Keeping it in the family
A large proportion of New Zealand firms are family businesses. Often family members pitch in and assist the business both with their time and money, without any thought to protecting themselves. When things don’t work out and a liquidator is called in, this lack of protection can have significant repercussions.
These are the top three issues we encounter when family members get caught up in a company’s demise.
Current Accounts
If family have invested in the firm and become a shareholder, they may have a shareholder current account. If they do, it is essential it is kept up to date and appropriately documented.
If a current account is in debit, that is the company owes the shareholder money, this may well be treated as an unsecured debt in a liquidation. It is worth getting professional advice when shareholder current accounts are first established to ensure it is documented, and where possible some form of security is obtained.
If a current account is in credit, that is the shareholder owes the company money, shareholders should not be surprised if the liquidator persues them for repayment. Overdrawn shareholder current accounts are quite common, and often shareholders are surprised to find how overdrawn they have become. Shareholders shouldn’t just rely on the directors or accountants of the company to maintain their current account. As a shareholder they should make sure that it reflects all the relevant dealings with the company and is up-to-date. This should include correctly recording any salaries received.
Loans
Too often as liquidators we see companies in financial distress or liquidation where funds have been borrowed from family to keep things afloat. Often this is done at times of stress or urgency and the personal dynamics at play can result in money being lent without a loan agreement and without the lender ensuring security is in place.
When loaning money to a family run company, lenders should take care to ensure the loan is
Employees
Having family members working in a company is quite common. Whether it is children of the business owner or more distant relatives, few people realise that being related to a director of a company can significantly impact their right to employee entitlements when a company goes into liquidation.
Schedule 7 of the Companies Act sets out certain creditor priorities when a company is in liquidation. This includes the preferential status of employees of a company for unpaid wages, salary holiday pay and redundancy. The definition of employee for the purposes of this preferential treatment excludes people who are, or were, in the last 12 months directors or relatives of directors of the company.
