Thursday, 15 October 2020 14:17

Supreme Court Judgment – Directors Duties

On 24 September 2020, the Supreme Court delivered its judgment on a case taken by the liquidators of Debut Homes Limited (In Liquidation) (Debut) against its director, Leonard Wayne Cooper.

In this case, the liquidators alleged that the director had been in breach of duties as director under the Companies Act 1993 (the Act) and were seeking orders against the director.

The liquidators were successful in the High Court, but that decision was overturned by the Court of Appeal. The liquidators were then granted leave to appeal to the Supreme Court, where they were successful, and the orders made in the High Court were restored.

The background to the case was that Debut was a property developer and Mr Cooper was its sole director. At the end of 2012 Mr Cooper decided to wind down Debut’s operations. It would complete existing projects but would not take on any new ones. At the time the decision was made, it was predicted there would be a deficit of over $300,000 in GST once the wind-down was completed.

Section 135 of the Act relates to reckless trading and contains duties of particular relevance to insolvency situations. Section 135 states –

135 Reckless Trading

A director of a company must not-

(a) Agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; or

(b) Cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.

Mr Cooper submitted that continuing to trade in circumstances of insolvency can be a legitimate business risk, not a breach of duty, if there is a probability of improving the position of most of the creditors, as was the case in this matter. He submitted that the reasonableness of such actions must be assessed in terms of the benefit to the company as a whole and not by reference to any detriment to individual creditors.

The Supreme Court found that there was a breach of section 135. It was known by Mr Cooper that there would be a GST shortfall of at least $300,000, which is a serious loss. It also said that it was not possible to compartmentalise creditors and held that it was a breach whether or not some creditors were better off and whether or not any overall deficit was projected to be reduced.

Section 136 of the Act also relates to insolvency situations and provides as follows-

136 Duty in relation to obligations

A director of a company must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.

The liquidators accepted that by continuing to trade, Mr Cooper may have reduced the company’s obligations to secured creditors. However, continuing to trade caused the company to incur new debt to the IRD and 10 new unsecured creditors who had supplied goods and services to complete the properties.

They submit that Mr Cooper knew, when signing the sale and purchase agreements, that the GST obligation at least would not be met and that therefore he had breached the duty under section 136.
The Supreme Court decided that it is clear from the existence of section 136 that it is not legitimate to enter into a course of action to ensure some creditors receive a higher return where this is at the expense of incurring new liabilities which will not be paid.

Section 131 of the Act requires the directors to act in good faith and in the best interests of the company and provides –

131 Duty of directors to act in good faith and in best interests of company

(1) Subject to this section, a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company.

The High Court held that Mr Cooper breached this duty in two respects. First, when he applied the funds realised from the sale of properties to fund further work and to satisfy secured debts which he had personally guaranteed. In doing so, the High Court said, he was not acting in good faith as he was not considering the obligations Debut owed to all its creditors. Secondly, Mr Cooper was acting in his own interests above those of Debut as, by failing to pay GST to the IRD, Mr Cooper was creating a new debt for Debut which would be subject to penalties and interest, while limiting his own liability for debts guaranteed by himself.

The Supreme Court held that Mr Cooper had breached his duties under section 131 because he failed to consider the interests of all creditors and acted in his own interests in direct conflict with Debut’s best interests.

The Judgment also includes decisions in relation to a possible defence for Mr Cooper under section 138 of the Act, whether or not a security in favour of a related trust should be set aside in part or in full, and the level of compensation to be ordered under section 301 of the Act, which we have not summarised.

As can be seen from the Judgment of the Supreme Court, which resulted in the restoration of the High Court orders against Mr Cooper to pay $280,000, there is a strong requirement on the directors of insolvent companies to consider the interests of the company, and all of its creditors, ahead of their own best interests.

It is also clear, when considering the interests of creditors, that a director has to consider them individually – not lump them together and say that while some creditors have lost more than they would have if trading hadn’t continued, overall the creditors are better off.

The practice of “robbing Peter to pay Paul” is not legitimate and can lead to directors facing allegations of breach of duty and, potentially, substantial orders to compensate the company and its creditors.


If you would like more information on the duties of directors, please contact one of the team at McDonald Vague.

