Voluntary Administration is a less known alternative to liquidation.

How does it work?

1. The board of directors resolves to put the company into administration.
2. Administrators take control of the company.
3. Creditors rights to pursue the pre-administration debt freezes for a five-week period (potentially extended by the court).
4. An initial meeting of creditors is held, where the Administrator puts the plan for the Administration to creditors and they vote on whether to confirm his appointment or replace him/her.
5. A 4-week period is set down during which time the Administrator reviews the position of the company and reports to creditors on his recommendation for its future.
6. A “Watershed Meeting” is held where creditors vote on the future for the company. Creditors, by majority, can choose;
   1. Liquidation
   2. Return the company to its directors (pre-administration state)
   3. Enter into a Deed of Company Arrangement (“DOCA”)

What is a DOCA?

A DOCA is an arrangement put to creditors where they swap their existing rights against the company for the rights under the Deed. The Deed can offer any proposal the directors see fit, however, it is important to note that creditors (majority in number representing 75% in value) have to accept the proposal, otherwise liquidation is the likely outcome.

If a DOCA is accepted, the Administrator will become the Deed Administrator and tasked with ensuring the company’s obligations under the deed are met.

For an Administrator to recommend a DOCA, the outcome for creditors should be better than the likely outcome in liquidation.

What can be proposed to creditors in a DOCA?

Depending on the circumstances the following types of proposals have, historically, been accepted:

• Where an otherwise profitable business has too much debt, creditors can be offered a percentage of the trading profits over a set period; and/or
• Directors/shareholders can personally advance additional funds to enable creditors to receive a portion of their debt now with the rest written off or a combination of this and 1.
• Directors/shareholders can agree to waive rights to secured/unsecured loans due to them from the company to increase the funds available for creditors.

Technically the proposal can be anything, however, the proposal must be accepted by the creditors, and in our experience, creditors are likely to be unwilling to accept a proposal unless it’s a better outcome for them.

Does a DOCA have to be proposed?

No.  If, during the administration, it becomes clear that a DOCA won’t be successful, then a DOCA need not be presented to creditors.  That typically means the creditors place the company into liquidation at the Watershed meeting.

That’s not necessarily a bad thing.  We have experience, in a couple of situations, where an offer was received to buy a business during the course of the administration.  The offer, being far more than the creditors would otherwise receive, represented the best option available.  In those circumstances, the Administrators can sell the business and ask the creditors at the Watershed meeting to place the company in liquidation to allow the proceeds of sale to be distributed.

Summary

Ever situation is different. Voluntary Administration is a tool which may help save some businesses, but it’s not a magic bullet. If you think Voluntary Administration may be of help to you or your client please feel free to call us on 0800 343 343 for a free consultation.

BEN FRANCIS
Senior Manager
021 042 6991
bfrancis@gerryrea.co.nz

The Government on the 3^rd of April proposed some legislative changes to the Companies Act in order to support business that are struggling due to the COVID-19 lockdown.

One of the more interesting changes was the proposal to allow business to place their debts into hibernation.

So, what is “Business Debt Hibernation”?

Exact details aren’t known at this stage, but the intention of the regime is to;

• Encourage directors to talk to their creditors with the view and intent to place the business into hibernation.
• Allow the directors to retain control of the company rather than passing control to an insolvency practitioner.
• Provide certainty to new creditors that they won’t have to repay any money they receive, so as to encourage businesses to continue trading with entities in Business Debt Hibernation.
• Be easy to implement so businesses can apply it to their own situation without the need for legal advice.

So, how do you place your business debt in hibernation?

Well, the regime appears to need to allow creditors to vote, one assumes in a similar way to, for example, a DOCA (Deed of Company Arrangement) in a Voluntary Administration.

However, a company only needs 50% of their creditors to approve a debt hibernation (by number and value) which makes it easier to obtain the relief.  All creditors will have one month to make up their mind.

So, how long does it last?

Once the creditors are notified of the intention to place the business debt in hibernation, none of the creditors can seek to enforce their debts for one month.

