The winding up of a company in New Zealand can occur in three ways –

• A voluntary liquidation initiated by the shareholders of the company (solvent or insolvent companies); or
• A Court ordered winding up initiated by a creditor of the company; or
• A short form removal also known as Section 318(1)(d) process (solvent companies)

The purpose of this article is to set out the different processes involved with these options.

Voluntary Winding Up:

The process to be followed by the directors and shareholders of a company to wind the company up depends on the financial position of the company, that is whether it is solvent or insolvent.

Solvent Companies:

When the decision has been made that a solvent company is no longer required, it can be placed into liquidation by shareholder resolution after the directors have provided a Certificate as to Solvency pursuant to Section 243 (9) of the Companies Act 1993 (“the Act”), and a declaration that the company will be able to pay its debts in full within a period of not more than 12 months after the appointment of the liquidator, pursuant to  section 243A of the Act.

The process to place a solvent company into liquidation is as follows:

• The liquidators’ consent to their appointment in writing.

• Directors pass a resolution as to the solvency of company on liquidation.

• Directors sign a certificate stating the grounds on which they are relying for their opinion as to solvency.

• Directors sign a declaration.

• A copy of the directors’ resolution is filed at the Companies Office within 20 working days before the appointment of liquidators.

• A special resolution of shareholders is signed appointing liquidators.

• The liquidators give notice of their appointment to the Companies Office.

• A notice of appointment and notice to creditors to claim is published in the New Zealand Gazette and a newspaper for the region in which the company operated.

• The liquidators’ first statutory report is filed at the Companies Office with copies to the shareholders and any creditors.

The shareholder special resolution cannot be passed until after the resolution of solvency has been signed and filed at the Companies Office (but no later than 20 days thereafter).

There is also a second procedure for having a solvent company removed from the Register of Companies known as the short form removal process.

This short form process can be administered by the company’s directors / shareholders or by its external accountants and it is quicker and easier, without the requirement for public notice to be given or the filing of reports.

The down side to this process is that it does not confirm the solvency of the company and does not provide the level of certainty to 3rd parties that a formal liquidation, conducted by an independent accredited insolvency practitioner, does, leaving the possibility of someone making application to the Registrar to have the company reinstated to the Register. In liquidation, the process to reinstate a struck off company involves a High Court application and is costly.

Insolvent Companies:

When the directors of a company conclude that the company is insolvent and should stop trading they have the option to commence the voluntary winding up of the company by having the shareholders appoint a liquidator.

The process to place an insolvent company into voluntary liquidation is as follows:

• The liquidators’ consent to their appointment in writing.

• A special resolution of shareholders is signed appointing liquidators. This requires 75% or more of shareholders by number and by value of shareholding to sign to make the appointment valid.

• The liquidators give notice of their appointment to the Companies Office.

• A notice of appointment and notice to creditors to claim is published in the New Zealand Gazette and a newspaper for the region in which the company operated.

• The liquidators’ first statutory report is filed at the Companies Office with copies to the shareholders and any creditors.

The voluntary process is only available if the company acts before the service of a winding up proceeding (which follows after the expiry of the statutory demand) or with agreement of the applicant creditor after service, and for the purpose to avoid delay, by appointing a mutually agreed licensed insolvency practitioner.

Court Ordered Winding Up:

As the creditor of a company that is failing to make payment of amounts owed, you may reach the stage where the only option left to you is to have the debtor company wound up, or liquidated, by order of the High Court.

The process to have an insolvent company wound up by order of the High Court, on the application of a creditor, is as follows:

• Make sure that you have the correct legal name of the debtor company – not just a trading name.
• Have a statutory demand served on the company. This gives the debtor company 15 working days to make payment or enter into an arrangement to settle.
• If the statutory demand is not satisfied, an application must be filed in the High Court to have the company placed into liquidation.
• Have copies of the documents filed at Court formally served on the debtor company.
• Public notice of the application has to be given in the local newspaper.
• Have the liquidators provide their written consent to being appointed.
• The matter will be heard at the next Court day set for hearing insolvency matters and the liquidation will commence once the Associate Judge of the High Court makes the order.

