Liquidation has been New Zealand’s main form of insolvency. The insolvency industry is lightly regulated and relies on the professional conduct of those in the industry, including insolvency practitioners, lawyers and accountants.
Liquidation is the effective end of a company’s life. It has a number of implications on different parties. Once a liquidator is appointed the Liquidator has total control of the company and the directors cease to hold any powers, although they are required to remain in office.
Commencement of Liquidation by Company
There are a number of ways a company can go into liquidation. In most cases, where the company decides to call it quits, the shareholders will appoint a liquidator.
Because the resolution is a major transaction the rules governing this resolution are separate from normal board decisions, and these differ from company to company depending on their constitutions.
However, in almost all cases, the following should suffice:
The company needs to call a shareholders meeting. In the notice enclose a copy of the resolution appointing a liquidator.
If all the shareholders are in agreement there is no need for a shareholders meeting. It only becomes an issue if there are some shareholders who may not agree on liquidation.
A special resolution usually requires 75% of all eligible shares voting for the resolution.
Importantly, in most cases, a board resolution is not sufficient to put the company into liquidation, unless the companies constitution makes provision for the board doing this.
THE 10 DAY RULE
If a creditor has petitioned the court to liquidate your company you have ten days to appoint your own liquidator or enter Voluntary Administration. After that time, the company must settle with the creditor or face having a court appointed liquidator, usually one chosen by the creditor.
A liquidator is appointed, usually by the shareholders but sometimes by the courts.
A liquidator is obliged to:
- Call a creditors meeting (in most cases)
- Investigate the activities of the directors and affairs of the company
- Take charge of the company’s asset
- Realise the assets of the company for the best value
- Distribute the assets according to the legislation
- Report any criminal activity
- Report on progress to the creditors and shareholders
In theory, a liquidator appointed by the shareholders is only an interim liquidator, and must be confirmed by the creditors at a creditors meeting. In reality, liquidators, once appointed, are rarely removed from office.
RESTRICTIONS ON COMPANIES APPOINTING THEIR OWN LIQUIDATOR
A company loses the right to appoint their own liquidator ten days after court action has commenced to wind the company up. This is very important. In theory it should make no difference if a liquidator is appointed by the Company or if the liquidator is appointed by the courts. In reality the difference can be significant.
A liquidator has a lot of discretion as to how to treat the large number of issues that arise in each liquidation. A Liquidator appointed by the courts is likely to take a more aggressive approach to the directors obligations than one appointed by the shareholders.
WHAT HAPPENS TO CREDITORS
Creditors fall into several camps: those with security and those without. A rough guide to who gets paid, and the order they get paid, is outlined below:
Secured creditors have a claim against a specific asset. They have a claim over the asset of the company, such as a vehicle, that allows them to retrieve the asset and sell it to recover the money they are owed.
The Liquidators Expenses
Once a liquidator is appointed the liquidator has a priority claim on all assets recovered in the liquidation. This includes any expenses incurred by the liquidator in the ongoing running of the business (staff wages from the date of liquidation, rent, etc).
Creditor Court Costs
The costs of a creditor who petitioned the court to liquidate the company. It is normal for these costs to be between two and four thousand dollars.
The staff wages, earned in the last four months, and all holiday pay (up to a maximum of $22,160) per employee. Note, this section excludes company directors or their relatives.
The IRD is paid first for any PAYE and GST owing.
Once all of the above expenses are paid out, the unsecured creditors are paid.
Finally, it is the shareholders turn. When all other costs have been paid out in full, the shareholders can receive a dividend. This almost never happens.