If the proposal is accepted, then the company gets a further 6 months where creditors cannot enforce their debts.

Its also binding on all creditors, even those that voted against it or didn’t vote at all. However, it isn’t binding on the businesses employees and is subject to any conditions the creditors insist on.

Can the company continue trading?

Yes, but subject to any restrictions placed on it by its creditors.

In fact, in order to encourage other companies to trade with it, it is proposed that any further payments made by the company to its creditors on new trading debts, be exempt from the voidable transaction regime.  While this exemption wouldn’t extend to related parties, it would give comfort to new creditors that a liquidation, if one is appointed later, wouldn’t be able to claw back the funds they’d received.

It should be noted that related party debts are not included in this exemption.

My business isn’t a limited liability company.  Is that a problem?

No, any entity can seek to place its debts into hibernation under this scheme unless you are a licenced insurer, a registered bank or a non-bank deposit taker, or a sole trader.

What about directors’ duties?

The whole concept about this is to provide businesses with, what the Government is calling, a safe harbour.  There is a specific exclusion to sections 135 and 136 of the Companies Act 1993 for any director who is allowed to take advantage of these benefits.

What’s the catch?

The business must have been solvent at 31^st December 2019 and the directors would be wise to ensure that’s the case.  The directors must also consider that, in good faith, that the business will be able to pay its debts as they fall due within 18 months and believe the issues being faced now, or in the next 6 months, are as a result of the impact of COVID-19.

If it is proved, at a later date, that the above criteria are not met, then the directors may still be liable for breach of directors’ duties.

Summary

This is an interesting regime that may provide benefit to some businesses.  Will many businesses be able to take advantage of it and will it provide a benefit when it only gives a 6-month breathing space?  Only time will tell.

There are a few unanswered questions though.  For example;

• Do different creditor classes have to vote separately and, if so, what happens if one class of creditor votes against the proposal? It would be unfortunate, for example, if secured creditors lose their rights via this process but also unfair if one class of creditor can dictate the process.
• What happens if directors fail to notify a creditor? Are they bound by the voting outcome?
• The concept appears to be that the debts are frozen at a point in time, but it is unclear exactly what that time is. One assumes it will be at the date the proposal is put forward.

There seems to be significant risk falling on the directors.  If they make a mistake during the process, for example, fail to notify a creditor or miss a creditor from the list entirely, they may find themselves in a difficult position.

While the process is intended to be manageable by the directors themselves, it may prove sensible for them to take appropriate independent advice from an accredited insolvency practitioner.

Any business considering this option should also look at the other statutory options available and weigh up the pros and cons of each.  Each option has its own unique advantages and disadvantages. Choosing the right option for your business is vital.

SIMON DALTON
Managing Partner
021 023 50682
sdalton@gerryrea.co.nz

How does this timeframe in 2017 compare to the last five years?

What’s happening in the market

Forex NZ and Forex NZ 2000 have both gone into liquidation. While the director of both companies has admitted to wrongdoing with the treatment of investment funds, the Serious Fraud Office (SFO) is conducting a full investigation.

Tourism has been listed as New Zealand’s biggest export earner, worth $10 billion last year. By 2023, this number is projected to hit $15 billion. The main draw? The friendly nature of New Zealanders. However, there are hurdles to overcome as overseas travellers incorrectly estimate it can take up to 41 hours to reach our island nation.

While housing prices remain strong, New Zealand is now reported to be in the midst of a faulty building crisis. Fire protection and structural issues are at the top of the list for apartments buildings now being inspected for weather tightness. While leaky homes have been the focus for several years, residential apartment buildings raised during the 1990s and 2000s are most at risk.

Canterbury based Oxford Dairy Farm recently sold to European investors for $18.2 million. This move is expected to increase milk production and lead to more exported milk products.

What happens with assets in a locked safe?

During the course of a liquidation, assets and accounts must be evaluated to determine which assets belong to the company, making them available as a means to pay creditors. This, as you know, is standard practice.