It is advisable to have your lawyers involved from the beginning of the process to ensure that the statutory demand is properly prepared and served. They will have to be involved in the preparation and filing of the Court proceedings. The creditor making application can nominate an insolvency practitioner to act.

Conclusion:

The processes set out above are the basic steps that can be taken to wind a company up in New Zealand. The processes described may not always be appropriate because of the particular circumstances of the case.

If you are considering winding up your own company, or taking steps as a creditor to wind up another company, and would like to discuss the options, please contact the team at McDonald Vague

Colin Sanderson

As the creditor of a company that is failing to make payment of amounts owed, the process you have to follow, to have liquidators appointed in relation to that debtor company, can be slow and frustrating.

It will be even more frustrating, and worrying, if you have concerns about what will happen with the assets of the debtor company while the process takes place?

There is an option, pursuant to Sections 241(4)(d) and 246 of the Companies Act 1993 (“the Act”) to have an interim liquidator appointed by the Court to take control of and preserve those at-risk assets.

NORMAL PROCESS

In the normal course of events, when liquidating a debtor company, the process starts with the serving of a statutory demand giving 15 working days for the debtor company to make payment or enter into an arrangement to settle.

If the statutory demand is not satisfied, then an application must be filed in the High Court to have the company placed into liquidation and requires the service of those documents on the debtor company. Public notice of the application has to be given in the local newspaper and, depending on the Court the application is filed in, it may be up to a month before the application is heard.

INTERIM LIQUIDATOR

Rather than go through the normal process of making demand and then following up with liquidation proceedings, a creditor can, if the circumstances justify it, make an application to the High Court for the appointment of a liquidator to the debtor company pursuant to section 241(4)(d) of the Act, on the basis that it is just and equitable to do so.

If there are justifiable concerns about the potential for the assets of the debtor company to be dissipated in the period between the time of the application being filed in the High Court to have debtor company liquidated and the date for the hearing of that application, the applicant creditor can also apply to the Court, pursuant to section 246 of the Act, to have an interim liquidator appointed.

The Court may appoint an interim liquidator if it is satisfied that it is “necessary or expedient for the purpose of maintaining the value of assets owned or managed by the company”. The Court impose some restrictions on the interim liquidator, such as not being able to make distributions, until the full liquidation order is made at the hearing date.

CONCLUSION

If you are looking to have a debtor company liquidated but have serious concerns about what will happen to assets in the intervening time, an application for the appointment of the interim liquidator can be made without notice to the debtor company and such an appointment should ensure that the risk of the debtor company’s assets being dissipated, before the full hearing of the liquidation proceedings can be held, is greatly reduced.

If you would like any information about appointing an interim liquidator please contact us.

We have recently been involved in a liquidation where we considered the directors breaches of duties and ultimate loss to creditors so extreme as to be worthy of taking an action in the High Court.

The action was funded by the largest creditor. We alleged the directors (a former banned director, an undischarged bankrupt based in Hong Kong, and a lawyer) traded recklessly (s135), incurred obligations without reasonable belief they would be able to perform the obligations (s136) and failed to exercise care, diligence and skill that reasonable director would have exercised in the same circumstances (s137). We sought recovery from the directors.

The case involved customer losses from the companies first order, when the customer had paid a large deposit to the company which in turn had contractual obligations to meet.

High Court Judgment

The High Court judgment agreed there was a causative link between the director breaches and the resulting loss to creditors. The Court agreed with the liquidators that there were clear, blatant, ongoing and serious breaches of obligations imposed on the directors for the duration of the trading life of the company and said “the directors’ initial actions set the company up to fail”. The judgment criticised the Directors “at no time did the directors stand back and undertake the “sober assessment” the company’s financial circumstances clearly required. The High Court found the case to be “a paradigm case of reckless trading under s135”. The case is a public record and can be viewed here.

The decision summarised the causes for the collapse and ultimate liquidation.