Link to the Judgment Of The Court 

Wednesday, 15 April 2020 14:30

Useful References - Covid-19

Government Resources:

An Australian perspective: 

Australian Covid-19 Insolvency Law changes: article here 

The Legal Perspective:

We share general notes from Lowndes Jordan on:

•    Leases 
•    The Government's Insolvency Response 
•    Force Majeure/Frustration  

The following articles from Stace Hammond also provide insight on key topics:

•    Director duties 
•    Implications for commercial contracts 
•    Lease rent abatement  
•    Enforceability of guarantees  
•    Proposed Companies Act changes 

And the following article from Dentons Kensington Swan also provide insight on:

•    Relaxing insolvency related director duties 

These articles provide a summary of the tax relief measures:

•    Anthony Harper Tax Relief Measures:   
•    IRD
•    NZ Herald

Wage Subsidy:

The COVID-19 Wage Subsidy is available to employers, contractors, sole traders or people who are self-employed.  More information is found here

•    This BDO Q & A on Wage Subsidy is a helpful guide

•    Work and Income  

RITANZ updates:

How does business debt hibernation compare to other company insolvency procedures?
(sourced from RITANZ)

The business debt hibernation scheme has some of the features of a creditors’ compromise under Part 14 of the CA and of a voluntary administration under Part 15A of the CA. However, unlike a creditors’ compromise or a voluntary administration, the only relief (in the absence of creditor agreement) available to a company will be a six-month moratorium on the enforcement of debts. We set out below a table comparing the differences between business debt hibernation, a creditors’ compromise, and voluntary administration.

There are many very small companies in New Zealand, where the sole director and shareholder is also the sole employee, or a couple are the directors and shareholders and one is the sole employee. 

These companies don’t have some of the issues faced by bigger companies in the normal course of business, such as dealing with employees and paying wages, but do have to deal with suppliers and clients and maintain workflow and profitability.  

In this article, we look at a couple of the issues facing very small companies and how the Covid-19 lockdown period could provide a chance for review.

Objective Assessment:

One of the problems for the directors of these very small companies is that they can get so involved in the operation that they can’t see the forest for the trees. Their time and energy is put into the day to day operation and they don’t take the time to stand back and look objectively at what they are doing, how they are doing it, and whether it could be done better to achieve what they want.

One possible upside of the lockdown period imposed in response to Covid-19 is that it could provide the opportunity for that objective review. 

It is likely that the business has suffered as a result of the lockdown – being unable to trade means little to no income for the people involved and no money coming in from which to pay mortgages, business loans, rent etc – so the director is likely to be looking closely at the business anyway.

Various support packages are available from the Government and the trading banks but before going to the bank to borrow money to support the company through the lockdown, the director needs to look closely at the financial position of the company.  If the company was insolvent, or marginal, prior to the lockdown, the bank may not agree to a further loan.

 While doing that assessment, directors should take the opportunity to go back to basics and look at why they are in business, what they are doing, and how they are doing it.  Some things to consider are: 

  • Is the company’s business purely to provide a wage for the director or is it an investment to provide a retirement fund?
  • If it is an investment, what plans are in place to sustain and grow the business so that there is a going concern business to sell when the director is ready to retire?
  • Are the job costing or product pricing systems current and set at the right level?
  • Is the manner in which the work is done up to date and efficient?
  • Are the advertising / promotional strategies currently being used proving to be cost effective? 

Separate Identity:

Another issue that is particularly relevant to very small companies is the blurring of the line between what is company business and what is the director/shareholder’s personal business. 

It is not uncommon in small businesses for the director to take drawings from the company rather than paying a regular salary and deducting and paying PAYE, etc. Sometimes, the mortgage over the family home is paid from the company’s bank account and the company vehicle is paid for by the company and used for both business and private travel.

If the company remains solvent, the merging of the private and business assets and activities won’t cause any issue but, if the company becomes insolvent and is placed into liquidation, the director’s actions and the shareholder’s current account will come under scrutiny.

The shareholder’s current account records the funds introduced into the company and the amounts taken out in drawings by the shareholder. If more is taken out than is introduced, then the difference is a debt owed by the shareholder to the company and it is repayable on demand.

During an objective review of the company, directors and shareholders should look at whether they are creditors or debtors of the company and how the money they are taking from the company is being treated such as:

Are drawings being taken instead of or in addition to a salary?

