A PRACTICAL GUIDE TO COMPANY LIQUIDATION
This guide is intended to provide some more detail on the process of liquidation, the role of the liquidator, and how Liquidation affects, creditors, directors and shareholders of a company in liquidation.
A small part is devoted to statutory demands and what to do if your company gets served with a statutory demand.
We stress this booklet does not offer nor designed to replace legal and accounting advice. You should always seek legal advice from a lawyer and accounting advice from an accountant.
I hope you find it useful whether you are interested as a company director, creditor or if you are looking to appoint a liquidator to a company.
This guide may include certain processes that I (David Thomas) use therefore if you choose another liquidator then some of the information provided in this guide may not apply.
While I strive to keep this guide reasonably up to date legislative and other changes may cause some parts of this guide to become out of date.
Some of the guide relates to solvent liquidations, which may not apply to you also.
Unless stated otherwise all references to the Companies Act mean the Companies Act 1993 and Regulations mean The Companies Act 1993 Liquidation Regulations 1994.
“BOARD”
The “board” will be a quorum of directors acting together as the board of directors. However, by the Companies Act’s recognition of a one-person company, the board can constitute a sole director
“DIRECTOR”
Directors can come in more than one form under the Companies Act.
A De jure” director(s) — those actually appointed director is a person occupying the position of director of the company by whatever name called”
A de facto director, although not appointed, is one who is held out by the company, and purports to act, as a director.
Other types of directors are:
- A “shadow director”;
- A person with managerial powers under the company constitution;
- A de facto director;
- A delegate of the board;
- The controller of any of the above (the labels “ultimate controller” and “master director” are also used to describe a person acting in this way);
While it may usually seem obvious what and who a director is examples of de-facto directors would include bankrupts being a director, an alternate director or a shareholder who directs the board.
“SHAREHOLDER”
Shareholders are the “proprietors” of the company, but they do not own the company’s property. They provide capital for use by the company in its undertakings. Shareholders are entitled to an equal share of any dividend declared by the company and an equal share of the surplus assets of the company (if any) at the time of liquidation, following satisfaction of all preferential claims and payment of the company’s creditors.
“SOLVENCY TEST”
The Companies Act sets out the solvency test, which comprises two limbs, the liquidity limb and the balance sheet limb. The solvency test plays a major role in the management of companies. Both limbs must be met for the company to be found solvent.
“Liquidity limb” means That to satisfy this test the company must be able to pay its debts as they become due in the normal course of business.
“Balance sheet limb” means That to satisfy this test, the value of a company’s assets must be greater than the value of its liabilities, including contingent liabilities. It is mandatory under section 4(2) if the Companies Act to have regard to the most recent financial statements of the company, and to all other circumstances that affect or might affect these values.
A contingent liability may include guarantees, uncalled share capital, letters of credit, bills of exchange, pending litigation, lease obligations, performance bonds, underwriting, or hire purchase agreements
The solvency test does not require a company to be solvent on every day the company trades but applies when certain transactions occur. The solvency test applies to:
- The making of distributions under Part 6 (including dividends, financial assistance, buy- backs, and share redemptions);
- A discounts scheme approved;
- The powers that all entitled persons may apply under s107(1);
- Buy-out rights under;
- Amalgamations under Part 13; and
- Transfer of registration under
In many cases, as a result of prudent management, companies will meet the test fairly easily. Moreover, directors will be aware from their general knowledge of the company’s affairs that this is the case. However, directors of companies that are marginally solvent will need to know with certainty whether the test has been satisfied, as this may be difficult to establish at a later stage.
“INABILITY TO PAY DEBTS”
Unless the contrary is proved, and subject to section 288 of this Act, a company is presumed to be unable to pay its debts if—
- The company has failed to comply with a statutory demand;or
- Execution issued against the company in respect of a judgment debt has been returned unsatisfied in whole or in part; or
- A person entitled to a charge over all or substantially all of the property of the company has appointed a receiver under the instrument creating the charge; or
- A compromise between a company and its creditors has been put to a vote by Part 14 of the Companies Act but has not
STATUTORY DEMANDS
A statutory demand is a demand by a creditor in respect of a debt owing by a company made by section 289 of the Companies Act.
