How liquidators add value

Many of our clients don't deal with insolvency on a daily basis, and therefore have only a fairly generalised idea of what we do. This article seeks to provide a better understanding of how the liquidation process works. It also demonstrates how choosing the right insolvency practitioner can result in funds being recovered for creditors that would otherwise not be available.

 

The liquidation process 

Most people have a basic intuitive feel for a liquidator's role. This is usually that he or she closes down a business, dismisses staff, sells assets and collects debts. This may well be true, but generally such activities form only part of a much more involved process.

Liquidators have very wide powers to investigate a company's affairs and seek recoveries from various parties. Many claims a liquidator brings (eg to set aside insolvent transactions or insolvent set-offs) are not available to directors, and only arise out of the liquidation process. Liquidators can also require those connected to a company to provide documents and information, and can examine those parties under oath.

 

Trading on 

It does not follow that a business must be closed down when liquidators are appointed. We frequently trade on businesses and sell them as going concerns. Often the fundamental problem is not the business itself, which may be highly cash-generative, but the unrealistic debt burden the purchaser took on when it bought the business. Trading on invariably results in a better outcome for creditors than an immediate shutdown.

 

Investigative work 

One of a liquidator's most important roles is to investigate a company's affairs. This involves taking possession of its accounting and other records and identifying those assets or claims which may be available. We recover records from a variety of sources, including the company's accountants and lawyers, and review electronic records including emails. This often produces recoveries which the directors had either overlooked or did not have powers to pursue.

 

Debtor reviews 

Our investigative work includes carefully examining the company's debtors ledger. In one case we recovered a three year old debt of $10,000, where the directors advised us that the customer had 'disappeared'. We did a company search on the business name and wrote to that party. They had bought the business from the previous owner but happily gave us that party's details. We then wrote to them and received full payment. The entire process involved only an hour or so's work, but enabled a dividend to be paid to creditors who would otherwise have received nothing. We never assume that simply because a debt is old, it must be uncollectable.

 

Overlooked assets 

There are often sums due to a company which the directors have either overlooked, or were not even aware of. An example is a liquidation where the company had subdivided land. On our appointment all the sections had been sold and there were no remaining assets. However, on reviewing the records we noted that the company had paid a council bond for required landscaping works. The council stated that the work had not been performed, so no refund was due. On closer questioning it emerged that the bond included a 50% uplift to cover possible contractor price increases. We asked for the costs to be requoted at current prices. Due to the property slump, prices had fallen and the amount held was well in excess of that required. This resulted in $28,000 being refunded.

On the same case, we were aware from other liquidations that the North Shore Council was paying refunds of development levies to property developers, following a High Court case. We contacted the Council, and kept the liquidation open pending a possible refund. As a result we received approximately $100,000. This, together with the recovery above, enabled the main creditor to receive a substantial repayment.

 

Insolvent transactions 

Previously known as voidable preferences, these are payments from a company to a creditor whilst it is insolvent, and where the creditor has reasonable grounds to suspect this. A liquidator can have such payments set aside, going back up to two years before liquidation. Part of our investigative role involves forensically examining accounting records and reviewing creditor payments. We pursue those cases where it is clear that the creditor had reason to suspect the company's insolvency, and has obtained an unfair advantage over other creditors.

 

Insolvent set-offs 

These are similar to insolvent transactions. They arise where a creditor recovers its debt by setting it off against some other amount it owes the company, at a time when it has reason to believe the company is insolvent. In one case a supplier had not been paid for ten months and was owed in excess of $250,000. Two months before liquidation it suddenly became a customer, but set off the $65,000 due against its unpaid debt, thereby effectively recovering this amount in full. We recovered 95% of the amount set off, in an out-of-court settlement. As a result, the bank was repaid in full and there will be a dividend to unsecured creditors.

 

GST recoveries 

There are often potential GST recoveries in a liquidation. Where a company is on the Invoice basis, there can be unclaimed refunds relating to bad debts. There can also be refunds due in respect of final supplier invoices which are only issued after liquidation, or where returns have simply not been filed. The amounts involved are often significant.

 

Overdrawn shareholder current accounts 

It is common for directors to owe their company money in respect of drawings over and above any advances they have made to the company. Sometimes there are no accounting records, but we reconstruct the current account from bank statements. In one case we reconstructed the current account entirely from bank statements and recovered $27,500 from the director.

 

Conclusion 

These are just a few examples of how liquidators can add value by a thorough investigation of a company's affairs. Whilst liquidation inevitably has a cost, the skill of an experienced liquidator is to ensure that these costs are more than compensated for by additional, and often substantial, recoveries which would otherwise not have arisen.

 

Note: This article was written by Jonathan Barrett who has subsequently left the firm.

DISCLAIMER
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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