  • Are the drawings taken as a regular fixed amount or is the company bank account used for all personal expenses?
  • Is there an overdrawn shareholder current account? If yes, how big is it?
  • Have the annual financial accounts for the company credited a salary to the shareholder each year? Have the necessary resolutions been passed?
  • Are there any personal assets recorded in the company’s asset register?

Directors and shareholders also need to consider whether the amount that they are taking from the company is fair to the company, when looked at objectively.  When salaries are taken by director/shareholders, section 161 of the Companies Act 1993 requires that the company’s board (which would be the director or directors):

  • Authorise the remuneration and/or benefit;
  • Record the authorisation on the company’s interests register; and
  • Sign a certificate confirming that, in their opinion, the authorised remuneration and/or benefit is fair to the company and the reasons for that opinion.

If the company fails and the section 161 requirements were not met or they were met but it was not reasonable for the directors to believe that the authorised remuneration was fair to the company, the directors can be held personally liable for the remuneration paid to the director.  While there is some limited relief available to the directors if they can show that the remuneration and/or benefits paid were fair to the company at the time it was given or paid, any payments above what was fair at the time will need to be repaid.


The issues faced by very small businesses can sometimes be overlooked by the directors involved in the day to day operation, but the issues are still there. 

Take the opportunity to look at those issues and discuss them with your accountants or other professional business advisors.












Friday, 07 February 2020 10:34

Relieving The Pressure

It is an unfortunate truth that, generally speaking, business owners only approach an Insolvency Practitioner about the financial plight of their company when the problem is terminal, and the only viable option is liquidation.

The approach often happens when the pressure on the directors of the company gets unbearable and it starts to effect their health. With a large number of New Zealand companies having directors and shareholders who have personally guaranteed the company’s debts to financial institutions and suppliers, the pressure that comes with running a struggling company is intensified by the fact their personal assets could also be at risk.

It isn’t unusual, when first meeting with directors and shareholders in this position, for them to tell us that they “can’t afford” to stop trading the business because they could lose their house. The reality is that by carrying on they are only digging the hole deeper and the light that they think they can see at the end of the tunnel is a train coming their way.

As soon as concerns arise around the solvency of a business, the best decision that can be made is to consult an experienced Accredited Insolvency Practitioner (AIP). If you do that soon enough, there are more options available to recover the position, without putting personal assets at risk, such as restructuring or compromises with creditors.

If, however, the damage has already been done, you may not be able to recover the position but, by contacting an AIP immediately, you can limit how deep the hole is and reduce the risk to your personal assets.

Regardless of the stage at which you contact the AIP and initiate a course of action, you will find that the pressure will ease. The AIP will take over dealing with the creditors who have been hounding you and will put in motion a process for the orderly winding up of your business.

Depending on your circumstances, there may still be issues for you to face over personal guarantees but, with insolvency process started, you will at least know the size of the problem and it won’t be getting any bigger.

If you would like advice in relation to the solvency of your company and the best way to deal with any issues, please contact one of the team at McDonald Vague.

In many cases, the director of a company will also be a shareholder – but the roles are separate and have different powers and responsibilities. There can also be different levels of control within those roles.

In this article we will look at the differences and discuss how those can be managed to lessen the chances of an impasse on any issue.


The Shareholders of a company have the rights and obligations set out in Part 7 of the Companies Act 1993 (the Act). For the most part, those powers can be exercised by an ordinary resolution passed by a simple majority of those shareholders entitled to vote and voting on the question.

There are, however, certain powers which can only be exercised by a “special resolution”. Those powers are –

a. To adopt a constitution or, if it has one, alter or revoke the company’s constitution:
b. Approve a major transaction:
c. Approve an amalgamation of the company:
d. Put the company into liquidation.

The special resolutions in a, b and c above can be rescinded by another special resolution but a special resolution to liquidate the company cannot be rescinded in any circumstances.

If a formal meeting of the shareholders is held, a special resolution requires the votes of not less than 75% of shareholders, who are entitled to vote, to vote in its favour.

If the resolution is to be passed in lieu of a meeting, the requirement is that not less than 75% of shareholders who, together, hold not less than 75% of the shares, vote in favour of the resolution.

One of the powers given to the shareholders pursuant to section 155 of the Act, is the appointment, by an ordinary resolution, of the company’s directors.


