FAQs

In a liquidation, the powers of the directors to control the company are passed to a liquidator. The liquidator has a statutory obligation under the Companies Act to realise the assets of the company for the benefit of all of its creditors, subject to certain priorities which are laid down in the Companies Act and the Personal Property Securities Act. It is unusual for a company to survive liquidation. Although the liquidator may decide to trade on for a short term in an endeavour to achieve a sale of part or all of the business, unless all creditors are repaid in full the liquidation of company cannot be reversed.

A receivership on the other hand may be a short term event. The receiver is usually appointed by a secured lender to the company, frequently a bank. His task is to realise sufficient assets to repay the secured lender before he is released. The receiver will still take over the powers of managing the business assets during the term of the receivership. But if, after the receiver has realised assets to repay his appointor, there is still a trading business remaining, it will be returned into the hands of the directors.

If the receiver is released, but there is no trading business remaining, a liquidator may be appointed by the shareholders or on the petition of a creditor. Unlike the receiver, the liquidator has a statutory obligation to review the affairs of the business and events leading up to his appointment

The situation for suppliers of stock has changed significantly since the Personal Property Securities Act came into force in 2001.

Prior to this Act suppliers of goods regularly relied on a Romalpa clause on their invoices to protect their title in goods supplied, until the goods in question had been paid for.

Although The Personal Property Securities Act has not eliminated entirely the right of suppliers to rely on Romalpa clauses, in practice the security granted by them is normally overridden by creditors holding General Security Agreements (GSA’s) or Purchase Money Security Instruments (PMSI’s).

GSA’s are typically held by a bank and generally grant the bank security over all assets on the debtor company’s property, with the exception of goods which are covered by a PMSI. There are a number of requirements to ensure that a PMSI registered by a supplier has been perfected. The space available in this document does not permit the requirements to be covered in here. However, if a supplier has a perfected PMSI for goods supplied, this security will take super priority over any GSA’s registered against the debtor company.

However, the Companies Act 1993 grants priority to certain preferential creditors over inventory held by a debtor company. Such creditors include IRD, and employee claims and liquidation fees.

For this reason, creditors holding a PMSI over stock remaining on the premises of a debtor company should contact the liquidator appointed to a company, to ensure that the security is recognised by the liquidator, and that if the goods are subject to preferential creditors claims they are disposed of for optimum value. If there are no preferential claims the liquidator may allow the supplier to recover the goods in question provided they can be identified.

Most certainly. When a statutory demand, also known as a Section 289 Notice, is served on company, it has 10 working days to dispute the debt by filing an application to set aside the demand, or 15 working days to pay the debt.

If the debt is neither disputed nor paid, then on the expiration of the 15 working days, the debtor company is deemed to be insolvent and the creditor can apply to the Court to place the debtor company into liquidation. The onus is then on the debtor to satisfy the Court that it is solvent. This will involve Court representation and the attendant legal fees.

This is the second step toward liquidation. Where a statutory demand by a creditor (including Inland Revenue) is neither disputed or paid by the debtor within the requisite period of 15 working days, the creditor may petition to Court to place the debtor company into liquidation.

The petitioning creditor must however first serve at the registered office of the debtor company a notice of its petition to the Court to liquidate the company.

This is a crucial point for the company. Unless within 10 working days of service of the notice of intent to petition, the shareholders of the company appoint a liquidator, no liquidator can be validly appointed until the Court hears the petitioning creditors request to appoint its chosen liquidator.

The liquidator is given full control of the assets and undertaking of the company. This control is however subject to the rights of creditors who have securities over the assets and undertaking.

The liquidator has a period of 5 working days in which to prepare a statement of the company’s position and report to creditors. During this period the liquidator will normally determine whether or not to continue to trade. This decision will be coloured by the fact that the liquidator will be personally liable for any debts incurred through trading whilst the company is in liquidation.

The liquidator will take control of all assets of the company including bank accounts, and request the bankers to dishonour all cheques subsequent to his appointment. The liquidator will either dismiss any remaining staff, or negotiate arrangements for their continued employment by him.

The liquidator has powers to disclaim any contracts which he deems to be onerous. This will normally be exercised to terminate rental agreements and other contracts for the provision of services.

When the assets of the company have been realised, the proceeds after the costs of the liquidation will be distributed to creditors in the order of priorities laid down in the Companies Act. Naturally, where assets are secured to creditors the proceeds from those assets up to the level of the debt secured be passed to those creditors, subject to the priority provisions of the Seventh Schedule of the Companies Act.

Employees are granted priority under the Seventh Schedule up to a designated amount for services provided in the 4 months prior to liquidation and holiday pay. The limit is amended annually by Parliament. However, the priority of employees is equal to that of Inland Revenue for GST and payroll related deductions. As a result, it is usual for a liquidator to hold off any distribution to employees until certain that sufficient has been realised from the assets of the company to meet the preferential clams of employees and Inland Revenue.

Although there is no register of insolvency professionals, there are a number of prohibitions from accepting appointment. These are set out in Section 280 of the Companies Act 1993.

Prohibited persons include those who have in the two preceding years served as shareholders, directors, auditors or receivers of the company or a related company. Persons who have had a continuing business relationship with the company, its majority shareholder, directors or secured creditors are also prohibited from acting, unless the directors resolve prior to their appointment that the company will be able to pay its debts.

It is recommended that the creditors seek a meeting with the liquidator to discuss the concerns which they have.

If they remain unhappy with the performance of the liquidator they may petition the Court to have the liquidator replaced. You should bear in mind that there are costs involved in this process, and the Court will not lightly dismiss a liquidator without proof that his actions have been unsatisfactory.

Most certainly. The Companies Act allows for the election of a liquidation committee comprised of creditors or their representatives. The liquidator is bound to meet with this committee and to hear their concerns as well as provide updates on the progress of the liquidation.

You can request the liquidator at any time to call a meeting of creditors for the purpose of electing a liquidation committee.

There is brief period when a liquidator can be changed. Within 10 days of receipt of the Liquidators First Report, you may require the liquidator to call a meeting of creditors for the purposes of appointing a new liquidator whom you have nominated.

After the 10 day period has expired a liquidator may only be removed by application to the High Court.

When a liquidator is appointed he is required to write to all known creditors of the company providing a Liquidators First Report and inviting creditors to lodge their claim on a creditors claim form provided.
If you have not received any communication from the liquidator of a company within (say) 10 days of the liquidation being advertised, you should contact the liquidator and request a Liquidators First Report and creditors claim form.