What is Company Liquidation?
Company liquidation most commonly occurs either voluntarily, by a resolution of the shareholders, or by court order where it has been established the company is unable to pay its debts as they fall due.
Solvent Liquidations may occur when a company has concluded a specific event for which it was established and therefore is no longer required to be in existence. This is often documented in the company constitution.
A liquidator is appointed to investigate the company’s financial affairs, protect and sell company assets, establish causes of failure. Officers of the company are required to assist the liquidator by providing information and answer questions. Remedies are available to the Liquidator if the officers fail to comply with reasonable requests made by the Liquidator.
What is the effect of liquidation on company creditors?
The creditor cannot begin or continue proceedings against the company after it has been placed into liquidation without the leave of either the Liquidator or the Court.
Creditors are required to file a claim in the liquidation if they wish to participate in distributions that may be paid to creditors. Creditor’s claims must be established by providing the liquidator evidence such as, invoices, agreements and or contracts that support their claim in the liquidation.
Will Liquidation creditors get paid?
Distributions to creditors is dependent on the value of the company assets and liabilities and how the creditors rank in order of priority, for example wages and holiday pay and some Inland Revenue debt is preferential in the liquidation and rank in priority to unsecured creditors.
What is Receivership?
A receivership is the name of a process that creditors can use to realise their security in some situations.
Your company can’t be put into receivership unless you’ve given your creditors a right in a contract with them to appoint receivers over some or all of your company’s property. Receivers can only sell the property that you put up as security in that contract.
A creditor will want the right to appoint receivers so that they can quickly and aggressively sell your assets if you default on your loan obligations. It’s industry practise for financial lenders (i.e., banks and finance companies) to insist on the right to appoint receivers over all of the assets of your business. Having a receiver appointed to your business is incredibly intrusive, and often fatal – which is why there are so many companies ‘in receivership and liquidation’.
Practically, you don’t need to know much about receivership – apart from what it is, so you can make an informed decision about whether you are going to give a creditor the right to appoint a receiver. If receivers are appointed, they’ll effectively take over your company for the sole purpose of quickly selling your company’s assets. There’s very little you can do to stop them – you’ve contractually pre-agreed to them selling your assets to pay off your debts to the creditor who has appointed them.
Receivers have a duty to sell assets for ‘the best price reasonably obtainable at the time of sale’.
What if I am just an ordinary unsecured creditor – am I completely powerless?
As an unsecured creditor you are not completely powerless. You can still make demands on the debtor for payment. More importantly if you think the debtor isn’t paying because they are insolvent you can take steps to put them into liquidation.
The recovery of a debt always starts with a demand. There are two sorts of demands you can issue as a creditor: ‘ordinary demands’ and ‘statutory demands’.
An ordinary demand is a letter from you to your debtor making a formal demand for a specific amount owed. If you are not paid, you can sue the debtor. Of course, if the debtor is insolvent, having a valid legal claim against them isn’t worth much. We have included a draft ‘ordinary demand’ for you to use in Appendix III of this section.
A statutory demand is much more serious than an ordinary demand: if a debtor can’t pay you after you issue them with a statutory demand, this creates a presumption that the debtor is insolvent and allows you to apply to the court to put the debtor into liquidation.
Because of the consequences of a statutory demand, you can’t use a statutory demand as a debt collection tool. The purpose of issuing a statutory demand needs to be to prove the debtor is insolvent, if you have grounds to suspect this.
Preconditions to issuing a statutory demand:
- You must be owed at least $1000 by your debtor; and
- The debt you are owed must be due and payable – you can’t send a statutory demand in anticipation of a failed payment.
Serving a statutory demand:
You need to take special steps to make sure you debtor gets your statutory demand. There are three main ways you can serve a statutory demand:
- By delivering it to a person named as a director of the company on the Companies Register (you can get this information by searching the debtor company on the Companies Office website). You (or someone working for you) need to physically hand the statutory demand to this director. If they refuse to accept it, leave it in front of them after bringing the demand to their attention;
- Deliver it to an employee of the company at the company’s head office (as listed on the Companies Register); or
- Leave it at the company’s registered office or address for service.
What happens after you issue a statutory demand?
- The company has 15 working days to pay the money owed (or longer if they apply to the court and the court grants them an extension); and
- If they don’t pay you within this time, you can apply to the court to have the debtor company put into liquidation under section 241 of the Companies Act 1993.
If you are going to apply to have a company put into liquidation, we recommend you retain a lawyer to help you with this.
What’s a “voidable transaction”? Is it true that any payments I receive from a business in the two years before it goes into liquidation can be taken off me?
What is a voidable preference? Simply put it is a pre liquidation transfer that favours one creditor over the general body of creditors of a company that is in liquidation. The voidable preference law intervenes to ensure that the basic insolvency objective of equal treatment is not undermined by preferential transactions.
Not all payments made by a distressed company are vulnerable as voidable transactions. If payments are made as part of ongoing ‘running account’ for the continued supply of services they will be safe (i.e., as long as payments are not out of the ordinary for the business relationship you and your creditor have had in the past, they should be safe). The test is whether your customer pays you to secure ongoing supply – as opposed to paying off existing debts. If you apply any payments you receive against your most recent debts you can argue that those payments were part of a running account, as opposed to being one- off preferential payments.