In general terms, the directors of a company make the decisions about the management of the business and affairs of the company and, for the most part, they do not have to seek shareholder approval for those decisions. The directors do however need the approval of shareholders for major transactions, which includes the following –

a. The acquisition of, or an agreement to acquire, assets, the value of which is more than half the value of the company’s assets before the acquisition;
b. The disposition of, or an agreement to dispose of, assets of the company the value of which is more than half the value of the company’s assets before the disposition
c. A transaction that has, or is likely to have, the effect of the company acquiring rights or interests or incurring obligations or liabilities, including contingent liabilities, the value of which is more than half the value of the company’s assets before the transaction.


On the face of it, the shareholders hold the upper hand when it comes to the big decisions – including the ultimate decision to liquidate the company.

However, depending on how the shareholding is structured, unless there is agreement between the shareholders, there can be situations that create an impasse between the shareholders when it comes to making that decision.

If there is only 1 shareholder there is no problem but, in many smaller companies, there might be 2 or 3 shareholders. In those circumstances, to pass a special resolution in lieu of a meeting, to liquidate the company all three shareholders need to agree.

Even if one shareholder holds the bulk of the shares you cannot reach the required 75% of shareholders requirement.

In a recent matter referred to us, the majority shareholder held 65% of the shares with the remaining 35% held by two others. The majority shareholder was not able to appoint liquidators by way of a special resolution.


The structuring of the shareholding in a company can effect the ability of the shareholders to make the major decisions for the company. Amended constitutions and shareholder agreements can be used to try and mitigate those problems but specialist advice should be obtained before finalising and signing either of those documents.

If you would like more information about company restructuring, please contact the team at McDonald Vague.


Friday, 29 November 2019 09:17

Insolvency - Causes And Symptoms

SMEs make up a large part of the insolvency work that we at McDonald Vague handle and the reasons for those insolvencies range from events beyond the control of the company officers to a complete lack of knowledge and understanding by the company officers of what is required of them.

• What led to those companies failing?
• What were some of the red flags that might have been seen along the way?


The causes of company failures, as reported to us by the directors, are many and varied and the real reason is not always identified correctly by the directors.

There are, however, common themes that come through in the reasons for company failures.

All the Eggs in one Basket:

It is not uncommon in insolvencies to find that the failure of the company has come about because they have all, or at least most, of their eggs in one basket. The sudden failure of their major client or the decision by that client to go elsewhere leaves a yawning gap in their cash flow.

In tight economic times there is not always the ability to find new business in a short period of time to enable the business to continue to operate. They can also be left holding stock that is particular to that client and have no ability to move it on.

Company directors don’t always have the marketing skills to get out and promote their business nor the financial understanding to see ways to restructure their business to take account of the sudden loss of a major client.

The unexpected loss of a vital staff member can have the same effect, leaving the business unable to operate to its potential while another suitable employee is hired or trained up.

The Economic Climate:

Often directors will point to a particular period and claim that this was when orders dried up.

A sudden down turn can sometimes lead to the company cutting its prices in an endeavour to obtain work but without giving enough thought to what it actually costs them to do that work. So they continue to operate but have no margin or insufficient margin to enable them to meet their costs and catch up on old debt.

Lack of Knowledge:

A number of the small companies that we manage the liquidation of are companies incorporated by a tradesman to charge out their services. Many of these are tradesmen who have moved from employee status to company director and employer because they have been advised that they will be better off working for themselves through a company structure.

While they may all be very capable plumbers, builders, electricians etc many know next to nothing about the requirements of running a company and managing the finances.

They often start with a few tools and a vehicle, no operating capital and no administration systems in place.

They fall behind in filing their PAYE and GST returns, they fall behind in invoicing out the work that they have done. They fail to differentiate between what is the company’s and what are their own personal assets and the company bank account is used for everything, including buying the groceries.

They do not keep accurate records of the income and expenses and fail to carry out even basic functions like checking off bank statements. They have no prepared budgets or cash flow forecasts and, essentially, exist day to day. If there is money in the bank account they can spend it without giving any thought to things like GST & PAYE that may be falling due in the next month.

The cumulative effect of these failings is the downward spiral of the business until a creditor, generally the Inland Revenue Department, puts the brakes on them by threatening to wind them up unless payment is made.