- A statutory demand must—
- Be in respect of debt that is due and is not less than the prescribed amount; and
- Be in writing; and
- Be served on the company;and
- Require the company to pay the debt, or enter into a compromise under Part 14 of the Companies Act. Compound with the creditor, or give a charge over its property. To secure payment of the debt, to the reasonable satisfaction of the creditor, within 15 working days of the date of service, or longer if the court
It is not necessary that judgment exists before the service of a statutory demand. The debt must be due and presently payable as at the date on which the statutory demand gets served.
Statutory demands should be used to prove insolvency of a company rather than as a means to collect outstanding money.
If a statutory demand gets served on your company, then you have some options
- Pay the debt
- Enter into a compromise with the creditor under Part 14 of the Act which means a compromise it may be possible to
- Cancel all or part of a debt of thecompany;
- Vary the rights of the company’s creditors or the terms of the debt;
- Alteration of a company’s constitution that affects the likelihood of the company being able to pay a
“Compounding” is a word used in statutory demands which appear to refer to a similar process whereby the creditor and the debtor reach agreement to the reasonable satisfaction of the creditor as to the payment of debt:
- Apply to the High Court to have the statutory demand set
The Directors can be liable to repay losses personally caused by any actions contrary to company law causing loss to the company, or causing greater risk to creditors,
Directors should immediately obtain legal advice if their company when a statutory demand is served with a statutory demand.
Failure to pay or settle a statutory demand is proof of insolvency which means the company has failed the solvency test.
The will mean that the creditor can then apply to the court to have your company put into liquidation.
“IF YOUR BUSINESS IS UNABLE TO ACHIEVE ANY OF THE ABOVE THEN IFIRMLY RECOMMEND SHAREHOLDERS CONSIDER APPOINTING A LIQUIDATOR”.
If a statutory demand isn’t paid or arrangement made, then the creditor will apply to the High
Court for the debtor company to liquidated.
One of the grounds on which a Court may appoint a liquidator (and consequently put a company into liquidation) is when it is satisfied that the company is unable to pay its debts and the failure to settle.
A statutory demand creates an automatic presumption that a company is unable to pay its debts.
In the absence of evidence before the Court that is sufficient to rebut that presumption, the Court will normally order the appointment of a liquidator, of the creditors choice.
The Court can even go as far as proceeding to appoint a liquidator even if the amount demanded in the statutory demand gets paid.
This approach is more when Inland Revenue is the creditor that issued the statutory demand. Because there could be further penalties and interest that has accrued between service of the statutory demand and payment of the statutory demand, but these further accruals have not been paid.
The appointment of a Court appointed (creditor) liquidator can only be made after ten working days after service of the application to liquidate the company.
Being served with an application to liquidate, is your very last chance to liquidate the company on your terms, and use a liquidator of your choice which the law allows.
If you go past the ten days after being served with an application to liquidate. You are locked into having a court-appointed (Creditor) Liquidator.
The same law governs both Court appointed and Voluntary liquidators.
But Court-appointed liquidators are usually corporate accounting firms that can be more expensive because they have higher overheads and charge rates.
What happens on Appointment of the Liquidation
On appointment you will lose all control and often say in the liquidation. You will likely find yourself locked out of your business.
The cost of the application, as well as any legal fees, will get preference over other preferential and unsecured creditors.
Less money can mean the likelihood of your secured creditors getting paid, under a general security agreement. Meaning after the liquidation shareholders might be left with substantial debt from a personal guarantee.
We have had calls from distressed shareholder and directors about the impersonal and debasing approach of corporate liquidators. They talk of even more stress and non- business assets are targeted by these liquidators.