We would like to talk about a liquidation, which has been covered by the media, where a locked safe was discovered. Curiously, no one at the company in question was able to unlock the safe, generating a great deal of speculation. What was in the safe? Of course, the mind is left to imagines all sorts of magnificent treasures … and, usually, reality doesn’t quite match up.

To the surprise of many, the safe held half a million dollars in gold bars ….

What happens next?

This discovery must be handled with the same level of care given to all company matters during liquidation. Of course, with actual gold involved, one question becomes most pressing: who gets the gold bars?

Is this discovery a company asset available to creditors … or something else?

Any liquidator appointed to manage company funds is required to investigate. He or she must determine whether or not the contents of the safe belong to the company before moving forward. If, for example, the gold bars are being held in trust, they cannot be used to pay company debts.

Assets held in trust must remain separate

As you know, customer or creditor funds held in a trust are separate from company assets. In a liquidation, these funds must be returned to trust beneficiaries.

For example, Ticketmaster holds funds obtained from ticket sales in a trust so customers get their money back if the company should go into liquidation. This is a responsible practice that protects consumers paying in advance for goods or services by purchasing vouchers or giftcards or paying deposits.

Further, trading foreign currency in volume is made possible by trust accounts. These accounts exist to hold client money so funds remain the property of clients should a company involved in this practice go into liquidation.

In the case of gaming companies where funds are held on behalf of betting clients, a trust must also be used to ensure client funds remain separate from company assets.

Until insolvency laws change, customers remain unsecured creditors and they would be wise to confirm that monies paid to a company by them in good faith is being correctly held on trust.

What happens when funds commingle or they are not declared as trust funds?

There are times when things become more complicated. If, for example a director’s personal funds or company funds are commingled with trust funds, it can be more challenging to determine which funds are available to creditors …

However, this sort of confusion may lead to penalties for the trustee who should have been aware of their responsibilities when creating the trust and managing it.

As liquidators, we do not have to prove any assets are held in trust; rather the company must do so. Funds held in trust should be:

• Separate
• Accountable
• Identifiable

If, for some reason, segregated accounts are not clearly identified as trust accounts but are still claimed as holding trust funds, these assets may become available to creditors based on the outcome of our investigation. The source of the funds is evaluated as well as the intention of the company.

If the source of the funds cannot be identified or it becomes clear the funds were not held on behalf of creditors in trust, those funds could, in fact, become available to other creditors in a liquidation. The only way to avoid grey areas is to label trust accounts appropriately and manage them in compliance with the law … in a recent case we sought directions from the Court to confirm we were able, as liquidators, to access and deal with commingled funds of a forex trader. In that case, I’m pleased to say, we were able to return 100 cents on the dollar to all of the company’s clients.

The takeaway

During liquidation, the burden of proof lies with a company if and when assets are claimed as being held in trust.

For this reason, every company should ensure that clear records are maintained of what assets are held in trust. If trust accounts were not set up properly at the start or were later commingled, assets held in trust may still be used to pay back the company’s creditors.

Further, trustees have a duty to ensure funds are handled appropriately and are potentially subject to legal consequences if this is not the case.

If you have a client in liquidation with concerns about assets held in trust and you would like advice, please feel to contact Simon at sdalton@gerryrea.co.nz.

Image courtesy of walknboston

If you’re trying recover debts, show strength

If you are a creditor of a non-paying debtor there are many steps you can take to improve the chances of receiving payment of that debt.

However, in our experience, creditors taking a more aggressive stance are more likely to receive payment.

Where a debt is due and payable, and not subject to any genuine dispute, a creditor may issue a statutory demand to force payment. If the debtor doesn’t comply with the statutory demand, a creditor may apply to the Court for an order that the debtor be placed into liquidation. It appears though that many trade creditors are unwilling to incur this cost and look to write the debt off at this point.

However, giving up on pursuing payment is not the best course of action. Company liquidation statistics we have gathered instead reveal another strategy.

Push forward with a liquidation application

Many liquidation applications do not get advertised as they settle prior to the advertisement date. It is apparent from looking at the numbers that, most times, when liquidation applications are issued, the matter settles (usually meaning payment in full or a compromised amount is received).