Related Party Loans:

This can include loans to shareholders, family and friends, as well as related companies. The temptation is there, if one company is flush with cash at any stage, to lend the funds to related parties.

Problems arise when there is no clear documentation of the loans and no specific requirement on the related party to make repayments.

While the related entities are still in existence and the loan sits on the company’s statement of financial position as an asset – giving a semblance of solvency – the truth of the matter is that there is no substance to the asset with no likelihood of the loan being repaid.

Allied to this is the giving by the company of guarantees for related entities leading to claims made on the company in the event of default by the related party.


What are the red flags, or danger signs, that the company’s directors or professional advisors might note along the way that indicate all is not well with the business?

• Notifications that PAYE or GST returns haven’t been filed

• GST refunds for 2 or 3 periods in a row. If the company is consistently spending more than it earns, what are the reasons.

• Failure to pay PAYE and GST. PAYE, in particular, is “trust” money deducted from employees’ wages. It should not be available for operational purposes.

• A steady increase in the outstanding creditors and increased age of the debt.

• A constant need for the shareholders to support the company with funds without any light at the end of the tunnel. How long can the shareholders continue to fund the company?

• A sudden change by creditors to expecting COD for supplies rather than place the amount on credit.


The vast majority of company directors and shareholders don’t deliberately set up their company to fail but sometimes, through a combination of matters beyond their control and a lack of skills and understanding of the requirements, that is what happens.

Good advice at the outset and continued support and assistance during the operation of the business from accounting and legal professionals could go a long way to reducing the likelihood of failure.

If you would like more information about the causes and symptoms of company insolvency, please contact one of the team at McDonald Vague.

Wednesday, 13 November 2019 13:57

Picking An Insolvency Practitioner

You wouldn’t pick a tradie on price alone so why would you pick an insolvency practitioner solely on this basis?

You expect your tradie to work to industry standards when working on your house or car so why wouldn’t you take the same care before you hand over control of a business to an insolvency practitioner, who will be dealing with your company, its assets, its creditors, and its stakeholders?

Not all insolvency practitioners are created equal. They have different levels of experience and qualifications, work in different size firms, and may or may not be accredited. If you appoint the wrong insolvency practitioners, it can be difficult to remove them. If it’s shortly after appointment, the company’s creditors may be able to appoint replacement insolvency practitioners at the initial creditors’ meeting. If not, it will likely involve a trip to the High Court. If the insolvency practitioner is not accredited, they will not have to answer to a disciplinary board.

You should expect your insolvency practitioner be law abiding and to deal with the company’s directors, shareholders, and creditors fairly and ethically. We have put together a handy list of what to look for, what to ask, and what to consider before engaging an insolvency practitioner.


Your insolvency practitioner should:

1. Have experience in the industry the business operates in

2. Have relevant insolvency experience, including in relation to the type of appointment you are considering and any steps you expect them to take after their appointment

3. Be an Accredited Insolvency Practitioner, either through RITANZ or CAANZ

4. Have sufficient resources behind them to properly carry out the appointment

5. Have a history of making distributions to creditors


Ask questions, and lots of them. The more information you are able to get up front the better position you will be in when it comes time to make the decision on who you should go with.


(a) Are they members of RITANZ and Accredited Insolvency Practitioners (AIPs)? Until regulation come into force in June 2020, we recommend that you only use AIPs. AIPs are required to comply with a code of conduct that dictates the professional and ethical standards they are expected to meet. The code is enforced by Chartered Accountants Australia and New Zealand. There is a public register of AIPs on both the CAANZ and RITANZ website.

(b) What previous relevant experience do they have? There are different types of insolvency appointments (advisory, compromises, voluntary administrations, receiverships, and liquidations). If you are looking at appointing voluntary administrators, you probably do not want to appoint someone who has never done one before.

(c) What kind of qualifications and experience do they have within the firm? Depending on the type of post-appointment work that will be required, you may want to appoint AIPs that are chartered accounts, have legal knowledge, or are experienced in forensic accounting.

(d) Are they Chartered Accountants, do they have a legal background, or forensic accounting skills? The appointment may determine what kind of background you should be looking for.

(e) Do they have the resources necessary to deal with the appointment? If the business operates multiple stores across the city or the country, does the AIPs’ firm have enough staff to take on the appointment?

