Liquidation

Liquidation is the effective end of a company’s life.

The Liquidation Process

There are three ways for a company to enter liquidation and have a Liquidator appointed:

1. Voluntary Liquidation:
   The most common is for the company directors and at least 75% of the shareholders to call a special general meeting where they vote on the question to appoint a Liquidator. This generally occurs when the directors / shareholders consider the chances of improving the company’s trading and or financial position in the future is hopeless, and therefore to continue trading is not a sensible or responsible option.
2. Court Appointed:
   On the application of the company, a director or shareholder, or a creditor of the company (including any contingent or prospective creditor), the Administrator (if the company is in administration) or the Registrar, the Court may appoint a Liquidator.
3. Solvent Liquidation:
   A solvent liquidation is where the company directors wish to cease the operation of the company and liquidate, generally upon the occurrence of an event as specified in the company’s constitution, the company directors (and generally with the shareholders) vote on the question to appoint a Liquidator, with the difference being the company has the funds and elects to pay all its debts on liquidation and the directors provide a personal declaration to that effect.

Once a Liquidator is appointed the Liquidator has total control of the company, and while the directors remain in office, they cease to hold any powers. A Liquidator acts in the statutory capacity as an agent for the company in liquidation.

The Ten Day Rule

If a creditor has petitioned the Court to liquidate your company, you have 10 days to appoint your own Liquidator or enter Voluntary Administration. After that time, the company must settle with the creditor or risks having the Court appoint a Liquidator, usually one chosen by the creditor. A Liquidator has a lot of discretion as to how to treat the large number of issues which can arise in a liquidation. A Liquidator appointed by the Court is likely to take a more aggressive approach to investigate the past trading affairs of the company, and/or the past conduct of the company’s directors.

What are the Risks of Continuing to Trade while Insolvent ?

If your company is unable to meet its debts as they fall due, has more debt than the value of its assets, you should seek professional advice immediately.

As a director or shareholder of the company you must take proactive steps to minimise the potential impact on creditors. If the company continues to trade and incur more debt, you may be personally liable and could face prosecution for reckless or insolvent trading.

The Principal Duties of a Liquidator are:

Broadly, the duties of a Liquidator divide into two categories, the first principal duty being:

“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 in accordance with this Act; and if there are surplus assets remaining, to distribute them, or the proceeds of the realisations of the surplus assets, in accordance with section 313(4) of this Act; In a reasonable and efficient manner.”

The second principal duty of a Liquidator is to report on the affairs of the company and the conduct (including any proposals for the conduct of the liquidation) to the creditors, shareholders and the Registrar of Companies.

At the date of liquidation the Liquidator must therefore quickly establish the estimated value of realisations against the anticipated costs and expenses which could be incurred, and determine the best course of action to complete the liquidation. This is often a delicate balancing exercise from what is predicted may be returned from the realisable value of the company’s assets.

The fact that the company has gone into liquidation generally because it owes substantially more than it owns, means that there is inevitably a shortfall of funds available to cover the costs of the liquidation and provide a return to creditors (if any at all). The Liquidator distributes the realisations from sales of the company’s assets in accordance to the Seventh Schedule of the Companies Act 1993 to the company’s creditors and (if there is a surplus) to its shareholders in accordance with the company’s constitution. The costs and expenses incurred in the liquidation (including the Liquidators remuneration) are paid in priority to those claims of the creditors out of the assets of the company.

The Sixth Schedule of the Act provides wide ranging powers to the Liquidator, and defines or outlines the circumstances where the Liquidator may use discretionary powers in the performance of their duties pursuant to the Act.

Liquidators Powers to enforce the Liability of Shareholders

A Liquidator may enforce a liability against a shareholder of the company in liquidation for any overdrawn current account, or any liability of a shareholder or former shareholder which is owed to the company.

