There is nothing preventing the directors from forming a new business.  However, if the new company has the same or a similar name, or trading name, as that of the liquidated company, the directors can be held personally liable for the debts of the new company, unless they obtain the leave of the court.   They can also face a substantial fine or even imprisonment.  These are known as the 'phoenix company' provisions.

The main exception is where the new company buys the old company's assets from its receiver or liquidator.  In this situation the directors must write to all creditors of the old company advising them of the new company's formation.

Also, where directors are consistently involved with failed companies, they can be barred from acting as directors in future, on application to the Ministry of Business, Innovation and Employment or the Court.

The liquidator's job is to obtain the best price for the assets.  If a director wants to buy assets, the liquidator has these items independently valued.  As long as the sale is at the same price or higher than would be achieved on the open market, there is usually no reason why it should not take place.  Such sales often in fact realise more for creditors, as there are no auction or other selling fees involved.

See also below regarding the 'Phoenix company' rules where directors buy the whole business back.

The Companies Act definition of director includes 'a person in accordance with whose directions or instructions the board of the company may be required or is accustomed to act'.  This is what is commonly known as a 'shadow' or 'defacto' director.  The definition goes on to state that this does not apply to a person to the extent that they act only in a professional capacity.

It is therefore essential that professional advisors provide advice only, and do not cross a line whereby they are instructing or directing a company's directors.  If a professional advisor becomes involved in making management decisions, they run the risk of being held liable along with the named directors in the event of insolvency.  If you have any concerns in this area we recommend taking legal advice.

Sooner rather than later is our strong recommendation.  We regularly meet directors who have continued trading a business for long periods when it was clearly insolvent and had passed the point of no-return.  Sadly, in many such cases the directors or their family members have sunk further money into the company, at a time when there was no realistic chance of repayment.

Delay also places directors at risk of action against them personally, especially where PAYE has been deducted but not paid over.  The IRD is becoming much more aggressive in pursuing directors personally for non-payment of PAYE.  Various examples of recent IRD prosecutions are located on the IRD website.

If you have credit insurance, you should check with your insurer whether you are covered for all or part of your loss.  If you are on the Invoice basis for GST accounting, you may be able to make a bad debt adjustment in your GST return.  Check with your accountant on this.  You may also need to make a bad debt adjustment in your income tax return if this has not already been included.  Again, check with your accountant.

We recommend always taking the time to submit a claim form, as it is often unclear at the start of a case whether a dividend will be paid.  Our six monthly reports are only sent to creditors who submit claims, so you may not be aware of developments giving rise to a payout to creditors.  We are only permitted to pay dividends to creditors who file formal claims.  Please also notify us of any change in address, as dividend payments are made by cheque rather than direct credit.

The IRD ranks as preferential for PAYE and GST, on the basis that these funds are held by the company in trust for the IRD.  Only the core debt is preferential, not any related interest or penalties.  Income tax is also not preferential.

The IRD's preferential claim ranks behind employee claims for wages, holiday pay and redundancy pay.  These preferential claims are capped at $20,340 per employee.

This is a slightly complicated area, but the broad outline is as follows.

After the costs of liquidation, secured creditors and preferential creditors are paid first, and then unsecured creditors.  Creditors with valid specific security over stock and equipment (such as retention of title clauses or leases) generally have priority to recover those items where they can be clearly identified.  The main categories of preferential claim are employees for wages, redundancy pay and holiday pay (up to a maximum of $22,160 per employee), and the IRD for GST and PAYE.

If there is say $50,000 remaining to pay to unsecured creditors and they are owed a total of $500,000, they will each receive a dividend of 10c in the $ on their debt.

A receiver is usually appointed by a bank or other creditor holding a General Security Agreement ("GSA") covering all the company's assets.  Although a receiver has a duty to preserve the rights of other creditors, his or her powers are limited.  Once the GSA holder is repaid, the receiver ceases to act.  If there are further assets to be realised or matters requiring investigation, a liquidator will also be appointed.

A liquidator's powers are much wider than those of a receiver.  Liquidators have investigatory powers, and powers to set aside voidable transactions and bring actions for offences under the Companies Act.

A liquidator is usually appointed either by the shareholders, or by creditors through an application to the High Court.  For shareholders, the procedure is generally as simple as signing a resolution.  There are therefore normally no legal costs involved in a shareholder appointment.  In a court appointed liquidation, the costs of applying to the court are a preferential claim in the liquidation.

For more information on the process of placing a company into liquidation, see our Liquidations page.