Liquidation – What Happens Now?
Liquidation represents the formal end of a company’s life. While establishing a company is relatively straightforward, bringing a company’s affairs to a close is a highly regulated process requiring careful management and specialist expertise.
A company liquidation involves a number of legal obligations and can have significant implications for directors, shareholders, employees, creditors and other stakeholders.
At Pryde Accounting & Advisory Limited, we understand the complexity of the liquidation process and provide professional guidance to ensure the process is managed appropriately, transparently and in accordance with legislative requirements.
What Happens When a Company Is Liquidated?
Once a liquidator is appointed, the liquidator takes control of the company’s affairs.
The directors remain in office but cease to have control over the company’s operations. The liquidator becomes responsible for managing the liquidation process, including:
- Taking control of company assets.
- Investigating the affairs of the company.
- Reviewing the actions of directors.
- Realising assets at appropriate value.
- Communicating with creditors and stakeholders.
- Distributing available funds in accordance with statutory priorities.
- Reporting any potential offences or misconduct where required.
- Providing ongoing reports throughout the liquidation.
The role of a liquidator is to act independently and ensure the company’s affairs are dealt with fairly and according to the law.
How Does a Company Enter Liquidation?
There are several ways a company can enter liquidation.
Shareholder Appointment
Where shareholders decide the company should cease trading, they may appoint a liquidator through a special resolution.
Court-Ordered Liquidation
A company may also be placed into liquidation by the High Court, commonly following action by a creditor who believes the company is unable to pay its debts.
If a company is experiencing financial difficulty, seeking advice early can provide greater clarity around the available options.
Restrictions on Appointing a Liquidator
Where a company has already been served with an application for liquidation by the Court, restrictions apply regarding the appointment of a liquidator by shareholders or directors.
In certain circumstances, an appointment must occur within prescribed timeframes or it may be invalid unless the creditor who filed the application provides consent.
These provisions exist to protect the independence and integrity of the liquidation process.
What Happens to Creditors in a Liquidation?
Creditors are generally paid according to the priorities established under New Zealand insolvency legislation.
The outcome depends on factors including whether a creditor has security, the assets available and the claims against the company.
Secured Creditors
Secured creditors have security over specific company assets or may hold a General Security Agreement (GSA) over company assets.
Their rights depend on the nature and registration of their security interests.
Liquidator Expenses
The costs and expenses associated with managing the liquidation are generally paid from available company assets before distributions are made to creditors.
This can include costs such as:
- Liquidator fees and expenses.
- Costs associated with preserving assets.
- Necessary expenses incurred during the liquidation process.
Employees
Certain employee claims, including eligible wages and holiday pay, receive preferential treatment up to statutory limits.
Some exclusions apply, including certain claims relating to directors and related parties.
Inland Revenue Department
Certain tax obligations, including PAYE and GST claims, receive priority over unsecured creditors where legislation provides.
Unsecured Creditors
After secured claims, liquidation costs and preferential claims have been addressed, any remaining funds may be distributed among unsecured creditors.
Shareholders
Shareholders are paid last and only receive a distribution if all other claims have been paid in full. In most insolvent liquidations, this does not occur.
Liquidation Reporting Requirements
Liquidators are required to provide reports to creditors and shareholders throughout the liquidation process.
The initial report provides information on the company’s position, including an estimated statement of affairs.
Further reports are generally provided at regular intervals until the liquidation is completed.
The quality and availability of company records can significantly affect the efficiency of this process.
Creditor Compromise – An Alternative to Liquidation
A creditor compromise can provide an alternative pathway for companies experiencing financial difficulty.
A compromise is a formal arrangement between a company and its creditors to restructure outstanding debts. It may allow a business to continue operating while addressing financial obligations.
The process generally involves:
Proposal
A proposal is prepared outlining the terms of the compromise, reasons for the proposal and the expected outcomes for creditors.
Creditor Meeting
Creditors are provided with information about the proposal and have the opportunity to consider and vote on it.
Approval
A compromise requires approval in accordance with the requirements of the Companies Act 1993.
Once approved, the compromise becomes binding on the relevant creditors.
Benefits
A creditor compromise may:
- Allow a viable business to continue trading.
- Provide creditors with a better outcome than immediate liquidation.
- Create a structured pathway to resolve financial difficulties.
- Reduce the need for formal liquidation proceedings.
Understanding Your Options
Every business situation is different. The best solution depends on the company’s financial position, the interests of stakeholders and the available options.
Early professional advice can help directors and stakeholders understand their position, protect value and make informed decisions.
At Pryde Accounting & Advisory Limited, we provide confidential advice and specialist insolvency services to help you navigate difficult situations.