A company may be placed into liquidation by passing of a special resolution of its shareholders (see ss 106 and 241(2)(a) of the Companies Act 1993 (“the CA”)).

For a special resolution to pass, it requires the majority of 75% (or a higher majority if the constitution requires it) of the votes of those shareholders entitled to vote and voting on the question.

However, the shareholders are unable to appoint a liquidator of their choice after 10 working days of service of an application to liquidate the company by an entitled person (for example, a creditor). Any appointment after the expiry of 10 working days is invalid and the Court will appoint a liquidator in their place (see for example Tradestaff Group Ltd v Alumen Ltd 9/3/09, Associate Judge Gendall, HC Wellington CIV-2008-485-2574).

Once a decision to put the company into liquidation is made, a liquidator must be nominated and must consent to the appointment (see s 282 of the CA). Once a company is in liquidation, its liquidators have custody and control of the company’s assets and the directors cease to have powers, functions and duties (see s 248 of the CA).

Once the shareholders appoint a liquidator of their choice, the common perception among creditors is that the liquidator will be ‘friendly’ and will not pursue the directors/shareholders should valid claims exist. In some circumstances, these perceptions are well-founded, in other cases, they are not.

The perception formed when shareholders appoint a liquidator of their choice should not be underestimated. In Baker v Gilbert [2015] NZHC 3311, the High Court held that the concern is that “the liquidator will not act as hard for the creditors as one appointed by the creditors”. If this concern is held, creditors may seek to remove the liquidator from office.

In this context, the most cost-efficient method to replace the liquidator is to have a resolution passed replacing the liquidator at an initial creditors meeting. The process for the calling of a creditors’ meeting is as follows:

  1. The liquidator must give notice of the creditors meeting to every known creditor (see s 243 of the CA).
  2. If the liquidator has decided not to call a meeting, the liquidator must give notice to creditors advising that no meeting is intended to be held and explains the reasons (see s 245 of the CA).
  3. In the event that a creditor wishes a meeting to be held, the creditor must notify the liquidator in writing within 10 working days of the liquidators’ notice to dispense with a creditors’ meeting.

The timeframes to call this meeting is crucial. If a creditor fails to notify within the statutory timeframes, the opportunity to present a resolution to replace the liquidator is lost.

All creditors’ meetings must be held pursuant to the procedure set out in Schedule 5 of the CA and regulations 17 to 27 of the Companies Act 1993 Liquidation Regulations 1994.

In the event that the creditors seek to replace the liquidator, a resolution to replace may be put forward and if passed, the proposed liquidator will become the new liquidator of the company (see s 243(6) of the CA). For the resolution to succeed, the majority in number and value of the creditors voting must vote in favour of the resolution.

On some occasions the liquidator will remain in office with support of the creditors related to the shareholders of the company. In such situations, the High Court has been given discretion to order a new meeting to be held to consider the vote and to bar the related creditors from voting (see s 245A of the CA).

It may become useful for a liquidation committee to be appointed at the creditors meeting. A liquidation committee has a supervisory role over the liquidators.

In many cases the creditors will be unsuccessful in replacing liquidators who have been appointed by the shareholders. It should be noted, however, that not all liquidators who are appointed by shareholders are ‘friendly’ to those who appoint them. For example, the liquidators of NZNet Internet Services Limited (in Liquidation) were appointed by the shareholders. The liquidators then undertook the following reported steps:

  1. In Grant v Johnston [2015] NZHC 611, the liquidators pursued the directors (and the shareholder who appointed them) for breaches of director’s duties.
  2. In NZNet Internet Services Limited (in Liquidation) v Engini Limited [2015] NZDC 19835, the liquidators pursued a debt owed by a related entity associated with the shareholder.
  3. After obtaining judgment for the debt, in NZNet Internet Services Limited (in Liquidation) v Engini Limited [2015] NZHC 2713, the liquidators obtained orders that the related company be put into interim liquidation and that the liquidators be appointed as interim liquidators of the related entity. The High Court praised their conduct: “I am reinforced in my confidence. Messrs Grant and Khov were appointed by shareholders’ resolution. Unlike some vanilla liquidations, they have pursued the interests of creditors of NZNet Internet Services Ltd vigorously…”
  4. In Andrews v Grant [2015] NZHC 2934, the liquidators pursued the shareholder who appointed them to claw back shares that had been disposed of to avoid payment to the liquidators. The liquidators obtained judgment to recover the shares.

Accordingly, the perception created upon the appointment of the liquidator by the shareholders can be based on valid grounds but sometimes the perception can be nothing more than a perception. Creditors ought to be encouraged to investigate the individual liquidator and their history in similar situations. Fortunately, judicial decisions are publicly searchable so it takes an insignificant amount of research to determine the liquidator’s reputation.

In the event that the perception is real, the process outlined above is recommended to obtain a liquidator who will pursue the interests of creditors vigorously.

This artcile was also published in the February 2016 edition of Law Talk.