(f) Do they have a history of making distributions to creditors? What level of overall fees would the AIP expect to charge on the job?


It is important that the AIPs you appoint understand your personal situation and your business’ needs so they can help achieve the best result for all parties. It is important that you take your time with this decision because you will be trusting them with the business.

McDonald Vague’s directors are AIPS and Chartered Accountants. We also have three non-director AIPs and our professional staff are members of RITANZ. McDonald Vague is also a Chartered Accounting Practice and is subject to practice review.

Tuesday, 08 October 2019 11:16

Failure To Maintain Statutory Records

All companies must keep company records, minutes, resolutions and a share register. This article discusses what is required and what can happen when there is a failure to maintain company, statutory and financial records.

Failure to keep accounting records and to comply with Section 194 Companies Act 1993 can render director(s) liable to conviction for an offence.

Failing to maintain books and records may cause a presumption of insolvency and directors could be held personally liable.

Companies have an obligation to keep company records under S189 of the Companies Act 1993. Minutes, resolutions and financial statements must be maintained for the last 7 years. S190 of the Act requires that the records must be kept in a written form or in form or manner that allows the documents and information that comprise the records to be easily accessible and convertible into written form.

Shareholders Resolutions

Best practice dictates that an annual shareholder resolution recording that the shareholders have received special purpose financial statements, prepared by the directors for compliance purposes, and believe these adequately meet their needs for information is recommended.

The purpose of such a resolution is to record that shareholders have received the taxation statements and to record that these adequately inform them of the progress of their company. These resolutions overcome any dispute at a later date, particularly where the directors and shareholders are not all the same people.

Shareholders also should approve the remuneration paid to the directors (even or often the same) when they record they have received the special purpose financial statements. Shareholders should also approve any major transactions as defined, by special resolution.

Directors Certificates of fairness are required for Director/shareholder remuneration and for interest on loans to/from shareholders.

Register of Directors Interests

If you are a registered office, you are required to maintain an Interests Register in the statutory records for each company.

The Register is required to disclose the directors:
• interests in company transactions, including those where the relationship is indirect, which may include other directorships or trusteeships (includes the initial issue of shares on formation (S. 140)
• use of company information (S. 145)
• share dealings, including the directors’ own holdings or holdings by trusts of which he/she is a beneficiary (S. 148)
• remuneration and other benefits (S. 161)
• indemnity and insurance (S. 162)

The Companies Act 1993 envisages an annual disclosure by way of entry to the register.

Company Constitution

If the company has a constitution this must be kept at the registered office.

Share Register

A company must maintain a share register that records shares issued, shareholders names and addresses’ and the number of shares held. The details of all shareholders and movements in shareholdings must be maintained for the last 10year period.

Financial Statements

Good records help business management. Financial records must record and explain company transactions and comply with generally accepted accounting practice. Companies have different reporting requirements depending on annual revenue and assets.

Large New Zealand and large overseas companies must file annual audited financial statements under the Companies Act 1993. Smaller businesses must maintain financial statements unless it is not part of a group and has not derived income of more than $30,000 and not incurred expenditure of more then $30,000.

A company falling below these thresholds must still keep tax records and employer records.

Director Duties to Maintain Books and Records

The obligation to keep accounting records is codified under section 194 of the Companies Act 1993. A breach of accounting requirements under Section 194 and 189 may constitute a default or breach of duties under Section 301. The potential liability for failing to keep books and records can be significant and is avoidable. Directors may face court action from the company, shareholders or creditors for failing to keep proper records. The Court can order compensation and hold the director personally liable.

Personal Liability following Company Insolvency

A director can be held personally liable (s300(1)) if a company is unable to pay all its debts and has failed to comply with its duty to keep accounting records (s194) or (if applicable) to keep financial statements (s201 or 202) and the Court considers the failure to comply has contributed to an inability to pay all its debts or has resulted in substantial uncertainty as to the assets and liabilities.

Poor records hinder a liquidators’ ability to investigate company affairs. The lack of records can mean there is no way for a company of determining the likelihood of an impending insolvency. This breach can support a reckless trading action.

In the liquidation of Global Print Strategies Ltd (in liq) v Lewis (2006) the directors knew there was no adequate accounting system. The Court said that a director cannot be heard to say “I did not realise we were in such a pickle, because we did not have any or adequate books of account.” The Court held it was fundamental that books must be kept and directors must see to it that they are kept.