We recently conducted a liquidation where the Company had several debtors that wouldn’t pay. As liquidators, we served statutory demands, and subsequently liquidation proceedings against five of these debtors.

Four of these debtors paid in full, including legal costs, and one debtor settled the amount by repaying the principal debt. A substantially better recovery was achieved because of the threat of liquidation.

The case referred to above is not unique, we are regularly asked to consent to act on liquidation proceedings where the matter settles prior to being heard in Court.

Let’s quickly review the numbers

We have conducted an analysis of the liquidation applications advertised in the New Zealand Gazette since 2011 and have observed the following:

(Please note: we have excluded applications undertaken by the Inland Revenue Department, as the IRD may choose to proceed with a liquidation to protect the integrity of the tax system.)

Liquidation Applications between 2011 and 2016 (inclusive) totalled over 7,500 with more than 4,900 of those made by the IRD. This indicates that, during that period, other creditors filed just under 2,600 applications to liquidate. But how many of those were placed into liquidation?

Court appointed liquidations in the period totalled only 5,200 and the majority of those were where the applicant creditor was the IRD.

By our calculation, over 80% of advertised liquidation applications — where the applicant is not the IRD — do not lead to liquidation. Instead, a settlement is reached.

What if the liquidation goes forward?

In the event your matter doesn’t settle and a liquidator does get appointed, you may still recover the funds through the actions of the liquidator.

Yet, you must nominate the person(s) to be appointed liquidator, who must consent to act. We recommend obtaining the consent of the prospective liquidator at the start of the process.

The costs (as awarded by the Court) of applying to liquidate the Company are preferential in a liquidation.

If you or your client is applying to liquidate a debtor, please feel free to contact Matt at mkemp@gerryrea.co.nz or 021 839 556. We are happy to discuss how we may be of assistance.

How will this impact businesses and consumers?

Insolvency laws in New Zealand have remained largely unchanged since the 1950s; however, we’re on the brink of seeing amendments to these laws.

As you know, insolvency law reform has been a topic in the news since the failure of big retailers like Dick Smith electronics, who finally closed the doors to all its New Zealand retail locations in May.

In response, the Ministry of Business Innovation and Employment put together an insolvency working group that has proposed changes to the rules relating to voidable transactions, preferential creditors, and other areas of law. These changes will effectively amend the Companies Act of 1993 in an effort to refine existing laws.

Key changes impacting businesses and its creditors are as follows:

Changes for voidable transactions:

A voidable transaction is a payment by the insolvent company within a period which enables one creditor to receive more than it would have received through the liquidation.

The working group has proposed three significant changes to the current law:

1. To decrease the period in which transactions are potentially voidable from two years to six months from the liquidation date.

 

2. To make it more difficult for creditors to defend a claim on the basis they didn’t know a company was insolvent.

 

3. To limit the time frame in which a liquidator can bring any claim to 3 years from the commencement of the liquidation.

Changes to the preferential creditor regime:

1. With several recent high-profile retail insolvency cases, the working group has proposed creating a preference for gift cards and voucher holders. For consumers, this could be a huge win as businesses will have to hold funds in trust to refund gift card and voucher holders in the event of liquidation.

 

2. Next on the list is to reduce the Inland Revenue preference to taxes unpaid in the six months leading up to liquidation.For example, if a company was placed into liquidation on 1 July 2017, any tax due and payable to the commissioner after 1 January 2017 would be preferential, any tax due and payable before this date would be unsecured.

 

3. The working group has recommended that parliament confirm whether employee Long Service Leave is intended to be a preferential claim. At present, there are differing views amongst practitioners and lawyers alike. This change should create more clarity in this matter.

A public consultation period, which ended on June 23, was requested to ensure the proposed changes to voidable transactions better balance the interests of individual creditors and all creditors.

If you have further questions about the proposed changes to insolvency law, please contact Simon Dalton at sdalton@gerryrea.co.nz.

 
The start of 2017 saw a slight dip in the housing market typical of the December trading period with claims the boom is over. Businesses also reported less confidence in the economy.
 
