Liquidation is the most common form of insolvency in New Zealand. It effectively signals the end of the company’s trading, with the liquidator appointed to realise the company’s assets for the benefit of the company’s creditors.
The liquidation of a company results in the liquidator taking full control of the company and its assets. The directors of the company cease to hold any powers however they are still required to remain in office and are obligated to assist the liquidator in performing his role.
There are two ways to appoint a liquidator.
1. Shareholder Resolution
The company’s shareholders resolve to place the company into liquidation, by completing a shareholders resolution. The resolution to liquidate the company requires the support of 75% of shareholders for the resolution to be approved.
2. Court Appointed liquidation
A creditor of the company can make an application to the High Court to place a company into liquidation. Upon application to the High Court, the company still has 10 working days to either settle the debt owed to the creditor or appoint a liquidator through a shareholders resolution. If neither option is exercised, the court will appoint a liquidator, which is typically chosen by the creditor.
Effect of Liquidation
The liquidation of a company results in the liquidator taking full control of the company and its assets. The directors of the company cease to hold any powers however they are still required to remain in office and are obligated to assist the liquidator in performing his role.
The creditors of the company are divided into three distinct groups upon liquidation of the company.
1. Secured Creditors
Secured Creditors are those that hold a security over specific or all of the company’s assets. Secured creditors are required to register the security interest on the Personal Property Securities Register to perfect their interest. If a secured creditors fails to register its security interest on the Personal Properties Securities Register, its security will rank below those who have registered.
2. Preferential Creditors
There are three distinctive groups of preferential creditors.
a) Employees of the company – outstanding wages earned in the previous four months of the company’s liquidation and holiday pay owed to employees up to a maximum of $18,700 per employee.
b) Inland Revenue Department – are preferential creditors in relation to outstanding GST and PAYE owed by the company.
c) Petitioning Creditor costs – in the event of a court appointed liquidation, the costs incurred by the petitioning creditor to place the company into liquidation is a preferential claim in the liquidation.
3. Unsecured Creditors
The unsecured creditors are last in line and only receive a distribution once secured creditor claims and preferential creditors claims have been met.
Liquidators Fees & Disbursements
Typically, the liquidator is remunerated from the assets of the Company. The liquidator’s remuneration is in preference to all other preferential creditors.
An important but largely under-utilised provision of the Companies Act 1993, provides a creditor with the option of funding the liquidators to preserve the company’s assets. Any creditor who funds the liquidator is afforded a super priority ahead of all other creditors for their funding costs and their entire claim in the event that recoveries are made by the liquidator.