Hope for the Best, and Prepare for the Worst – The Insolvent Liquidation of a Company
Despite optimism about the economy in New Zealand some parts of the country are still dealing with the effects of the economic downturn. Many businesses took a hit.
In facing the harsh and unpredictable commercial reality it is wise to hope for the best and prepare for the worst. As such it is beneficial to know about the process of insolvent liquidation of a company.
The process of liquidation of a company is commonly referred to as "wind up". A company is insolvent and should be put into liquidation if it cannot pay its debts when they fall due. It is an offence to a director and the director may be held personally liable under the Companies Act 1993 ("the Act") for allowing a company to trade when it is insolvent.
The insolvent liquidation of a company can be carried out either by resolution of shareholders and directors when an event specified in the company's constitution has occurred. It can also be through an order of the High Court of New Zealand.
The High Court has the power to order that a company be put into liquidation upon a creditor's application where if the Court is satisfied that the company is unable to pay its debts.
In making its decision whether to order the liquidation of a company the Court will look at a number of factors. These include whether there is a genuine dispute that the debt is owed and if the debtor company is able to provide evidence of its solvency. Although a statutory demand has been widely used as a tool of debt collection the Court will not order that a company be placed in liquidation if the company is indeed solvent. For more information on court ordered liquidation and statutory demand please see our earlier article on statutory demand.
During the liquidation the directors of the company remain in office but their powers are very limited.
Upon liquidation the liquidator will take control over all the company's assets and affairs. The liquidator's function includes finding out the company's financial position from the directors, collecting debts and realising the company's assets and making payment to creditors.
The liquidator may challenge certain transactions entered into by the company not long before the liquidation order was made. These include transactions made when the company was unable to pay its debts.
Notwithstanding the liquidation of the company secured creditors are permitted to realise secured property. The liquidator will also provide assistance to the secured creditors if necessary in their realisation of secured property. The creditors are notified of the progress of the liquidation by progress reports filed by the liquidator.
Once the liquidation process is finally completed the company will be struck off the Company Register.
The above article is intended to provide brief and general information only. The contents contained in this article are not exhaustive on the topic in question. They do not constitute legal advice and should not be relied on as such.