This is the third and last issue in our series of articles on enforcement of judgments. These series discuss different methods of enforcing judgments in Court and outline best ways to get paid depending on the debtor’s financial position.

In this issue, we discuss applications for bankruptcy and liquidation. For completeness, we also discuss an option of selling the judgment debt. All these options are generally considered as options of last resort and usually recommended where other enforcement options are not available, or have already been exercised and have not resulted in the repayment of judgment debt in full.

Bankruptcy

If the judgment debtor is an individual, and the judgment debt is over $1,000.00, the judgment creditor may apply for the individual to be adjudicated bankrupt.

Before an application can be made, the judgment debtor must commit an act of bankruptcy within 3 months of the application. The most common example of an act of bankruptcy is where a bankruptcy notice requiring payment is served on the judgment debtor, and the judgment debtor fails to make payment or apply for the setting aside of the notice within 10 working days.

Once the person is an adjudicated bankrupt, the Official Assignee will take control of the person’s income and assets and will exercise that control for the full duration of bankruptcy. The Official Assignee will represent the interests of all creditors and will attempt to realise funds for distribution to the creditors.

Bankruptcy usually lasts for 3 years. During that period, the bankrupt usually cannot manage a business, travel overseas or be employed by relatives without the consent of an Official Assignee.

For more information regarding bankruptcy, please refer to our bankruptcy series or to: https://norlinglaw.co.nz/personal-insolvency/.

Liquidation

If the judgment debtor is a company, and the judgment debt is over $1,000.00, the judgment creditor may apply for the company to be placed into liquidation.

Usually, the judgment debtor would first be required to serve a statutory demand on the company pursuant to s 289 of the Companies Act 1993.  The company would then have 10 working days to apply for the statutory demand to be set aside, and 15 working days to pay the debt. If no payment or application to set aside is made, the judgment creditor can apply for liquidation.

Once the company is in liquidation, the liquidator will take total control of the company. The liquidator will represent the interests of all creditors and will realise the company’s assets, and repay the company’s debts in accordance with the Companies Act 1993.

The liquidator will check whether the directors or shareholders owe any money to the company and whether any offences have been committed. If offences have been committed, the liquidator will report them to authorities.

The liquidator will also investigate the activities of the directors and affairs of the company and commence legal proceedings if circumstances warrant so. Proceedings could be commenced to:

  • Recover payments made by the company to directors and shareholders. These payments could be recovered where certain requirements were not satisfied or a prescribed procedure was not followed at the time the payments were made.
  • Pursue transactions made by the company at undervalue. The liquidator can claim the difference between what the assets were sold for and what the assets were worth.
  • Pursue preferential payments made by the company to its creditors. The liquidator can claim a refund of all preferential payments made by the company within 2 years of liquidation if they were related party transactions, or within 6 months of liquidation for transactions with other parties.
  • Pursue preferential dispositions of property made by the company. The liquidator can seek to reverse, or seek a compensation for, a disposition of the company’s property made during the period starting on the date on which an application was made to court to place the company into liquidation and ending at the time the Court orders appointment of a liquidator.
  • Pursue directors for breach of their duties. Breaches can include actions like reckless trading, failure to act in the best interests of the company, causing the company to incur debts when the company was unable to repay them, failing to exercise due care, diligence and skills when exercising its powers and performing duties as a director. Breaches may also be in the form of failing to ensure that the company kept accounting and financial records that comply with the Companies Act 1993. If established, directors may be held personally liable for all debts of the company, without exception.

Once the company’s funds are distributed and the liquidation is complete, the company is usually removed from the Companies Office Register.

For more information on liquidation refer to: https://norlinglaw.co.nz/creditor-liquidation/.

For more general information on insolvency and possible restructuring options the debtor may have, refer to: https://norlinglaw.co.nz/insolvency-and-restructuring/

Sale of debt

The process of enforcing judgment debts can be too stressful and costly for a judgment creditor. If the judgment creditor does not want to get involved in this process, the alternative option is to sell your debt to a debt purchaser. Once the debt is sold, the debt purchaser will pursue the debt using their own time and resources.

The sale process is usually structured through one of the following methods:

  • The judgment debtor can sell the debt for a fixed price that is repayable immediately.
  • The judgment debtor can assign the debt and be paid once the debt purchaser makes recoveries. Then, the recoveries are split by percentage between the judgment debtor and the debt purchaser.

Usually, selling your debt will result in lower recoveries than enforcing the debt yourself, as the debt purchaser will cut a substantial portion of all recoveries. However, this might be still a preferred option for those who do not want to get involved with enforcement.

If a sale of debt is pursued, we recommend www.90nine.co.nz as a great choice to pursue.

Conclusion

Applications for bankruptcy and liquidation are usually the options of last resort as there is always a risk that there will be a minimal recovery (or no recovery at all).

However, the threat of bankruptcy or liquidation often encourages debtors to enter into settlement discussions and settle the debt.

In relation to companies, the chances of recovery could be increased with the appointment of a robust liquidator.

If you are considering applying for bankruptcy or liquidation, or require legal assistance with the application, we invite you to contact our specialists for a no obligation discussion.