The most common method is shareholders appointing a liquidator by a special resolution of those
shareholders entitled to vote.
A shareholder is a person whose name appears on the company’s share register as the holder of one or more of the company shares
A special resolution can be passed at a meeting or by a resolution in writing and signed by 75 percent of shareholders entitled to vote on the resolution at a shareholders’ meeting.
Once a company is put into liquidation by way of special resolution that special resolution can’t be rescinded
The board of a company may also appoint a liquidator but only upon the occurrence of an event specified in the company constitution.
If the company’s constitution does not allow the board to appoint a liquidator then a liquidator would be appointed by way of special shareholders resolution.
There are limitations on when shareholders or the board of a company can appoint a liquidator.
The right of shareholders or the board to appoint a liquidator is available at any time up to within 10 working days after being served with an application for the company to appoint a liquidator.
The creditor who filed the application to appoint a liquidator may subsequently apply to the Court for a review of the appointment.
A resolution of shareholders appointing a liquidator is not effective if, at the time of its passing, the proposed liquidator has not provided written consent to such appointment
Liquidation is the method by which a company’s (which is a legal entity separate from its shareholders and directors) existence is ended. Liquidation occurs on the appointment of a liquidator.
Reasons why companies need to be liquidated.
They are:
- The inability of the company to pay its (The most common reason)
- The company is solvent and ceased trading, and the shareholders want toliquidate the company for a variety
- An event has occurred that is set out in the constitution of the company that requires the board to appoint
- Creditors have appointed a liquidator at a watershed
- The Court has appointed a
All liquidations, whether solvent or insolvent, voluntary or not, are commenced by the appointment of a liquidator although the steps leading up to the appointment may be different. It is important to note that although the process of appointment may be different the subsequent procedures are essentially the same.
A company can be put into liquidation by special resolution of the shareholders, whether or not that the company can pay its debts.
The liquidation procedure is the same whether the company is solvent or insolvent. However, in the case of the liquidation of a solvent company, no creditors’ meetings need to be called if the board has resolved within 20 working days before the liquidator’s appointment that the company would be able to pay its debts on that appointment taking effect.
Solvent Liquidations
One must consider that what may start out as solvent liquidations can end in being an insolvent liquidation.
There are clear benefits in completing a solvent liquidation as opposed to just letting a company be struck-off theregister.
Some classes of persons or entities may apply to the High Court to have a company reinstated, they include:
- Any person who, at the time the company was removed from the New Zealand reggister,—
- Was a shareholder or director of the company;or
- Was a creditor of the company;or
- Was a party to any legal proceedings against the company; or
- Had an undischarged claim against the company; or
- Was the liquidator, or a receiver of the property of, the company:
- The Registrar:
- With the leave of the Court.
The Benefit of Liquidation
In a liquidation, the actions of the liquidator, inactions of other parties or the process of liquidation brings a level of certainty to the ending of a company’s useful life.
The main benefit is it ends any future liability of the company and its directors and shareholders.
Practically provided the liquidator has carried out his job correctly, and no fraud by directors or shareholders has occurred then from the above list of persons no one is likely to seek reinstatement,
Because all assets have been realised and distributed, shareholders because they either voted for liquidation or the court appointed a liquidator, and any legal claimant would have no chance of receiving the satisfaction of a court judgment. This is not the case when a company is just left to be removed from the register.
The courts do have the power to appoint a liquidator to a company that has been removed from the register.
Duties of the Liquidator
The principle duty of a liquidator is set out in the Companies Act 1993. They are:
- to take possession of, protect, realise, and distribute the assets, or the proceeds of the realisation of the assets, of the company to its creditors by this Act; and
- if there are surplus assets remaining, to distribute them, or the proceeds of the realisation of the surplus assets, by section 313(4)— in a reasonable and efficient
The liquidator achieves the above by taking control and custody of the company’s assets to protect, realise and distribute the proceeds of realisation of such property to the creditors and possibly the shareholders.
