An increasing number of building firms "went bust" in 2014 despite the building boom in Christchurch and Auckland, leaving homeowners, contractors, and the taxman out of pocket.  As the construction boom in Auckland gathers pace the situation is going to get worse.

Nearly 100 rebuild-related companies have gone into liquidation or receivership in Christchurch alone since the February 2011 earthquake. We see the same trend occurring in Auckland.

People often ask us why so many building firms are going under as they should be making a fortune.  The simple answer is that the good ones are, but there are many that have been caught out by over trading (transacting more business than the firm's working capital can normally sustain), thus placing serious strain on cashflow and risking collapse or insolvency.  Some of these companies shouldn't be in business in the first place.

This trend could worsen as mismanagement woes continue and big ticket construction projects open new avenues for white collar crime. 

More than half of the failures came in 2014

Construction-related liquidations more than tripled between 2013 and 2014 (mainly in Christchurch). Subcontractors were heavily represented in the liquidation numbers and the Serious Fraud Office ("SFO") received 29 complaints about suspect dealings in the rebuild and has launched six investigations.  As a result, the Government introduced new laws in 2015 to protect consumers, including mandatory written contracts, and builder requirements for residential building work costing $30,000 or more.

With an increasing number of small operators who were previously working as employees deciding to go out there and do it themselves there is increasing concern that many don't have the skills needed to run a business.  Many are good tradesmen, but not good businessmen.  Some don't manage their cashflow well and don't file PAYE returns, GST returns, or get their invoices out on time.  We often see overdrawn current accounts where the tradesman has operated the business account as their own personal bank account.

As the building boom gathers pace, tradespeople with varying levels of skills have poured into the industry as they see it as a cash cow. They often have little or no capital.  Many of them "gear up" with the latest tools and ute all purchased on HP.

New Zealand is an extremely expensive country in which to build houses.  McDonald Vague has recently been appointed over two large building companies (eHome NZ Limited and Shears and Mac Limited), both employing over 100 people and both manufacturing in a factory and then installing onsite.  eHome NZ Limited built houses in a factory and Shears and Mac Limited did commercial and shop fit-outs in New Zealand and Australia.  They operated in different sectors of the building industry but failed for similar reasons including:

• High overheads and slim margins;
• Missed deadlines;
• Contract disputes;
• Cost overruns;
• Unhelpful bureaucracy and compliance costs.

High costs driving failures

We provide consultancy and turn-around advice to a number of building firms and often the problems are the same.  Fixed price contracts stay constant but the cost of labour and materials constantly increases in a construction boom.  The costs of labour and materials will continue to increase until there is a slowdown in demand. 

Why so many fail

• Out of control pricing;
• Characterised by small businesses (a ute and a dog);
• Aggressive tendering trying to increase market share at the expense of margin;
• Poor estimates/pricing - running a project at a loss;
• Poor variation analysis;
• Undercapitalised balance sheet;
• Lack of building knowledge, the level of education in the industry is poor;
• Leaky buildings (warranties and guarantees) ongoing issue without provision;
• Desperate to climb the ladder - egos prevail in a testosterone dominated industry;
• Poor documentation/record keeping leads to failure (PAYE, GST, creditors);
• Variation sign-offs not formally completed leading to further costs borne by contractor;
• Low margins;
• Businesses are easy to establish and easy to close, with no capital requirements.

What can your clients do to protect themselves?

There are a number of things they can do, including:

• Register on the PPSR;
• Stop work when they don't get paid;
• Be familiar with remedies under the CCA;
• Do due diligence on developers or head contractors before doing work;
• Take personal guarantees;
• Enforce credit limits;
• Look at liquidated companies on the Companies Office;
• Be aware of phoenix companies;
• Make credit checks;
• Do directors' checks for liquidations;
• Get money held in trust where possible.

We can help

Please contact the team at McDonald Vague Limited if you would like to learn more about how your client can protect/mitigate the risk of a customer going into liquidation.

Creditors of companies that fail are often shocked and angered by the ability of directors of the failed company to start up a new business and carry on as though nothing happened.

They cannot accept that they are suffering because of the losses they are facing whilst the people they see as being responsible for the losses appear to suffer no ill effects.

Who is at fault?

It is important to note that the debt owed to the creditor is owed by the company, not the directors personally.  A limited liability company has its own separate legal identity and it is generally only when the directors have given personal guarantees in favour of particular creditors that they become personally liable for the debts concerned.

Furthermore, company failures are not always attributable to actions of the directors.  Failures come about for a variety of reasons including economic downturn, natural disasters, default in payments from customers and major clients changing supplier.

Starting over

There is no automatic bar to a director of a failed company starting up a new business on the failure of the old one.

There are provisions within the Companies Act 1993 in respect to starting and operating phoenix companies within five years of the commencement of the liquidation of the failed company.

Section 386B(1) of the Companies Act 1993 defines a phoenix company as follows:

A phoenix company means, in relation to a failed company, a company that, at any time before, or within five years after, the commencement of the liquidation of the failed company, is known by a name that is also -

1. a pre-liquidation name of the failed company; or
2. a similar name

A pre-liquidation name means any name (including any trading name) of a failed company in the 12 months before the commencement of that company's liquidation.

A similar name means a name that is so similar to a pre-liquidation name of a failed company as to suggest an association with that company.