These included:

• Failure to ensure the company was properly capitalised from the outset;
• Misrepresented expertise and nature of business by directors
• The involvement of an undischarged bankrupt in the company’s business – in a shadow and at times de facto director position;
• Failure to undertake a proper risk assessment before entering into its main contract;
• Failing to keep proper business management records and financial statements;
• Failing to consider in advance how the company was going to fund the outgoings required to meet its obligations to its customer;
• Spending the deposit paid by the customer to the benefit of related entities;
• Entering into an order with a customer which it had no means to perform;
• Transferring the assets of the company to a related entity for no proper consideration.

Conclusion

The case highlights that when directors engage in practices that primarily benefit themselves and related entities and enter into commitments that the Company cannot meet, that the Court will take a strong position. In this case the [188] “company’s ongoing mismanagement blighted its prospects” and the Court has issued judgment that the Directors are liable to compensate the company 100% of creditor losses plus interest, and costs.

This case is a reminder that Directors need to be diligent and be aware of their obligations and seek advice before they create a position of serious loss to its creditors.

The case is currently in its appeal period.

We are often asked ‘how do liquidators’ work’ and what are their rights regarding access to company records and information. To clarify we have put together this article.

When a liquidator is appointed over a company, either by the shareholders or by order of the High Court, one of the first steps taken will be to locate and uplift the books and records of the company and to seek information about the business, accounts or affairs of the company to enable a full review to be undertaken.

The purpose of the review is to –

• Establish the financial position of the company at liquidation;
• Ensure that all assets have been properly accounted for;
• Identify any other avenues of recovery for the benefit of the company’s creditors; and
• Examine the actions of the company’s officers to see if they have properly carried out their duties and take the appropriate steps where necessary.

Books & Records

The books and records are generally in the possession or control of the director or are held by the company’s professional advisors, such as accountants and lawyers.

When we are appointed as liquidators, our first approach in relation to obtaining company records, is by way of a letter to the relevant person or entity requesting details of the records held and seeking arrangements to uplift those records.

In most cases that initial letter is sufficient but, on occasion, the request is either ignored or refused.

When the records requested are not provided in a timely manner, the liquidator has powers under section 261 of the Companies Act 1993 (“the Act”) to issue a written notice demanding the records and it is an offence to fail to comply with a notice.

Pursuant to section 263 of the Act, a person is not entitled to claim or enforce a lien, over the books and records of the company, against the liquidator, that arises in relation to a debt for the provision of services to the company prior to the liquidation commencing.  However, the debt is a preferential claim in the liquidation to the extent of 10% of the total debt up to a maximum of $2,000.

Information

When it comes to obtaining information about the company’s affairs, again our initial approach is to ask the people concerned to provide it.

But, if that doesn’t happen, section 261 of the Act also gives the liquidator the power to issue a notice in writing to various categories of people who have knowledge of the company’s affairs, to attend on the liquidator in person to provide the information that they have.

The people who can be required to attend are –

• a director or former director of the company; or
• a shareholder of the company; or
• a person who was involved in the promotion or formation of the company; or
• a person who is, or has been, an employee of the company; or
• a receiver, accountant, auditor, bank officer, or other person having knowledge of the affairs of the company; or
• a person who is acting or who has at any time acted as a solicitor for the company.

The person to whom the Notice is issued may be required –

• to attend on the liquidator at such reasonable time or times and at such place as may be specified in the notice:
• to provide the liquidator with such information about the business, accounts, or affairs of the company as the liquidator requests:
• to be examined on oath or affirmation by the liquidator or by a barrister or solicitor acting on behalf of the liquidator on any matter relating to the business, accounts, or affairs of the company:
• to assist in the liquidation to the best of the person’s ability.

A person who fails to comply with a notice given under this section commits an offence and, if convicted, is liable to a fine not exceeding $50,000 or imprisonment for up to 2 years.

Conclusion

When appointed over a company, the liquidator doesn’t know what they don’t know so they have been given statutory powers to uplift company records and to obtain information from those people who do know to ensure that any potential avenue of recovery for creditors is identified.