January to March 2017

 
How does 2016 compare thus far to the last five years?

 

Credit and savings

 
KiwiSaver is currently worried about the impacts of 130,000 of its members taking contribution holidays. While this opportunity to divert funds during hard times or to pay down bigger investments (such as mortgage payments) is a welcome flexibility, the length of these holidays is up to 5 years.

Increases in housing prices and other costs of living could be partially responsible for contribution holidays. However, KiwiSaver has helped 2.7 million New Zealanders save $40 billion dollars.

Despite doubts, New York-based credit rating agency, Moody’s has confirmed a stable credit profile for New Zealand. This is due to strong demand in ASIA for New Zealand exports, such as dairy, fish and honey, as well as a vibrant economy supported by SMEs and steady population growth.

Exports

 
New Zealand’s manuka honey exports are taking off in Asia. While further regulations are needed to ensure consumer confidence (ensuring honey labelled as manuka is the real thing), demand for this unique product is on the rise.

Housing

 
In terms of the housing market, Queenstown is now outranking Auckland as the least affordable place to purchase a home in the country. Further, unsettling news for renters comes as Rentberry announces plans to launch its platform in NZ. Described as the “ebay of renting”, there’s reason to be concerned about technology that will likely increase rental prices.

Severe weather

 
Heavy rains have increased the number of flood related insurance claims. Edgecumbe, located in the Bay of Plenty, was recently inundated when the Rangitaiki River breached its banks.

Farmers and winemakers across the country are worried about the rainfall, especially the last round of wet weather, brought by the remnants of tropical storm Debbie. Farmers have said nearly half our annual rainfall has occurred in just one month. This could have impacts but farmers are not currently reporting serious trouble. Fonterra appears to be unaffected so far.

Photo courtesy of CDC Global

Here’s a ready-made article for your clients

With a new financial year starting, it’s timely to comment about the importance of keeping complete and accurate accounting records.

We know you’ve just been through your busiest time as an accountant, and you’re probably trying to forget how many of your clients came in with their records and receipts “organised” in boxes. Undoubtedly, these records, or lack thereof, held a few surprises for both parties as the tax process unfolded.

To help prevent this scene next year, we’ve created an article to highlight the importance of keeping accounting records. Here, we emphasise the benefits of maintaining complete records all year long for multiple business reasons, not just to fulfill obligations to the tax department. Feel free to pass this information on to your clients.

Keeping good financial records:

3 vital areas a watchdog should be guarding

You’ve got a successful business and you want it to keep thriving. Maybe you’ve even got plans to expand this year…

All of this is rather exciting, but how did your end of financial year go? Was it a bit stressful when you last visited your accountant and struggled a bit due to gaps in your record keeping?

We want to help you avoid making record keeping mistakes that could hurt your business or even send your dreams into liquidation. We recommend you use the following points as motivation to improve your record keeping practices:

1) Your personal liability

As a director (and/or business owner) you need to be aware of what records you should keep, how you should be keeping your records and for how long. The IRD has current information (organised in a way that’s useful!) that we recommend you review and then pass on to the person in charge of your books, if there is someone helping you.

http://www.ird.govt.nz/yoursituation-bus/running/recordkeeping/recordkeeping-index.html

Knowing your responsibilities and taking steps to meet them will help you ensure your business has a solid foundation for continued success. Directors have a duty, set out in the Companies Act 1993, to keep accounting records. Failing to do so could leave the directors personally liable for the company’s debts.

As a director, we know you have many business items to attend to, but we encourage you to stay informed and keep your records in good standing.

2) Your risk for default or liquidation

The only way to know if you’re business is showing early signs of financial trouble, is to keep your financial records up-to-date. There are key places to be looking and regularly maintaining records to be sure you’re business isn’t headed for default.

Debtors and creditors

If you don’t yet have an accurate debtor ledger, you could very quickly start having cash flow difficulties. If you aren’t recording creditor invoices correctly, some may fall through the cracks. Having complete records for all your debtors and creditors makes it easy to identify who owes you money and who you owe money to. Good business is about avoiding nasty surprises.

