The Court may appoint an interim liquidator in order to maintain the value of a company’s assets during the period following the filing of a liquidation application.
This is a powerful safeguard in regard to the assets of a company and it is often overlooked by those seeking to liquidate a company. The Court may appoint an interim liquidators if:
- The company’s assets are in jeopardy;
- The status quo should be maintained; and
- The interests of creditors require a safeguard.
However, there are three main preconditions to the interim liquidator’s appointment:
- A liquidation application must be filed which discloses good grounds for putting the company into liquidation.
- There must be a need for urgency.
- The circumstances must justify the appointment of an interim liquidator.
The Court retains discretion as to whether the appointment ought to be made. The Court will only exercise its discretion if it necessary or expedient for the purpose of maintaining the value of the assets owned or managed by the company. The word expedient means “fitting, suitable, desirable or convenient”. This has been said to import a relatively low threshold.
Associate Judge Gendall (as he then was) in Apostolakis v Café Italiano Wellington Limited was to decide a case between the two co-proprietors of the company who had fallen out.
In that case, the liquidation application had been made on “just and equitable grounds”, and one of the co-proprietors of the company led evidence that the assets of the company were in danger of being dissipated by the other co-proprietor. The Court granted the application for the appointment of an interim liquidator, on the grounds of preserving the status quo and on the grounds of urgency.
This case emphasises the power of s 246 of the Companies Act 1993. It may allow an independent party to take control of the company in order to protect the assets at a crucial time.
As per Williams J in Elders Pastoral Holdings Ltd v NZ Ostriches Ltd:
It is nonetheless to be borne in mind that the appointment of an interim liquidator trenches across director’s powers, affects a major irruption into the company’s business and, to a large degree, amounts to a pre-judgment on the winding-up application itself. Hence the necessity for an applicant to demonstrate a good prima facie case for liquidation and a cautious approach to the question as to whether the Court is satisfied that the statutory criteria have been met.
Interim liquidators will be given very similar powers to ‘actual’ liquidators. For example, they will be able to take possession of and protect assets, take possession of books and records and documents of the company, examine under oath those with knowledge of the company’s affairs. Accordingly, the appointment of an interim liquidator can be a powerful tool to ensure that the company’s assets and records are maintained while the liquidation application works its way through the Court’s processes.
Associate Judge Bell in NZNet Internet Services Ltd (in Liq) v Engini Ltd was of the view that the appointment of an interim liquidator was useful to recover assets that may have been disposed of. His Honour was also minded to appoint the same liquidators as the appointed to the creditor because of the way in which they had conducted the liquidation of the creditor and because “unlikely some vanilla liquidations, they have pursued the interests of creditors of NZNet Internet Services Ltd vigorously”.
The primary duty of interim liquidators is to preserve the status quo with the least harm to interested persons. However, in certain circumstances interim liquidators will be authorised by the Court to take positive steps outside of preservation of the status quo. For example, sale of assets, trading the business of the company, examination of officers of the company, and conduct, defend and compromise claims against the company.
The interim liquidator’s remuneration is usually paid from the assets of the company in the same way a liquidator is paid.
Failure to appoint an interim liquidator can sometimes result in a pyrrhic victory for the creditors. In particular, by the time the liquidation application is determined, the assets of the company may be whittled away by those who retain control. While a liquidator may seek to claw back assets, often the time and expense involved can be onerous to such an extent that a liquidator may not pursue those matters.
There is a process to be followed should one seek such an appointment and one needs to move the Court promptly to avoid losing the opportunity that an interim liquidator provides.
This artcile was also published in the October 2016 edition of Law Talk.
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