Monday, 25 February 2019 14:12

Liquidation To Resolve Shareholder Disputes


One way of dealing with difficult shareholder disputes is to have an independent party control and sometimes deal with the company assets, while the dispute is worked through.

This allows the parties to focus on the dispute without further issues arising from current trading. Such a reliable independent party is a liquidator (solvent liquidation).


We were appointed by the High Court as liquidators of a solvent company to resolve a shareholder impasse. Two shareholders owned 70% and 30% respectively of the company shares. The companies only asset was its ownership of all the shares in a trading subsidiary company. The directors were in dispute on the management of this company.

The liquidators needed to control the subsidiary trading company. The liquidators consented to becoming directors of the trading subsidiary company for an interim period.

The High Court Order was to realise the assets of the holding company by whatever method the liquidators deemed to be practical and, after the realisation costs, the distribution of excess funds from the sale were to be distributed 70%/30% to the respective shareholders.

Why the need for a solvent liquidation appointment?

The court appointed solvent liquidation was due to a protracted disagreement and dispute between the 2 directors over a period of about 3 years over how a wholly owned subsidiary company was to be run and that the business profitability was declining rapidly.

The main issues centred around:

1. The sales price that the subsidiary on sold its product to one of the directors own private businesses. One director who was not involved in the separate private business, believed the price that the product was on sold for was too low and did not reflect the true value of the product.

2. A disagreement as to how and when a large capital expenditure for a factory upgrade would occur to meet Food Safety Authority regulations. The upgrade required a significant capital injection and the patience of the Food Safety Authority was near an end. Potentially the factory may have been forced to shut down.

3. On closing the business a significant redundancy liability would arise as many employees had worked for the company for a long time. In addition, the Union collective pay agreements were well overdue for settlement.

4. The directors were in a deadlock and could not agree on a correct sale price of the product to a related party and the upgrade development to the factory.

Obtaining the best result for the Solvent Liquidation

The plan was to sell the shares in the trading subsidiary. After discussion with the shareholders, agreement was settled on tendering these shares on the open market as the preferred method to obtain the best price.

The sale of shares in the trading subsidiary would also require continuity of supply agreements of raw material product for the factory to be agreed.

The trading business was profiled along with financial information, advertised in local and national newspapers and also directly marketed to interested parties that were identified. The sale process was by way of a tender of shares.

34 expressions of interest were received, and 20 confidentiality documents were signed and, after discussions with the highest tenderer, a sale was concluded with the 70% majority shareholder.

Of considerable concern to the liquidators throughout this process was to ensure that the return back to the shareholders was maximized, and that tax implications were properly addressed.

The liquidators sought tax advice and two options were available:

1. A bonus issue of retained earnings in the trading subsidiary then sale of that company.

2. Or the preferred proposal was that 30% of the shares that the successful tender did not own of the shares in the company in liquidation be sold direct to the successful tenderer.

Thereby the 70% majority shareholder would acquire the 30% of the shares it did not own in the company in liquidation that owned all the shares in the trading subsidiary.

Option 2 avoided a significant funding arrangement being organised as the successful tenderer only had to fund 30% of the tender price. The payment would be a tax free capital gain for the vendor of the shares and have no downside for the successful tenderer.

The shareholder/directors and their advisors agreed to this proposal, and the liquidators applied to the High Court to have the share transfer endorsed as required by section 248 of the Companies Act along with an application to take the company out of liquidation. The court approved this.


The shareholder dispute was resolved, the 70% majority shareholder now owns 100% of the holding company who in turn owns 100% of the trading company and the minority shareholder received the best price for their shares on an open tender.

The application to the High Court to place the company into liquidation to resolve the director impasse resulted in a good conclusion to the matter for both parties.

Effective cashflow management is critical to any businesses survival and growth. Understanding your businesses underlying cashflows will help identify potential changes to your business processes that will improve cashflow, profitability and business value

A firm's ability to reliably spin-off positive cashflows from the firm's routine business operations is one of the key factors business owners and potential investors look for.

Cashflow Defined

Cashflow is typically defined as the net change in your firm’s cash position from one accounting period to the next. If you generate more cash than you consume, you have a positive cashflow. If you have greater cash outflows than inflow, you have a negative cashflow. Thus, your cashflow is a key indicator of a firm’s financial health.