As part of realising the assets of the company, debtors and voidable transactions or incorrectly preferred creditors may be pursued.
Shareholders who have taken drawing or loans from the company, and owe the company money must pay the money back to the company.
The directors remain in office but cease to have powers, functions, or duties other than those required or permitted to be exercised by Part 16 of the Companies Act.
INITIAL MEETING WITH SHAREHOLDERS
Usually, I will have an initial meeting with shareholders and director(s), it’s an excellent opportunity for you to get to know me a bit and decide if you’re comfortable.. The things I will likely discuss are:
- Business History: business trading and why the company needsto go into
- Assets: location, what type of property, insurances, registered security(s) over the
- Liabilities: what obligations are owed and to
- Records: location of all company records,
- Professional Advisers: – accountants, solicitor, business consultant,
- Any potential or known complications, or difficulties
If your are comfortable I will ask to photograph all known assets, in this meeting. The meeting is confidential and free of charge. I will never pressure you will not be pressured to sign anything; I respect the fact that all decisions are yours to make, and sometimes that takes time.
My Approch
The people I work with and I take the “reasonable person” approach. Meaning we continually ask the question “Are we being reasonable and fair in these circumstances?”
Some liquidators have been known to come in close the doors lock people out. I have never even contemplated that, because I work with you.
My principles are based around helping people I am fair, empathetic, and make no judgements. So you clients can get on with their life sooner and with less regret.
I keep your business confidential. I will be honest with you, which means you will always have a realistic expectation of what can or cannot happen. I do what I say I can do and keep my word. From the time you first talk to me until the liquidation finished, I don’t change, my reasonable, friendly approach.
Options
Sometimes there will be items you want to (keep) you can purchase from the liquidation so long as a fair market price paid for the item and evidenced.
In some circumstances, the business can be repurchased or sold as a going concern. We are open to this idea if it is the best outcome for creditors, and a fair market price paid.
What to expect,
On appointment, we have to inform your bank and write to all creditors,
So we will need a creditors list with, their name, and email address, how much they are owed if they own any stock or equipment and if they have any security or a personal guarantee. Also the contact details of your personal banker.
I will send you three forms
4a. My consent to act
4b. Your Shareholders resolution to place the company into Liquidation (for you to sign).
4c. A letter to your bank, (for you to sign).
I will ask you to sign, scan and email back to us for 4b and 4c. I will then put the company into liquidation and inform the bank.
I will need your last two years financial accounts if available, and bank statements, or access to online accounting systems. I will contact you about the debtors and creditors, and help you get that information required if necessary.
I will arrange for my asset manager to communicate with you for assessment and pick-up of any company assets for sale. They will work with you, contact any known potential buyers personally to get the very best pricing they can for your assets; They manage all sales to achieve this.
On signing the resolution, I advise all clients to take time for themselves and start to relax. I deal with all of the hard stuff from there so you don’t have to.
What I must do
The liquidator is by law David Thomas or person working for David Thomas. As the liquidator, I have an obligation to comply with the law, be unbiased and fair. I must consider your concerns, as well as all creditors.
I must advise of our appointment to the Companies Office, the company’s bank, known creditors, accountant and solicitor and publish a public notice in the NZ Gazette.
I will prepare an initial statement of affairs based on what records and information we have obtained from various sources and publish our first report setting out our understanding of the affairs of the company, its financial position, comments on issues related to the liquidation and the liquidator’s intentions as to going forward.
This first report sent to the Registrar of Companies, all known creditors and shareholders, reports on the progress of the liquidation made every six months.
A final report prepared when all assets sold and we are ready to distribute dividends to creditors. Sometimes we make earlier payments to creditors, but we have no obligation to do so.
To get the best result sometimes taking time and getting the best sale price, or making the best decision’s pays off where liquidation is concerned.
- The cost of liquidation comes from the funds realised from the sale of assets and collection of debtors.