Liquidators Power to Obtain Documents, Records and Property of the Company

A request by a Liquidator to a director, shareholder (or any other person) for:

(a)  Documents and information,

(b)  Or the identification and delivery of property of the company,

must be provided to the Liquidator, or the person who fails to comply with such a request, commits an offence and may be liable to a conviction or penalty of a fine not exceeding $50,000.00 or to a term of imprisonment for a term not exceeding two years.

Creditors Meetings

The necessity to call a meeting of creditors may arise at several points in the course of the liquidation. For example, the Liquidator may call a meeting of creditors where the Liquidator has been appointed by the Court, by the board, or by a resolution of shareholders (voluntary appointment). The creditors themselves may initiate a meeting. The Liquidator may decline a request from a shareholder or a creditor to hold a meeting on the basis the request is frivolous or vexatious, or the request was not made in good faith, or except where the shareholder or creditor agree to meet the costs, or the costs of calling a meeting would be out of proportion to the value of the company’s assets.

Reporting to Creditors, Shareholders and the Registrar of Companies

The Liquidator is required to prepare and distribute an initial report shortly following the date of liquidation containing a statement of the company’s affairs, proposals for conducting the liquidation, and if practicable, the estimated date of the completion of the liquidation.

After each six month period of the liquidation, the Liquidator must prepare and distribute a six-monthly report, giving a report on the conduct of the liquidation during that period, and any further proposals which the Liquidator has for completing the liquidation.

At the end of the liquidation, the Liquidator must prepare and distribute a final report including a financial statement of realisations and distributions of the liquidation after the Liquidator has completed his or her duties in relation to the liquidation of the company.

Challenging the Acts or Decisions of a Liquidator

Should discussions or negotiations with the Liquidator not settle disputes that may arise, the correct procedure for aggrieved creditors, shareholders (or parties upon whom the company constitution confers any rights) or directors, is by seeking leave to apply to the High Court to bring a claim under section 284 of the Companies Act 1993, to hear “any matter arising in connection with a liquidation” pursuant to section 284(1)(a). Therefore claims relating to past acts or decisions of Liquidator’s in a liquidation cannot be brought through the Disputes Tribunal or the District Court.

The Payment Priority of Liquidation

The company assets when recovered and sold, and after deduction of the Liquidators costs and expenses, the balance of funds are distributed according to Schedule 7 of the Companies Act 1993, with preferential creditors in the order of priority (company staff wages, IRD) being paid next, then unsecured creditors, and subject to any surplus remaining, to the shareholders in accordance with the company constitution.

The Pari Passu Rule

The pari passu rule (the most fundamental principle of insolvency law) is applied in the context of liquidation to mean that all creditors of the same class rank equally. On this basis they are entitled to share in the pool of assets available for distribution in proportion to their claims.

Preferential Creditors

Preferential creditors are firstly those who are affected by section 275 of the Act, generally those who supply essential services such as gas, power, water or telecommunication services. These rank as a first priority to the Liquidators costs and expenses pursuant to Schedule 7 paragraph 1(1) (a).

The order of priority of payments to preferential creditors is determined by the Seventh Schedule of the Companies Act 1993.

Preferential creditors are those who rank in the order of priority above unsecured creditors such as petitioning creditors, creditors who assist fund or provide an indemnity to the Liquidator assisting preserve or recover assets of the company, company employees to a maximum of $18,700 (excluding directors or family members) and the IRD.

Petitioning Creditors to the Court

The costs of a creditor who has petitioned the Court to liquidate a company can range from between $1,500.00 to $4,000.00. The costs of petitioning creditors are paid out in priority to the unsecured creditors of the company from the realisations of the company’s assets.

Creditors who fund and assist the actions of the Liquidator, the “Salvage” status

Section 1(1)(e) of the Seventh Schedule of the Act  provides for any creditor who protects, preserves the value of, or recovers assets of the company for the benefit of the company’s creditors by payment of money or giving of an indemnity,-

(i) The amount received by the Liquidator by the realisations of those assets, up to the value of that creditors unsecured debt; and,

(ii) The amount of the costs incurred by that creditor in protecting, preserving the value of, or recovering those assets.