Understanding Your Cashflow Statement

Operating cashflows illuminate a company's true profitability. It's one of the purest measures of cash sources and the use of cash within a business and is the launching pad for complementary financial statements and reports.

Operating cashflow is a fundamental part of your cashflow statement. Your cashflow statement illustrates the fluctuations in cash compared to less volatile equivalents such as shareholders' equity and the balance sheet.

Your cashflow statement details both where cash is being generated and consumed in the business over a set period of time.

By taking the net income figure from the firm’s income statement and adjusting it to display variations in the firm’s working capital defined as payables, receivables and inventories as reflected on the balance sheet, the firm’s operating cashflow line item illustrates the sources of cash spun off during the reporting period.

Cashflow Sources

A business’ sources and uses of cash are typically split into categories covering operations, investments and financing activities.

1. Operations: Reflects a firm's operational cash inflows and outflows, the net effect of these defines a firm’s operating cashflow position
2. Investments: Shows changes in the businesses’ cash position from the divestment or acquisition of property, plant and equipment or other typically longer-term investments
3. Finance: Captures changes in cash levels from the share buyback schemes or bond issues, together with interest payments and dividend distributions to shareholders.

Operating Activities

A firm’s operating activities comprise its routine core commercial activities within the business that generates cash inflows and outflows. These operating activities typically include:

1. Sale of goods and services recorded during an accounting period
2. Supplier payments covering goods and services consumed during the production of outputs recorded during an accounting period
3. Employee payments or other expenses incurred during an accounting period.

To establish the significance of underlying material changes in a firm’s operating cashflows, it is useful to be familiar with just how a firm’s cashflow is estimated. Two models are generally used to tally cashflow generated by operating activities. These are the Indirect and Direct models.

Direct Method: Uses information derived from the income statement based on cash receipts and cash outgoings generated by the businesses’ operations.

Indirect Method: Adopts the firm’s net income and derives its OCF by incorporating those line items used to determine the firm’s net income but which did not affect the firm’s actual cash position.

Operating Cashflows

Your operating cashflow is a very useful assessment tool as it assists business owners to understand the firm’s fundamentals. For many owners, the OCF position is considered to be the cash component of net income, as it purges the firm’s income statement of non-cash related items and non-cash based expenditure such as amortization and depreciation and changes to the firm’s current assets and liabilities position.

Operating cashflows is a more accurate indicator of underlying profitability than measures of net income, as it is less open to massaging the operating cashflows to window dress profitability.

Cashflow As A Business Diagnostic

A cashflow statement is much more than simply a snapshot of your business’ financial health. They can also be used as a powerful management tool to affect positive change within your organisation.

Business owners can use a cashflow statement to evaluate their firm’s strengths and weaknesses, helping them to chart a savvy and more efficient path forward. Used the right way, a cashflow statement can show an owner how efficiently the business is harnessing its cash while identifying which areas are absorbing more cash than they generate.

This information can be critical to ensuring the firm’s survival while providing a point of focus for growth initiatives. Cashflow is also a useful indicator of how efficient an internal business process is and how dynamic a firm’s products or services are.

By identifying changes to a firm’s internal business processes that will improve the firm’s underlying cashflow, profit, and business value, a business owner can drive innovation, lift productivity and effectiveness levels and cull under-performing products.

When a firm enjoys robust operating cashflows with more cashflowing in than flowing out, the owners know they have a healthy business. Companies with solid operating cashflow growth are more likely to enjoy predictable net income levels, together with an enhanced ability to pay suppliers and reinvest in the business.

Robust operating cashflow also provides more opportunities to expand the business and to cope with fluctuating economic conditions, turbulence in their industry or adverse weather events.

Final Observation

A firm’s operating cashflow is simply one aspect of a firm's cashflow position. Cashflow is also one of the most insightful measures of a firm’s financial viability, underlying profitability and its long-term prospective outlook. Cashflow measures a company’s incoming and outgoing cashflows over a nominated accounting period. Cashflow is also a useful tool for identifying inefficient processes and under-performing products or services. If you truly identify with the "Cash is King," mantra, then robust operating cashflow is one of the most reliable key indicators to look for when assessing a firm.

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