In the midst of the financial crisis, as demand for products falls and credit is harder to get, more businesses are becoming insolvent. Unfortunately, the farming sector is not immune.
If a business cannot pay its debts as they come due, it is insolvent.
What can you do if you are in financial trouble?
Farmer George is struggling to pay his bills because the drop in the forecast payout has affected the availability of credit and reduced his payout instalments. Sometimes he will not have much control over what happens next.
If he owns the farm personally, a creditor may apply to have him declared bankrupt. All his property, with limited exceptions, is then transferred to the Official Assignee and for the three years bankruptcy usually lasts, he can't do things like run a business or travel overseas.
Or, if the farming business is a company, a creditor (including the IRD) may apply to put the company into liquidation, or the bank may put it into receivership. And if George gave a personal guarantee, or breached his directors duties by, for example, trading recklessly, he may face bankruptcy too.
What can George do when faced with insolvency?
Apart from obvious steps (like cutting costs, increasing revenue, exploring different lines of credit, selling assets) there are some things George can do when faced with the consequences of insolvency.
He can try to negotiate a compromise with creditors (say, pay-off debts over a longer timeframe). A formal (Court mandated) compromise binds all creditors even if only a proportion (usually 75 percent) agree.
If a company owns the business, George can think about Voluntary Administration. This is a business rescue mechanism that places a moratorium on creditors claims while an administrator tries to trade the company out of trouble. George's creditors will still ultimately decide the fate of the company though.
What if you're a creditor?
One of George's creditors is Mildred the timber merchant.
Three months before George went into liquidation, he paid Mildred $5,000 of the $15,000 he owed her. All the timber sits unused on George's farm.
Since Mildred had registered a security interest in the timber on the Personal Property Securities Register she was able to recover the timber.
"Phew!" thinks Mildred. "If I hadn't registered my security interest, I would have had to wait until preferential creditors like the IRD and the bank were paid, and then take my chance with other unsecured creditors. I might also have had to repay the $5,000 I was paid three months earlier because it may have been deemed to be an insolvent transaction."