If you would like to find about more about the different insolvency services available you can read more here. If you would like more information about the powers of the liquidators to obtain information and records or how liquidators work, please contact one of the team at McDonald Vague.

It is common in New Zealand for the directors and shareholders of small companies to be the same people and many are also employees of the company – executive directors.  Whether this is in the form of a family owned business or a just a small to medium sized enterprise made up of unrelated individuals this involvement on all levels can create difficulties.

The advantage of such a set up is that the individuals are motivated to make the business work and be profitable.

The downside is that the closed nature of the board can leave gaps in the knowledge and experience held by the directors and their closeness to the business can lead to subjective decision making.

Depending on the numbers on the board, this can also lead to a stalemate position if there is a difference of opinion on matters requiring board approval.

There are two other types of directors that can be brought into the board to help address these issues, non-executive directors and independent directors.

Non-executive directors vs Independent directors

Whilst both can address the lack of knowledge and experience, a non-executive director may be representing a shareholder and, therefore, may not act without some bias.

An independent director will generally have no links with the company, other than sitting on the board, and have no affiliation to any of the other directors or shareholders.

Case Study

A liquidation that we have been conducting involves a company with two directors with the shares held by entities associated with each of the directors.  One director was an executive director, employed by the company. Two further non-executive directors were appointed to the board – one nominated by each of the other directors.

The board functioned properly, and in unity, until the company faced financial issues. 

When the issues were identified, one director made a proposal to restructure the company’s business in an effort to remedy the problems. The restructure proposal was not accepted by the other executive director and, when it went to a vote, the non-executive directors voted with their appointer so there were two in favour and two against – stalemate.

As a consequence, the company continued to trade for a period and left all four directors with a potential liability for breaches of their duties as director.

The closely aligned shareholder interests did not want to change the boardroom dynamic by resigning as directors, or voting against their appointors interests and/or personal views.  In the end the directors settled with the liquidator. 

A truly independent director, with no affiliation to the other directors or the shareholding parties, could have looked at the restructure proposal in an objective way.

Conclusion

There is no way to know what decision an independent director might have made in the liquidation referred to above but at least a decision would have been made, and action taken accordingly, rather than having the company in limbo.

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

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 no such meeting be held.

In those circumstances, the liquidator must give notice in writing to creditors of the decision not to call a meeting and the reasons for doing so. The notice must also include the advice that creditors have 10 working days from receipt of the notice to require a meeting to be called.

The Background

The background to the case, Nayacakalou v Minister of Education [2017] NZHC 792, is that Ms Nayacakalou was appointed liquidator of a building company by shareholder resolution. At the time of her appointment, the Minister of Education (MoE) had filed proceedings against the building company in relation to weather tightness issues.

The MoE filed a claim in the liquidation and gave written notice, within the required time period, requiring the liquidator to call a meeting of creditors.

After reviewing various reports provided by the MoE and other claimants, the liquidator decided that their claims were unenforceable against the company and, therefore, they had no standing to call a creditors meeting nor any entitlement to vote at any creditors meeting. This position was not accepted by the MoE and other claimants.

The liquidator subsequently applied to the Court for directions in relation to the discharge of her duties. The MoE filed a notice of opposition and a cross-claim

The Findings

The liquidator’s position was that the MoE’s claim was not enforceable as it was a claim in tort and no Court had issued judgement against the company. It was argued that it was a contingent claim and that only contractual claims qualify as a contingent debt.

The Court did not accept this submission and made orders that the liquidator must –
• Accept or reject the MoE’s claim as required by s 304(3) of the Act;
• Make an estimate of the amount of the claim or refer the matter to the Court for a decision on the value pursuant to s 307 of the Act; and
• Call a meeting of creditors.

Conclusion

It is common practice that liquidators do not call a meeting of creditors for the reasons set out in s 245 of the Act and give notice in writing of that decision.

Creditors of the company, including contingent creditors and creditors whose claim is for an unascertained amount, have the right to call for a meeting and to decide, by a majority in number and value of votes cast in the meeting, either in person, by proxy or by postal vote, if the liquidator should be replaced.