If you’re not maintaining complete records here, you’re likely delivering goods and services without timely payment. How long do you feel your business can survive if you’re not being paid? Two weeks? One month? Three months? Shouldn’t you be paid on time, every time?

There’s a great deal of good accounting software out there if you don’t have someone who can help you with managing your ledgers. Use these programs to quickly identify when debtors are behind before overdue payments become a significant problem for your business. This can get out of hand much more quickly than you might think! We’ve seen it happen too many times.

Similarly, if you aren’t fully aware of your creditor position, you run the risk of getting behind with your own debts. This is just as dangerous for your business as not being paid for what you do.

Making the right spending decisions

Without proper accounting records, spending decisions are often made without a financial basis. This translates to your bottom line in a serious way as you’ll be facing quite a few surprises about your revenue stream without a detailed picture of what’s going on in your business.

For example, you may think that a product or service should be giving you a 30% profit margin but changes over time and expenses you haven’t figured into the numbers may actually leave you with a 5% margin. What’s worse, by the time you work out the difference, it may be too late!

For the good of your business, you should know:

• Which product lines are performing well
• Where the business is currently investing its resources
• Where the company should be putting energy and resources … or cutting them

3) Your business growth

Is your business doing well? Despite a hectic end-of-year finance session, are you looking forward to what this financial year brings? Are you thinking about a business loan in order to proceed with plans for expansion?

That’s excellent news but organising your records for tax season is not enough to keep your business in good standing for capital loans. While we’ve touched on some of the general areas you should be minding, we thought we would also highlight the sorts of records that need to be maintained to prove the financial position of your business when requesting loans from banks or lenders:

Key financial information you should maintain at all times:

• Debtors (people or businesses that owe you money)
• Creditors (people or businesses that you owe money to)
• Sales
• Purchasers and expenses
• What assets are owned by the company?
• What money is owed by the company?

Banks and lenders must ensure your business is stable before agreeing to lend money.

Without complete and accurate financial records, your odds of securing additional capital are fairly slim. You’ll likely have quite a bit of work to do to correct the state of your books, so why not save yourself headaches by improving your record keeping practices now?

Start taking steps toward a better financial future

As you can see, it pays to maintain accurate accounting records. Record keeping is not a tax season-only exercise. Record keeping is a year-round practice that will help strengthen your business’s long-term financial standing.

In liquidations, it’s often the case that companies did not have adequate accounting records. If their records had been in order, issues would have become apparent much sooner, meaning steps could have been taken to avoid the final outcome.

Before dreaming up your next business innovation, take the time to improve how you maintain your financial records.

If you ever find yourself with client who is experiencing serious financial issues that need further consideration, please contact us and ask for Simon. We’re here to help.

Photo courtesy of Surrey County Council News
 

It’s not as straightforward as you would think

It is understandable that creditors want to get paid. They’ll suggest all avenues possible within the course of business and law, including suing directors personally, to reclaim funds owed.

Creditors often ask us three questions in their quest for payment:

1) Why haven’t you sued the director?
2) Why is this person allowed to get away with this?
3) Why is this individual not bankrupt?
 

Our response:

Is it worth it to sue the director?

As liquidators, we are obliged to investigate the reasons for the failure of the company. However, before incurring costs in taking legal action we must consider the following:

1) How strong is our case? Do we have all the evidence we need? What further evidence would we need?

2) Do we have money to pay for the case? If not, will creditors fund the case?

3) Does the proposed defendant have the means to pay the claim (in full or part)?

 
Litigation can be an expensive exercise. As liquidators, we are appointed to act prudently and not spend good money after bad. 
 
However, we will take legal action where some or all of these conditions are met:
 

• There is a strong case,
• We have the funding to do so, and
• The proposed defendant has the ability to pay
• A common difficulty is a director’s inability to pay.
• Directors have often invested everything they own into the failed business, and no longer have the means to make payment.
• Other directors have protected their assets through legitimate trusts which would not be available to cover debts even if they were bankrupted.
• Other directors may be renting everything they have. Just because a director lives in an expensive house doesn’t mean he or she owns it.

