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I’m looking to wind up my business – What should I not do!

The business has been struggling for some time. There are debts to the IRD namely GST and PAYE and you haven't completed a tax return for the last one maybe two years. There is a few trade creditors but not huge. You have made the decision to sell up and pay the creditors off. That way you feel you can stop the bleeding and the stress. You should be able to get enough from the business sale to pay the trade creditors and then you can wind it all up.

Does this sound familiar? We have seen this scenario on a number of occasions. It's important to get advice before you carry on down this track as there are potentially some nasty surprises in store.

Creditors must be paid in a specified order which is set out in the Companies Act 1993 Schedule 7. It's long, complicated and not easily understood. When creditors are paid, but not in the order specified, then these transactions can become voidable transactions.

Voidable transactions are one of the most controversial areas of insolvency. A voidable transaction (or an insolvent transaction under the current terminology), is one where the liquidator can compel a creditor who has received a payment to pay it back to the company. Needless to say, the affected creditor is usually not impressed and a vigorous debate often ensues.

Now, PAYE and GST are creditors that need to be paid before unsecured trade creditors. Income tax must be calculated up until the date of liquidator appointment. This is another creditor often conveniently forgotten. Unpaid PAYE is a criminal offence as well, so you will have to dig into your own pocket to pay this off.

We also see as an asset of the company that is overlooked is the overdrawn shareholder advances account. The liquidator is obligated to recover the shareholder advances as these are borrowings from the company, the repayment of which will go towards payment of the creditors of the company. Therefore the creditors of the company are always very keen to see this is enforced, quite rightly so.

If you are operating a distressed business, before you make plans, seek professional advice. As members of RITANZ - Restructuring Insolvency & Turnaround Association of New Zealand we know what options are possibly available and who needs to be paid first.

If you are looking to wind up your business – don't do it alone. Avoid pitfalls where possible by talking to us first.

Hamish Pryde – Accredited Insolvency Practitioner and member of RITANZ



 

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