If a meeting is requested within the time specified by the Act then this case reinforces the requirement that the liquidator is obliged to call a meeting.

A formal meeting is called for the specific purpose of validating the appointment of the liquidators or seeking a replacement and to consider the appointment of a liquidation committee. These meetings can add an extra level of cost in a liquidation, they require public notice and formal notice of meeting.

If the larger creditors in value or a significant majority in number are not concerned by the party appointed then the other alternative is to request an informal meeting to raise concerns and provide background.

Liquidators have a duty to consider the views of creditors.

If you would like more information about creditors meetings you can read this article or contact the team at McDonald Vague.

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 prices that resulted in increasingly tighter margins for the company and resulted in the business becoming unsustainable.

The director and his advisors wisely chose to have the company placed into liquidation when it became apparent that the business would be unable to compete in the new industry norm. The company’s creditors were owed $1,189,700. Following our appointment and meeting with the director, we attended the Kingsland premise to meet with the company’s 10 to15 staff and to advise them of our plan to realise the company’s assets.

There was a considerable amount of stock onsite so flooding the market by way of auction would not maximise the return for creditors. With the assistance of the director and some of the staff, we traded the business down over 3 months and moved the stock for the best price. We performed a cost benefit analysis on a regular basis to monitor and ensure that we ceased trading the business when it was no longer cost efficient to operate.  When the business stopped trading, the remaining assets were sold at auction and the premise was handed back to the landlord.

By trading on the business for a short period, we were able to:

- Get the maximum realisable value for the company’s current assets

- Pay dividends totalling $870,400

The intangible impacts were:

- Offer some of the business’ staff continued employment while we traded on (and they looked for new jobs)

- Provide the landlord with some time to look for a new tenant for the site while we traded on the business

- Reduce the directors’ personal liability under their guarantees

By trading on the business, the liquidators made a full distribution to the employees, the Inland Revenue Department, and NZ Customs on their preferential claims in the liquidation. Once the business stopped trading, the liquidators collected the company’s outstanding debtors, with the assistance of debt collectors, and returned 84 cents in the dollar to the secured creditor on its secured claim. This amounted to a total distribution to creditors in excess of $870,000.  Put another way, the return to creditors was more than 8 times the costs of administering the liquidation.

The return to Global Textile’s creditors far exceeded that originally anticipated at the start of the liquidation by both the director and his advisors. By taking a practical approach, we were able to obtain positive results for a number of the stakeholders.

This is one of the many examples we are starting to see of a director acting responsibly and in a timely manner, assisting the liquidators during the liquidation process and understanding their duties to creditors. As a result, significant amounts were returned to the company’s creditors.

A statutory demand can threaten your company’s very existence. Used to collect debt, they’re the most common form of evidence used in the High Court to support liquidating a company. Given how serious receiving a statutory demand is, it’s important to act fast and seek professional advice. If you do nothing, liquidation proceedings are virtually guaranteed.

Pay Up

A statutory demand requires payment of debts owing more than $1000 within 15 days. Time is not your friend. If you can settle the debt within that time period then you should be fine. It may still be worth seeking professional advice to see whether your creditor is abusing the statutory demand process, as there could be legal repercussions for them.

Dispute Payment

If there is an issue with the debt or invoice, then statutory demands cannot be served. If you have a genuine dispute over payment you can apply to the High Court to have your statutory demand set aside, but it must be done within 10 working days!

The Court can take into account any counter-claim, cross-demand or other relevant issues and set aside the statutory demand.

Out of Court Resolution

There are a number of formal and informal compromises available to help you reach a settlement with the creditor who served you notice. Any offer needs to show your creditor that for you to continue trading is in their best interests. You can offer assets as a form of security while you negotiate a payment arrangement.

Statutory demands can be costly

In a real life example, a debtor company was late paying an invoice but paid the total amount in full. While the payment was being processed, the creditor company passed the debt over to their debt collection agency. The debt collectors contacted the debtor for the full amount of the invoice plus their debt collection fee which was over $1000.

