CS Insolvency Ltd

Liquidation – What Happen’s Now?

Liquidation is the effective end of a company's life. It is easy to create a company but it is a different story for a company's death. Liquidation is a highly statutorily prescribed process. Interpretation of the order of priorities itself is a complicated process on a first reading. Extensive experience is required to undertake this often very demanding process.
A Company liquidation 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. In short, this can be achieved by a special resolution, which requires 75% of all eligible shares voting for the resolution. A company can be placed into liquidation by court order, which is usually because a creditor has petitioned the court. The issue of a statutory demand, then an application for liquidation starts this process.

The Process

A liquidator is appointed. Once appointed a liquidator is obliged to:
Call a creditors meeting (this may not be required if the company is hopelessly insolvent) Investigate the activities of the directors and affairs of the company Take charge of the company's assets Realise the assets of the company for the market value Distribute the assets according to the legislation Report any criminal activity Report on progress to the creditors and shareholders

Restrictions on Companies Appointing Their Own Liquidator

Once a company has been served with an application for the appointment of a liquidator by the court, the shareholders or board can only appoint a liquidator within 10 working days after the application is served. If the appointment is made after this period, it is invalid unless the creditor who filed the application consents to the appointment. This provision was introduced to prevent companies from appointing a liquidator who might be partisan to the company, thereby pre-empting the court's appointment

For shareholders needing or wishing to appoint liquidators we encourage them to start the process as soon they are concerned about insolvency, and at the latest following an unsatisfied statutory demand.

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

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.

They can exercise this right regardless of the fact that the company is in liquidation. However, it is important that the secured creditor has registered their security on the PPSR register. If they have not done, so their security ranks below those of other secured creditors or preferential creditors.

However, sometimes a creditor will have a claim against all of the company's assets. This is generally called a General Security Agreement, or GSA, and can mean that once their claim is satisfied there will be nothing for other claimants. It is not uncommon for a bank or finance company to have such a security.

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, insurance of the assets etc)

Staff Wages

The staff wages, earned in the last four months, and all holiday pay up to a maximum of $31,820 from 30 September 2024, previously $25,480 per employee. It should be noted that this section excludes company directors or their relatives.

The IRD

The IRD is paid for any PAYE and GST owing ahead of unsecured creditors.

Unsecured Creditors

Once all of the above expenses are paid out, the unsecured creditors are paid.

Shareholders

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.

Forms & Resources

Reporting

The liquidator has to complete a first report within five days of appointment. This is a very short period for the liquidator to gather all the financial information required to prepare an estimated statement of affairs. Often the financial records of a company that is struggling is in a less than ideal state making this process more difficult than it could be.

This first report is sent to all shareholders and creditors both secured and unsecured.

A liquidator then must report on the progress of the liquidation every six months until the liquidation is completed at which time a final report will be submitted.

How Does A Creditor Compromise Work

A creditor compromise in New Zealand is a formal arrangement between a company and its creditors to restructure the company's debts. This process is governed by Part 14 of the Companies Act 1993, which provides a mechanism for companies that are, or will be, unable to pay their debts to propose a compromise with their creditors. Here is how the process generally works:

Proposal of Compromise: The compromise can be proposed by the board of directors, a receiver, a liquidator, or, with the court's leave, a creditor or shareholder. The proposal must include details such as the terms of the compromise, the reasons for it, and the foreseeable consequences for creditors if the compromise is approved.
Notice and Meeting: The proponent of the compromise must give notice to all known creditors, the company, any receiver or liquidator, and the Registrar. This notice must include a statement of the terms of the proposed compromise and the reasons for it, among other details. A meeting of creditors is then held to vote on the proposal.
Voting: For the compromise to be approved, it must be accepted by a majority in number representing 75% in value of the creditors or class of creditors voting on the resolution. If approved, the compromise becomes binding on all creditors or all creditors of that class to whom notice was given.
Court's Role: The court has a limited role in the compromise process, primarily to ensure that the process is not unfairly prejudicial to any creditor or class of creditors. Creditors who voted against the compromise can apply to the court for relief if they believe the compromise is unfairly prejudicial or if there was a material irregularity in obtaining approval.
Effect of Compromise: Once approved, the compromise is binding on the company and all creditors or classes of creditors to whom notice was given. This means that creditors are prevented from taking further action to enforce their debts, such as applying for the liquidation of the company, unless the compromise is later set aside by the court.

The process is designed to provide a more efficient and less court-intensive method of restructuring a company's debts compared to liquidation, allowing the company to continue trading while addressing its financial difficulties.

FAQ