies Office insolvency practitioner register.
• If not, what’s your role? Some restructuring or “business rescue” advisers aren’t licensed practitioners. That doesn’t make them wrong, but you should know what they can and can’t do, and who they’d hand you to.
• How are you paid for this meeting and for what follows? If the meeting is free, what’s the business model?

Questions about control

1. If I sign what you’re proposing, who controls the company, and from what exact moment?
2. What will I, as a director, still be able to do? Sign cheques? Talk to customers? Hire and fire?
3. What happens to the staff?
4. Can I reverse the decision later? In most formal processes, practically, no.

Questions about fees

1. How are your fees calculated? Hourly rates, fixed fees, or a mix? Ask for the rates in writing.
2. What’s your estimate of total fees for this engagement? A range is fine; no estimate is a warning sign.
3. Who pays them, and from what? In liquidation and administration, fees are generally paid from company assets, ahead of unsecured creditors.
4. What happens if the assets don’t cover your fees? Will you ask directors or shareholders to fund or guarantee them?
5. Are there other costs? Legal fees, advertising, valuers, agents.

Questions about alternatives

1. What alternatives did you consider, and why did you rule them out?
2. Did you consider refinancing? If the company’s pressing debts were paid by a loan, would it be viable?
3. What about informal arrangements with IRD and key creditors?
4. What would a Part 14 compromise look like instead?

If the answer to the refinancing question is “the bank won’t lend”, that’s worth probing. Banks aren’t the only lenders. Specialist lenders secure business loans on New Zealand property, including with IRD arrears, defaults and no recent financials, and there are unsecured options based on turnover. Our page before you talk to a liquidator explains more.

Questions about outcomes

1. What are unsecured creditors likely to receive? Cents in the dollar, and when?
2. What happens to IRD’s debt?
3. What happens to the business, its name, its customers?
4. Who might buy the business or its assets, and on what terms? If a related party is involved, how is the price tested?

Questions about you personally

1. Which of my personal guarantees are likely to be called on? Bank, landlord, suppliers, equipment finance.
2. Will you investigate my conduct as a director? In a liquidation, investigation is part of the role. Ask what that involves.
3. Could I face claims personally, for example for reckless trading or for money taken from the company?
4. What happens to my credit file and future directorships?

For point 3, independent legal advice is wise. Our guide to directors’ duties when a business is struggling gives background.

After the meeting

• Ask for a written summary of what’s proposed, the fees and the alternatives considered.
• Sleep on it unless a genuine legal deadline makes that impossible, and ask which deadline applies.
• Compare it with the funding route. Take a minute to check whether a loan could clear the pressing debts. Start an enquiry. It’s free and doesn’t affect your credit score.
• Talk to your accountant and, where needed, a lawyer.

A simple test

After all the questions, ask yourself: if the company had the money to pay its pressing debts, would I still be sitting here? If the answer is no, and the business itself is sound, your problem may be a funding problem. Funding problems can have funding solutions.