At this point, lawyers for the debtor company disputed the collection fee and advised the debt collectors the original invoice had been paid in full. The debt collectors issued a statutory demand to recover their fee, but lawyers for the debtor company successfully argued in court to have the demand set aside.

The court felt the debt collectors had abused the statutory demand process, so they failed to recover their $1000 fee and were ordered to pay costs of over $4000.

Statutory demands are complex proceedings involving the High Court and the Companies Act (1993). Your best course of action is to always seek professional legal advice, and from there figure out how to proceed. Ignoring a statutory demand or acting too late will almost certainly mean liquidating a company, so get professional advice before it's too late.

For more information, download our free Guide for NZ Companies in Financial Difficulty.

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 skills and competence required of an IP, the differing approaches of liquidators, reasons why applicant creditors or shareholders should appoint an accredited IP, or a member of CAANZ or NZLSA and what should be considered in taking an action.

Competent liquidator and principal duty

A reasonable and competent liquidator should take into account the amount owed to creditors, the prospects of recovery and consider the cost versus benefit of advancing claims and legal actions. It is a liquidator's obligation to maximise the return to creditors and to act in a reasonable and efficient manner.

Underlying principles to regard

Every liquidation is different but the underlying principals are the same. In all liquidations, the liquidators should have regard to:

1. Duties imposed on liquidators by the Companies Act 1993;
2. Schedule 6 of the Companies Act 1993;
3. Companies Act 1993 Liquidation Regulations 1994;
4. Insolvency Engagement Standards issued by NZICA;
5. Court decisions (eg. Peace and Glory Society (in liq) v Samsa [2010] 2 NZLR 57);
6. The value of the assets available to be realised (if possible);
7. The probable claims and creditors to pay from asset realisations.

Benefits of governing bodies and regulation

Liquidators who are members of the CAANZ or the New Zealand Law Society have a governing body they need to report to. The Insolvency Engagement Standards ("IES") issued by the Board of the CAANZ apply to a firm's conduct on any insolvency engagement. IES provides the required standards of a CAANZ insolvency professional.

These standards should be required of all liquidators. IES is not binding on non-Institute members. A member of the Institute acting as a liquidator is required to comply with Rule 10 of the Code of Ethics 2003 which relates to timeliness and to the Insolvency Engagement Standards SES-1 and paragraph 22 of IES. The New Zealand Law Society have their own high standards for conduct. Many IP's are now CAANZ accredited insolvency practitioners.

Key standards for CAANZ members

Key standards include:

1. An Insolvency Practitioner has a duty to apply the degrees of specialised skill, knowledge, judgment and competence required to perform a job in a timely manner. A liquidator has a professional responsibility to carefully plan the liquidation and perform in an efficient and effective manner and assure quality of work performed.
2. A liquidator is required to ensure that all personnel engaged in insolvency work adhere to the principles of objectivity and integrity.

Companies Act 1993 - obligations and duties

The duties, rights and powers of liquidators are set out in Sections 253 to 279 of the Companies Act.  The principal duty of a liquidator is recorded in Section 253 as follows:

Section 253 - Principal duty of liquidator

Subject to Section 254 of this Act, the principal duty of a liquidator of a company is - 

1. To take possession of, protect, realise and distribute the assets, or the proceeds of the realisation of the assets, of the company to its creditors in accordance with this Act; and
2. If there are surplus assets remaining, to distribute them, or the proceeds of the realisation of the surplus assets, in accordance with Section 313(4) of this Act - in a reasonable and efficient manner.

In undertaking an investigation, a liquidator must bear in mind a duty to act in a reasonable and efficient manner.

Liquidators have different approaches to recovery actions often driven by creditor attitude/requirements. Some liquidators will be compelled to bankrupt directors. In the absence of other recoveries, the net costs of these actions should be borne by the liquidators or a particular creditor if that creditor has agreed to fund the cost.

A liquidator also has a duty to have regard to the views of creditors and shareholders under Section 258 of the Companies Act 1993.

Considerations for liquidators when taking actions

These are always judgment calls and a balancing of the various interests.

A liquidator should consider the financial position, the likely prospects of recovery, and public interest (if pursuing bankruptcy) and the costs in advancing an investigation and legal action.

