How can liquidation be a beneficial process?

When a company is insolvent and its debts cannot be paid, liquidation is often the next step. While no asset procedures and summary instalment orders can be helpful for individuals, they do not apply for companies, or debts in excess of $47,000.

It's important to understand that liquidation is not the end of the world - the NZ Insolvency and Personal Trustee Service (IPTS) notes that 3,598 companies entered the process in the 2015-16 financial year. Liquidation does not mean a company was run poorly or conducted illegal activities - directors and debtors can often just be victims of circumstance.

So the corporate liquidation process is serious, yes, but it does not have to be the end of the line. In fact, in the long-term it can prove extremely beneficial.

Insolvency is often not indicative of poor business management.Insolvency is often not indicative of poor business management.

Employees can still be paid in liquidation

In many insolvency cases, employees can lose out on their wages if the business has no assets or cash to pay out all creditors. But when a liquidator decides to close a business, employees can file a claim for anything they are owed, including:

  • Outstanding salary or wages
  • Holiday and annual leave pay
  • Redundancy payments

When there are unsecured creditors, employees may even move ahead of them in the preferences list for who is paid out of the business' remaining security.

Everyone is dealt with transparently

Another benefit of liquidation is that all parties are kept up-to-date on changes being made, and who will receive what. It provides a degree of certainty that gives both debtors and creditors the peace of mind they need.

In a voluntary liquidation process, the liquidator sends the first progress report to all creditors within five working days of the initial announcement. For other forms of liquidation, the issuing of this notice takes a little longer - up to 25 working days. There will also be biannual reports providing all details on dividends.

When the liquidation is handled by an officer of the Crown (the Official Assignee), there is a further degree of transparency - after the filing of the initial liquidation report, progress is available on the IPTS website. 

Privacy is still maintained

For many directors and debtors, insolvency and liquidation is a stressful time. Bankruptcies and insolvencies can remain on your credit record for up to five years, hampering your capacity to secure credit or operate a business in that time. 

As liquidation is not necessarily indicative of a director's failure, privacy and safety is often an essential part of a liquidation. While Official Assignee liquidations will be listed on the IPTS records and there are registers of insolvent companies in NZ, using a firm like McDonald Vague helps with efficiency and security in either court-appointed or voluntary liquidations. 

Secured creditors can claim what they are owed

While insolvency solutions like a creditors compromise can often be the best way forward for all parties, there is always a chance that liquidation will be the only solution for an insolvent company. In this process, secured creditors can make claims and receive the money they are owed. 

Liquidation is one way for directors and creditors to settle affairs efficiently.Liquidation is one way for directors and creditors to settle affairs efficiently.

The first priority is to pay liquidator expenses, but then payments are directed to creditors that made claims to the court or who assisted the Official Assignee in the process. When a company cannot pay its debts and liquidation is on the table, proactive behaviour in good faith can see all parties achieve a satisfactory resolution. 

Directors can restructure their business effectively

Liquidation is not reserved solely for insolvent companies. Some firms, like McDonald Vague, offer a specialist service for directors who wish to enter liquidation for companies that are still able to pay their debts. This often occurs when directors close a business or restructure their company for tax and management purposes. 

Liquidation can be used when directors break down and reorganise a business.Liquidation can be used when directors break down and reorganise a business.

This also helps directors distribute tax-free capital gains in a secure manner. By using the liquidation process to close a solvent company, third parties cannot make claims at a later date - it is a closed case, rather than a closure that can be contested down the line. 

Understand the consequences

Despite there being many benefits to creditors, shareholders and (in some rare cases) directors, liquidation should not be entered into lightly. Most of the time, a company will be closed effective immediately - although this decision rests with the liquidator. The liquidator secures all company assets, and directors must comply with their requests to produce pertinent information regarding the business' trading. 

In cases where the director does not comply, consequences can go beyond black credit marks and into legal action. For many New Zealand companies, liquidation is a last resort when debts cannot be paid and there is no other way. 

For advice on whether liquidation should be an option for a business - whether you a are a director, creditor, or related party - speak to the team at McDonald Vague

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