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

A company loses the right to appoint their own liquidator once a company has been served with winding up proceedings (effective 1 Sept 2020).  

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 $22,160) 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.

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.
 

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