Our role is sometimes misinterpreted
 

It can be frustrating for creditors to see directors “getting away” with perceived wrongdoings; however, a liquidator’s role is not to punish. Rather, liquidators maximise returns for creditors.
 
There is also a misunderstanding that, simply because the company cannot pay its debts, the director must be “trading while insolvent” and, therefore, held accountable for the debts of the company.
 
Companies fail all the time and, in most cases, not through the fault of the directors. “Trading while insolvent” is not illegal. If a director realises the company is, or is likely to become, insolvent, they must take appropriate steps to ensure the creditor position does not worsen. The director must also look for ways to salvage the business.
 
If the business cannot be salvaged or sold, then the director should look to liquidate. In doing so, they are meeting their obligations as directors. If they don’t take such action, the director may be deemed to have “traded recklessly” which is an offence. Yet, even if they have committed this offence, that doesn’t mean a liquidator should take legal action if there will clearly be no benefit to creditors in doing so.
 
Sometimes, if creditors wish (and are prepared to pay for it), a liquidator may sue to bankrupt the director of a company with the hope that a family member puts some money in and a settlement proposal put forward. Yet, prudent creditors are typically unwilling to put good money after bad.

Always seek sound advice

 
Gerry Rea Partners takes pride in operating independently and offering sound advice to our clients. You can always count on us to deliver a fair perspective and take action to prevent further losses.

If you in a situation where suing a director seems like the next logical step, please contact Simon Dalton at sdalton@gerryrea.co.nz.

  ]]> https://gerryrea.co.nz/solvent-liquidation-whats-the-point/ Tue, 11 Apr 2017 02:15:47 +0000 http://www.gerryrea.co.nz/?p=5979

Photo courtesy of Thomas Angermann
 

Give your client another option to consider

 
We bet you’re wondering: “Why would a company choose to undergo a solvent liquidation? How would a company even find itself in this position?”

Essentially, a solvent liquidation is a liquidation where the directors declare their organisation will be able to pay all of its debts. Liquidators are appointed in the usual way, by shareholder resolution. Liquidators have the same powers and obligations and creditors must also make a claim in the usual way.

The point of difference: directors declare the company to be solvent and sign a certificate of solvency.

What’s the catch?

A director who signs a certificate of solvency is providing a personal guarantee that the company will be able to pay its debts. If, in fact, the company cannot pay it debts, the director becomes personally liable to pay.

Why would a director choose personal liability?

So, why would any director choose to sign such a document? What are the advantages?

1) The biggest advantage is time.

Usually, in a liquidation, creditors receive approximately one month to make a claim in the liquidation. Before making any distributions to creditors or shareholders, the liquidator must wait, even if the company appears to be solvent and a distribution to shareholders is likely.

Let’s assume you, or your client, are the director and sole shareholder of a company and that you have just sold the business assets in an effort to cash up. For arguments sake, let’s also assume the assets included a commercial property which sold with a large capital gain — and there are no known creditors. If you declare the company solvent, a liquidator would be more willing to make an immediate capital distribution to shareholders rather than wait for creditors to make a claim.

2) The other key advantage:
 
If a liquidator makes a distribution of capital during the course of a liquidation, it will not incur income tax. Whereas, a distribution declared prior to liquidation could be deemed as taxable income by the IRD.

When would it be a bad idea for a director to take on personal liability?

Simply put: the director is not sure the company is solvent. Perhaps, there is a contingent liability they are not certain about; or perhaps, the shareholders are simply not in a hurry to get paid.

If in doubt, a director should not sign a declaration of solvency.

What’s next?

If your client is facing financial trouble, or looking for the best short- or long-term exit solutions, then difficult decisions lay ahead.

Gerry Rea Partners is always here to help you provide the right guidance. If you have a client with unusual circumstances that require further consideration, please contact us and we will discuss the next steps.

If you have further questions about solvent liquidations, please contact Simon Dalton at sdalton@gerryrea.co.nz.