PAYE Debt is the worst

If you have clients' whose Companies are struggling and have been for some time, it's best to stop the bleeding. If the Company has lost too much money, it may be dead anyway.

If a Company continues to trade whilst insolvent the Directors are in breach of the Companies Act 1993 and could be prosecuted. Additionally, a Company cannot issue a "Solvency Certificate" while it remains insolvent, which is a necessary prerequisite to a number of matters such as making a "Distribution" (e.g. paying a dividend), reducing its equity, and – in some circumstances – paying salaries or drawings to working Shareholders.

What is serious for Directors of insolvent Companies is if there is PAYE debt owing, and this is happening right now. Both Stonewood Homes New Zealand Limited and Stonewood Homes Limited were placed into Liquidation by the Inland Revenue earlier this year. Amongst the debt is $335,014 of PAYE. This will be a significant issue for the Directors, because PAYE is effectively money owned by the employees that is due to go to the Government on their behalf. A failure to pay PAYE could give rise to criminal liability if the Directors knew about it. "Theft as a servant" has been bandied about in the past for like occurrences. The last thing a Director should be doing is not paying PAYE; this is a serious red flag that the Company is bleeding out.

We are seeing more Banks requesting confirmation that there are no Inland Revenue arrears before they will lend money to customers.

The Inland Revenue is active in recovering debts, and prosecuting those Directors that don't pay the PAYE. I read in today's Taranaki Daily News about a Taranaki man facing charges related to his failure to pay PAYE and other related taxes between December 2013 and November 2015.

Excerpts from the Taranaki Daily Times:
At the time, Hansen was the sole Director of French Cake Shop and Catering Limited. Defense Lawyer Andrew Laurenson said the offending was the result of a series of events which began after a former staff member stole money from the Company and put Hansen in a difficult financial situation.

He said Hansen was essentially "robbing Peter to pay Paul" and trying to keep suppliers happy, but he ran out of cash to settle his tax obligations. (The IRD was owed $195,000).

Along with the criminal charges he faced, Hansen's business was placed into liquidation in February this year. The judge said the offending was related to the staff theft, which had put pressure on Hansen, who then prioritised paying other creditors before squaring things away with the tax agency.

As part of his penalty Hansen will serve a four month community detention sentence, where he will have to adhere to a daily curfew from 7 pm to 6 am. He was ordered to do 100 hours of community work and to pay $3,000 to the IRD.

If a Company has "red flags flying" it is vital that the situation is independently reviewed, with consideration of the options followed by pro-active action taken to stem the bleeding where possible; so that the Company may be revived, or laid to rest. If you have clients that need to visit the A + E, we are happy to meet and talk it through.

~ Hamish Pryde


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