- Each assignment’s cost gets estimated by what shareholders disclosed at the time, and there being no
- Our costs comply with the costs set out in the Companies Act 1993. We find our price structures to be lower than other insolvency firms because of lower
- We maintain the right to alter our estimate and charges, because of cost and time can accelerate upwards very quickly if the directors, creditors, or secured creditors, actions require unforeseen time to be
- Sometimes equipment may need repair before we can sell it so that can increase cost
- In short we cannot always predict all of the events we may encounter, from the outset, but we do our best to manage costs because our goal is to put as much money as we can back in the hands of shareholders.
If I choose to trade the company for a short time
Trading companies are usually (not always) closed down. Sometimes we can trade the company
and may require the director(s) and some staff to assist with trading however the decision to continue to trade is primarily based upon what is best to maximise the return for the creditors.
The requirement is: that the liquidator must carry on the business of a company only to the extent necessary for the liquidation. In other words, the liquidator may carry on the company’s business for getting a higher sales value for the benefit, protecting, and realise a higher return on the company’s assets
In addition to the actions outlined for a non-trading company the trading company scenario has added matters that may require addressing:
- Premises, Stock, plant and equipment and Work in Progress: these will need to be secured so we can control identification of assets and
- Staff: I can meet with staff. If the company is to cease trading, then the loss of jobs is inevitable.
- Landlord: I will negotiate the terms upon which the company can use the premises for a
- Asset Valuation: assets will be valued. We will get any repairs needed done and market them for the best possible price through our sales
- Retention of Title Issues: Some assets may have strong retention of title claims in which case we will deal with these
Company Creditors
Upon appointment of a liquidator, the company is run by the liquidator. All creditor enquiries must go through the liquidator. The benefit of relieving directors of the stress they may have been under if the company was unable to pay its debts.
It is important to note that liquidation does not bring to an end any personal guarantees directors or shareholders may have provided creditors at any time before liquidation.
Creditors have to establish with the liquidator within certain time frames their right to any claim they may have and their status and any registered securities over company assets.
The liquidator must have regard to—
- The views of the shareholders by whom any special resolution was passed at a meeting held for section 241(2)(a) of this Act set out in a resolution passed at that meeting:
- The views of creditors set out in any resolution passed at a meeting held in section 243 of this Act:
- The views of creditors or shareholders set out in a resolution passed at a meeting called by subsection (2) of thissection:
- The views of any liquidation committee given in writing to the
A liquidator is not obliged to act on the views of the creditors or shareholders, but the liquidator would not ordinarily wish to be seen to be acting in direct conflict with those views unless he has a good reason for doing so.
An initial creditors’ meeting does not have to be held, where the Board has resolved that the company will be able to pay its debts at the date of the liquidator’s appointment under s 243(8),
Or the liquidator considers that no meeting should be held, and the appropriate notices sent to creditors without any requirement for such a meeting received from a creditor within the prescribed period:
Creditors Meetings
It is not normal for a liquidator to call a meeting where the dividend available to unsecured creditors (not being Schedule 7 preferential creditors) is likely to be less than 20c in the dollar.
The principal purpose of the initial creditors’ meeting is:
- To determine whether another person should be appointed liquidator and if so to make that appointment (in the case of a liquidation initiated by shareholder or board resolution);
- To determine whether to make an application to the Court for the appointment of another person as liquidator in place of the individual appointed by the Court to that office (in the case of a Court ordered liquidation).
Where shareholder or board resolution have initiated the liquidation, the initial creditors’ meeting is to be held within ten working days of the liquidator’s appointment or such longer period as the Court may permit.
Where the company has is put into liquidation by Court order, the initial creditors’ meeting is to be held within 30 working days of the liquidator’s appointment or such longer period as the Court may permit.
However, if the liquidator has decided not to call an initial creditors’ meeting under section 245 but a creditor requires such a meeting to be convened (under the requirements of the same section), then a meeting is to be held within 15 working days after the liquidator receives such notice from the creditor.
David Thomas – Liquidator 021-124-6689