Voluntary Business Liquidation

In New Zealand, companies can struggle to pay all debts in full. This can occur for a variety of reasons.

An inability to pay debts can result in Voluntary Liquidation, Receivership or Voluntary Administration.

What is Voluntary Liquidation?

Voluntary liquidation is a process where a company’s shareholders voluntarily decide to wind up operations due to an inability to service the company’s debts. The liquidation process is initiated by the directors or shareholders and starts with the appointment of a liquidator, who is responsible for collecting and selling the company’s assets, paying off its creditors, and distributing remaining assets, if any, to the shareholders. The liquidator must also investigate the company’s affairs, including any potential breaches of directors’ duties.

It is important to note that voluntary liquidation should not be entered into lightly, as it has serious consequences for the company, its directors, and its shareholders.

How Does a Company Begin the Liquidation Process?

A company may be placed into liquidation by the passing of a special resolution of its shareholders.

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.

The Liquidation Process

Once the shareholders have passed a resolution, this must be filed with the Companies Office.

A liquidator can then be appointed. The Liquidators’ primary duty is to take possession of and sell assets for the benefit of creditors.

A liquidator will:

  1. Call a creditors’ meeting (in some cases);
  2. Investigate the affairs of the company;
  3. Investigate the governance of the directors;
  4. Take possession of the company’s assets;
  5. Realise assets;
  6. Distribute funds;
  7. Report any criminal activity.

Who Appoints a Liquidator?

A liquidator is appointed by the directors or shareholders of a company undergoing voluntary liquidation.

If a company has been served with an application to liquidate the company by a creditor, the shareholders are unable to appoint a liquidator of their choice, unless the creditor who made the application to Court consents to this. Find out more about Liquidation by Creditor.

Who Should be Appointed as Liquidator?

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.

Can a Shareholder Appointed Liquidator be removed?

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.

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 meeting to every known creditor.
  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.
  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 prescribed procedure.

At the creditor’s meeting, the liquidator must disregard the related creditors’ votes. If the related creditor wishes for their vote to be taken into account, they need to make an application for such purpose to High Court.

Creditor Committee

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.

Can Shareholders & Directors be sued by a Liquidator?

In reality, most Liquidators do not sue those who appointed them. However, some do.

Liquidators have many causes of action to sue Director/Shareholders. Some of these are:

  1. Overdrawn Current Accounts;
  2. Transactions at undervalue;
  3. Breaches of Director Duties;
  4. Failing to prepare financial records;
  5. Voidable Transactions.

Liquidators can take action against directors and there can be serious consequences.

Do I need a Specialist Liquidation Lawyer?

At Norling Law we have expert insolvency and liquidation lawyers to assist our clients to navigate insolvency and to determine the correct procedure or whether an alternative will result in the best outcome for all concerned.

There is a process to appoint your own Liquidator. We assist clients to navigate this process correctly. There are many pitfalls if implemented incorrectly.

We offer a FREE 30-minute Legal Consultation where we can discuss the issues and we can add strategic value. After the discussion, we can decide whether we can help you and at what cost. Please refer to our People for more information on who we are, our experience and how we can help you.

We have offices on the North Shore in Auckland, New Zealand or can have the consultation by phone.

 

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