Articles

A recent case in the Hamilton High Court looked at the requirements on a liquidator to accept the claims of creditors and to call a meeting of creditors to decide if a replacement liquidator should be appointed. The Law on Calling a Meeting with Creditors Where a liquidator is appointed by shareholder resolution they are required to call a meeting of creditors within 10 working days of their appointment pursuant to section 243 (1)(a) of the Companies Act 1993 (“the Act). This requirement can be dispensed with, pursuant to section 245 of the Act, if the liquidator considers, having regard to the assets and liabilities of the company, the likely result of the liquidation and any other relevant matters, that…
The Solvency Test The Companies Act 1993 requires directors to focus on the financial state of the company and to consider whether the company meets the solvency test before permitting distributions and certain other actions by the company. The statutory Solvency Test is set out at section 4 of the Companies Act 1993.  The Solvency Test requires that both the liquidity limb and the balance sheet limb of the test are satisfied immediately after a distribution or other action.  Distributions are widely defined and include the direct or indirect transfer of money or property and incurring a debt for the benefit of shareholders. In making a distribution, directors who vote in favour of the distribution must sign a solvency certificate…
In our article published in April 2017, Internal Fraud – The Threat from Within, we discussed the issue of fraud committed on an organisation by its own officers and staff, the types of offending and some basic steps that can be undertaken to reduce the risk of internal fraud. These steps included the need to have robust and durable systems and procedures in place to lessen the opportunities for fraud to be committed or, if they are committed, increase the chances that they will be discovered before they can cause irreparable damage to the business. A case that our firm was involved in highlights what fraud can cost a director of a company personally if another member of the business,…
As a business owner, have you been kept awake at night trying to work out why your business is struggling to pay its bills on time when you know that you are doing more work and earning more income. The answer could be that someone within your organisation is taking advantage of their position and is defrauding your business. It is a sad fact of life that some people will abuse the trust placed in them by their business associates or employer and use their position to obtain personal profit.  This can have a devastating impact on a business, putting its ability to continue to operate in jeopardy, and also putting its creditors and directors at risk because of the…
With financial year end, one of the considerations fresh in the minds of business owners and their advisors is the decision regarding appropriate directors’ remuneration. In a previous article we reviewed the case of Madsen-Ries and Vance v Petera [2015] NZHC 538. In this article, we consider an issue on appeal by the liquidators of Petranz Limited (“the company”) as to whether salaries paid by the company to the directors were fair to the company when they were paid (Madsen-Ries v Petera [2016] NZCA 103). This article will also cover where creditor considerations fit in with such decision making, and the appropriate remedies for creditors if things go wrong. Background Mr and Mrs Petera were the sole directors and shareholders…
Global Textiles Limited (In Liquidation) We were appointed liquidators of Global Textiles Limited (“Global Textiles”) on 13 March 2015 and are now in the final stages of the liquidation. Prior to our appointment, Global Textiles had been in business for nearly 20 years.  It supplied textiles to a number of brands in New Zealand and Australia from Jean Jones to small businesses.  It was also the designer and wholesaler of a popular clothing brand. With the emergence of globalisation and technology allowing easy access to markets outside of New Zealand, the local textiles industry has moved into the sunset phase of its life cycle. With cheaper imports from overseas coming into the market, Global Textiles’ traditional customers were increasingly demanding…
Businesses get into difficulty for a range of reasons.  When directors have acted in good faith and react to the situation early enough, and where there is a good prospect of recovery, a compromise may be acceptable to the company’s creditors.  The purpose of a compromise proposal is to increase the likelihood of some classes of creditors receiving more than they would if the company were put into liquidation. Often, voting outcomes rely on the creditors’ opinion of the director(s) but issues can arise when related parties, who may be seen as voting to protect their own interests, are involved. Statutory Requirements The statutory requirements of a compromise are set out under Part 14 of the Companies Act 1993 (“the…
If you're a typical small business owner, your business lending is likely secured against your family property (or your family trust’s property). If your business is going well and the market is booming, securing your business lending against your property gives you the benefit of a good interest rate and the increasing equity in your property can give you the opportunity to borrow more so you can smooth out any bumps in the road.  The question is: What happens if you hit a bump in the road and the property market is on its way down? Over the last few years, the property market has been on an upward cycle but, like all market cycles, at some point the market…
In the words of Fredrick Nael: “It takes both sides to build a bridge.” An Alternative to Bankruptcy – Part 5 Subpart 2 Proposals Insolvent individuals are often unaware that there are alternatives to bankruptcy and what the impact of those alternative options will be, so they are ill equipped to make informed decisions. This article focuses on Part 5 Subpart 2 Proposals. There are other bankruptcy alternatives such as summary instalment orders and no asset procedures (for debts less than $47,000) as well as informal settlements, none of which are discussed here. Resolving personal insolvency issues using a Part 5 proposal requires the insolvent to put his/her best foot forward and the creditors agreeing to a concession and giving…
The Court of Appeal has upheld the decision of the High Court in Lewis Holdings Limited v Steel & Tube Holdings Limited, and held the parent company responsible to pay the debts of its subsidiary.   In this case the level of involvement of the parent compromised the independence of the subsidiary.  There was no clear distinction between parent and subsidiary.  The parent treated the subsidiary as an economic division of itself, akin to a "de facto amalgamation".  The cumulative factors supporting lack of independence led to this decision. The case relied on a rarely used section of the Companies Act 1993 ("the Act").  It highlights the importance of subsidiary companies maintaining independence from their parents.  Failure to do so may…
From time to time we are approached by persons or companies pursued by liquidators of other insolvency firms. We are also asked to provide guidance or opinions on how a liquidator should act, what is reasonable and how to respond to demands/requests. Insolvency specialists take different approaches and some Insolvency Practitioners ("IP") do not always act in the best interests of the company creditors. There have been several reported instances in recent years. At McDonald Vague our objective is to maximise the return for creditors. We do not always achieve a return for unsecured creditors but have a good reputation for taking a firm and fair approach and getting returns. Cost/benefit is always a consideration. This blog post discusses the…
There is a lot of confusion amongst business owners on the best sale option – assets or shares. Getting it wrong can incur unexpected liabilities and loss. There are two types of business sales: An asset sale (plant, property, machinery, equipment, goodwill, etc) A share sale (being shares, either all or part). However, understanding the risks and benefits will help business owners make an informed decision.  The sale/purchase decision should consider debt structures, securities held and required, the level of transparency sought, risk profile of the parties, the tax impacts, how the business operates, who is required, and whether the business will attract investors. It also depends on consents being achieved, transferability or gaining of regulatory licenses, warranties, contingent liabilities,…
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