A liquidator should consider the likely return to creditors against the costs, and if spending money that could or should otherwise be distributed to creditors the likely increased return for creditors by advancing the action.

Along with the economic factors above, there is also sometimes a feeling that other enforcement action is required, such as bankruptcy, which affects all of the creditors of the individual who owes money. A bankruptcy option should recognise that this will stop any chance of future recoveries being made.

A liquidator should therefore question whether it is reasonable to issue proceedings against an individual when there is a good prospect of bankruptcy but no likelihood of a return from bankruptcy, particularly where there are competing claims likely in the bankruptcy estate, and where the party is clearly insolvent, or where another creditor could, with minimal cost, advance bankruptcy proceedings.

Certain actions require funding. Creditors can be approached and litigation funders are an option.

Estimating costs when litigation is involved is a difficult exercise as some legal costs are reactive to positions taken by the defendants. Settlement can avoid legal costs associated with discovery, interlocutory matters and trial preparation.

While we recognise that insolvent individuals and companies are a risk to their creditors there are recovery avenues available for the insolvent. They are referred to in our articles on our website, but include:

1. Part 5 subpart 2 proposals;
2. No asset procedure;
3. Summary instalment orders;
4. Settlements.

The McDonald Vague approach to debt collection and legal action

Our approach in collecting debts is some money is better than none.  

To that end, our aim is to:

1. Assess the likely ability to collect;
2. Set a game plan and budget;
3. Write claiming as quickly as possible;
4. React/report any dispute;
5. Consider legal action if the benefit has more than reasonable prospects of exceeding the costs of pursuit and will more than likely provide a return to creditors;
6. If appropriate, appoint a professional debt collection agent; and
7. Consider settlement and repayment options.

We do not typically bankrupt individuals for overdrawn current accounts, particularly when they can show in sworn statements of position that there would be no benefit to creditors in doing so. Each case is considered on its merits and we often agree to repayment plans.

For those directors/shareholders who have acted with a clear intent to defraud creditors, we take the appropriate action. In any action, a liquidator needs to consider the cost and benefit and the public interest and risk.

To find out more about how McDonald Vague can help, or for confidential advice please contact This email address is being protected from spambots. You need JavaScript enabled to view it..

One of the first tasks facing liquidators after their appointment is to ascertain and communicate with those people and entities who can rightly register a claim in the liquidation as a creditor.

Generally, this information will be provided by the directors of the company, along with copies of unpaid invoices or statements on the individual accounts, but not all eligible creditors are that easily identified.

Section 303 of the Companies Act 1993 ("the Act") sets out the admissible claims in a liquidation -

1. Claims admitted - Subject to subsection (2) of this section, a debt or liability, present or future, certain or contingent, whether it is an ascertained debt or a liability for damages, may be admitted as a claim against a company in liquidation.
2. Claims not admitted - Fines, monetary penalties, and costs to which section 308 of this Act applies are not claims that may be admitted against a company in liquidation.

As you can see from the definition in section 303(1), claims can be filed in relation to contingent matters and this could include things like potential costs and awards made against a company in legal proceedings and guarantees provided by the company for the debts and liabilities of other companies or individuals.

Consideration also has to be given to debts that are disputed by the company. The fact that the directors don't think a creditor is entitled to claim does not always mean that they aren't.

We are currently working on a liquidation where the company directors were of the belief that all external creditors would be paid in full in the liquidation. This was based on their belief that funding provided to the company by a third party could not be clawed back under the terms of the agreement under which the funding was provided.

Legal advice obtained by the liquidators after the commencement of the liquidation established that the third party was entitled to claim in the liquidation for some of the funding.

In this case, the decision had been made to proceed with the liquidation on the basis that the company was insolvent but the claim received from the third party means that all creditors will not be paid in full.

When a decision is being made by the directors and shareholders about liquidating a company, and whether or not the company is solvent, these potential contingent and disputed claims have to be taken into account.

If you would like more information about liquidations and who can file claims please contact one of the team at McDonald Vague.