This category of preferential claim was introduced by the Companies Amendment Act 2006 and is intended to “provide an incentive to creditors to financially assist a Liquidator in recovering or preserving a business’s assets”, ultimately to the benefit of all creditors. In certain respects it is an extension of the common law priority given to properly appointed “salvors” for their reasonable costs and expenses incurred in salvage work which benefits persons with a prior ranking claim in respect of relevant assets. The priority afforded under clause 1(1)(e) however extends to the actual costs and expenses of the relevant creditor and the creditors unsecured debt, and does not require the approval or acquiescence of persons with a prior ranking claim.

Staff Wages

Staff wages earned but not paid in the last four months prior to liquidation, and all holiday pay (up to a maximum of $18,700.00) per employee, are paid in priority to unsecured creditors. It is important to note however, that staff excludes company directors or their relatives who may have been employed by the company prior to liquidation.

Secured Creditors

Secured creditors generally have a PPSR security registered by a General Security Agreement recorded against specific items of plant and or machinery, and or the finances of the company including accounts receivable. The secured creditors will either elect to collect and realise those assets themselves, or enter into an arrangement with the Liquidator. Any funds in excess of the security held goes back to the Liquidator for distribution to creditors. In some cases, the secured creditor may appoint a Receiver after liquidation, to ensure control over the realisation of the company’s assets to which the secured has security by a registered charge. While a Receiver has a duty to the company, and as appointed by the secured, the Receiver acts therefore in the capacity as an agent of the secured being the Receivers principal, and not strictly as an agent of the company.

The Costs of Liquidation

The fees and or costs involved in a liquidation varies significantly due to the location and size of the liquidation, and the costs incurred in undertaking the statutory duties and role as the Liquidator.

Liquidation Asset Sales

NMSNZ Ltd through our associated company Nelson Merchant Surplus Ltd buys and sells liquidated stock, plant or machinery. We take instructions from finance companies for the recovery and sale of secured items. We also can act for other Insolvency Practitioners in the collection and disposal of liquidated items. This generally gives the Liquidator appointed more control on the liquidated asset sales and generally provides that a higher end value is achieved by fully investigating and direct marketing to potential identified sales markets. NMSNZ has a large data base for the potential sales of a wide variety of company assets achieved from many years of past sales trading and experience. For these reasons NMSNZ also undertakes sales for other companies wishing to liquidate stock items using the facilities and combined sales experience of NMSNZ. The cost of sales are generally identified as collection and removal, storage and insurance, sales schedules, valuation fees / costs, advertising, listing or success fees (Trade Me) and dispatch and freight costs. Commissions are charged on sales with storage and handling fees separately charged.

Sales Cost Versus Benefit Consideration

In a number of cases however, the cost of retrieval and sale of the company’s assets outweighs the actual value achieved from the company’s assets. For this reason it is always a fine line between those costs incurred and the funds ultimately received, and depends entirely on the final sale values achieved for those assets within limited time frames.

Generally most unsecured creditors of the company in liquidation do not hold much hope of receiving any distribution from a liquidation. Most important to creditors appears to be that the directors and shareholders of the liquidated company have acted responsibly and honourably in their business, and that the directors and or shareholders do not financially benefit from the demise of their company at the cost of the creditors. For these reasons a Liquidator must ensure all assets of the company are retrieved from directors and or shareholders.

Duty of the Liquidator to Report Suspected Offences

The liquidator is required to investigate the past trading activities of the company and also the reason for the demise of the company. Due to the complexity of some trading activities, this exercise can take time and resources which must also be funded through the liquidation. The Liquidator is required to report to the Registrar of Companies of any irregularities or suspected offences uncovered in this review and investigation of the past trading affairs of the company, or the conduct of the company’s directors.