The rights of creditors when a company fails – Part 2 of 2

This month we conclude our discussion of the rights of unsecured creditors in various insolvency proceedings, by looking at the position in a liquidation.

A liquidator is normally appointed either by the shareholders or the High Court. The shareholders choose their own liquidator. The High Court appoints a liquidator chosen by the applicant creditor. More unusually, a liquidator can also be appointed by creditors at the 'watershed meeting' in a voluntary administration - seePart 1of this article.

A liquidator has a duty to take possession of, protect, realise, and distribute the proceeds of realisation of the company's assets to its creditors. He or she looks after the interests of all creditors.

The plight of the unsecured creditor
Unsecured creditors do not have it easy. They rank after General Security Agreement holders, employees for wages, holiday pay and redundancy, Inland Revenue for GST, PAYE and other payroll deductions, and NZ Customs. Any money remaining may also have to be shared with directors who advanced money to the company through their shareholder current accounts. What rights then do creditors have?

The right to receive reports
A liquidator must prepare a report containing a statement of the company's affairs, proposals for conducting the liquidation and if practicable, the estimated date of its completion. It must also contain a list of creditors' names and addresses, but not amounts due. This must be issued within five working days of liquidation (shareholder appointments) or 20 working days (court appointed liquidations).

An update report must also be issued every six months, and a final report on ceasing to act. All these reports are filed at the Companies Office and sent to creditors.

The right to have a first meeting of creditors
A liquidator is obliged to call a meeting of creditors for the purpose of resolving whether to confirm the appointment of that liquidator, or to decide upon a replacement liquidator. There is a power for a liquidator to dispense with meetings of creditors (and this power is usually exercised). However, he or she must call a meeting if a creditor gives the liquidator notice in writing requiring a meeting, within ten working days of receiving the notice that the liquidator intends to dispense with the meeting. In practice creditors' meetings are now very rare, but they do serve a valid purpose where creditors are unhappy with the choice of liquidator.

The right to have a liquidation committee
If requested by a creditor, a liquidator must call a meeting of creditors to vote on a proposal that a liquidation committee be appointed, and to choose its members. A liquidation committee represents creditors as a whole and assists the liquidator in the conduct of the liquidation. The committee can call for reports from the liquidator on the liquidation's progress. It can also call a meeting of creditors. Again, creditors' committees are now very rare.

The right to call further meetings of creditors
A liquidator must summon a meeting of creditors if this is requested by creditors owed at least 10% of the amount owed to all creditors. It is necessary to advise the liquidator of the purpose of the proposed meeting. This is because voting can be conducted by post. The intention is that creditors should not be disadvantaged simply because they cannot attend the meeting. Again, such meetings are very rare in practice, and usually only occur if creditors are unhappy with a liquidator's conduct.

The right to express views
The liquidator must have regard to the views of creditors. Those views might be expressed by the creditors or a liquidation committee representing them.

The right to apply to the court for supervision of the liquidator
A creditor with the Court's leave, or a liquidation committee without leave, can apply to the Court to supervise the liquidator. The Court may give directions in relation to any matter arising in connection with the liquidation. It may also confirm, reverse, or modify the liquidator's acts or decisions.

The right to take action to make the directors personally liable for the debts of the company
While the ability to bring civil actions against directors and others primarily lies with a liquidator, a creditor may apply directly to the Court in an effort to make recovery from company officers. The circumstances that give rise to such proceedings are:-

  • Where it appears to the Court that a past or present director or manager has misapplied or retained company money or property
  • Where it appears to the Court that the company has incurred an obligation without reasonable grounds for believing that it could meet that obligation
  • Where it appears to the Court that the company has continued to trade when there was substantial risk of serious loss to creditors ('reckless trading')
  • Where it appears to the Court that a distribution to shareholders has been made when the company could not satisfy the solvency test

Creditors have many rights, depending on the nature of the particular insolvency proceeding. If they want a return they should be aware of those rights and take an active interest in the recovery process. Creditors should also be prepared to assist and pass information to an insolvency practitioner appointed to act on their behalf.

Note:this is an expanded and updated version of an earlier article written by John Vague and was subsequently revised by Jonathan Barrett.

This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.

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