There are some exceptions to the rules regarding phoenix companies, for instance Court approval can be obtained (Section 386A(1)) or a Successor Company Notice can be issued (Section 386D).

You can see more detail regarding phoenix companies in the article on our website written by Peri Finnigan, Phoenix companies:  what exactly are the rules here?

What can be done to stop them?

Directors don't always just walk away unscathed by the failure of their company.

There is a personal toll in the stress that they have been under leading up to the failure, the personal loss they may have suffered through funds they had put into the company or through personal guarantees provided to financiers or suppliers, and the sense of failure that most feel when their company is liquidated.

Their actions will also be subject to scrutiny by the liquidator of their company.

Liquidators will investigate, among other things, the activities of the directors to establish if the directors have breached their duties.  This can lead to legal proceedings being taken against the directors if they are considered to have acted in breach of those duties and caused loss to creditors by doing so.

If found to have been in breach of their duties or reckless in their actions the Court can impose monetary penalties on the directors to the level it thinks is appropriate to the circumstances.

One of the statutory duties imposed on liquidators is to report to the Registrar of Companies where they suspect the company or any director of the company has committed an offence that is material to the liquidation against the Companies Act 1993, the Crimes Act 1961, the Financial Markets Conduct Act 2013, the Takeovers Act 1993 and the Insurance (Prudential Supervision) Act 2010.

The liquidators will also report to the Registrar of Companies on any director who they believe should be banned from being director because of the belief that their actions were wholly or partly responsible for the failure of the company or because they have had two or more failed companies in the previous five years.

Breaches of the banning orders and operating a phoenix company can, on conviction, lead to penalties of up to five years' imprisonment or a $200,000 fine.

In conclusion, whilst it may seem unfair that the directors of a failed company can just carry on with business as usual after the failure, there are provisions available to have them brought to task and penalised where appropriate.

The solvency test is not required to be met each day a company trades.  It is required for certain transactions including distributions and dividends and requires the company to demonstrate it can meet two tests.  These tests are the trading solvency/liquidity test and the balance sheet solvency test.  

To satisfy the solvency tests, a company must be able to pay its debts as they become due in the normal course of business; and the value of its assets must be greater than the value of its liabilities (including contingent liabilities).

One objective of the solvency test is to control all transactions that transfer wealth from a company.  In a liquidation context, where transactions have occurred when the company did not satisfy the solvency test, creditors may be able to recover from directors personally.

CONCERNED ABOUT YOUR PERSONAL LIABILITY?
TALK TO US IN CONFIDENCE

• If you are concerned you have authorised distributions while not able to meet the solvency test;
• or are worried about your personal liabilities as a director if your company goes into liquidation,
• contact us now for free, confidential, expert advice.
• The sooner you contact us the more options are open to you.

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Peri Finnigan

Director

Phone: (09) 303 9519

Mobile: 021 900 657

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The solvency test 

The solvency test consists of two parts:

1. Trading solvency/liquidity - the company is able to pay its debts as they become due in the normal course of business; and
2. Balance sheet solvency - the value of the company's assets is greater than the value of its liabilities, including contingent liabilities.

The Companies Act 1993 requires that in some situations directors sign a solvency certificate.  Sometimes this considers only the ability to pay debts as they fall due.  

The situations requiring a signed solvency certificate are: 

• Distributions by the company for the benefit of a shareholder, including a dividend, and incurring a debt to or for a shareholder's benefit, solvency to apply before and after distribution ;
• Share purchases;
• Share redemption options being exercised;
• Financial assistance to acquire share is offered by the company;
• An amalgamation; and
• 20 days prior to a Solvent liquidation.

The considerations

Directors need to consider all circumstances that the directors know or ought to know that affect the value of the company's assets and liabilities.  In the case of contingent liabilities consideration is required to be made on the likelihood of the contingency occurring and any claims the company may reasonably be expected to meet to reduce or extinguish the contingent liability.

Contingent liabilities to be factored in

Contingent liabilities can impact a solvency certificate and impact the validity of a distribution.  If directors are aware of a contingency, action must be taken to determine projected costs and probable outcomes.  Directors must be realistic when assessing solvency and take reasonable steps to obtain all information relevant to forming an opinion.  The Courts have confirmed the solvency test should be applied with a sense of commercial reality.

Contingent liabilities can include obligations under guarantees, letters of credit, bills of exchange, current or pending litigation, eg. leaky building claims, performance bonds, leases, tax assessments, deferred purchase agreements and underwriting adjustments.

Section 4(4) of the Companies Act 1993 - Meaning of Solvency Test - says:

"In determining, for the purposes of this section, the value of a contingent liability, account may be taken of -

1. The likelihood of the contingency occurring; and
2. Any claim the company is entitled to make and can reasonably expect to be met to reduce or extinguish the contingent liability". 

Risk of personal liability

Directors who do not fulfil their obligations under the Companies Act 1993 are subject to penalties and personal liability. The liability of a director will be determined by his or her involvement in the decision.  Failing to vote on a board matter should be carefully considered as directors are collectively responsible for any decision made by the board.

Directors should ensure all workings support solvency certificates and contain all necessary information and support for decisions made.  This detail can provide vital defence when a liquidator challenges a distribution made.

Directors should be aware that they should not sign a certificate as to solvency if there is doubt as to the existence of reasonable grounds for such belief.  If they do not take reasonable steps, they can risk being held personally liable for any non-recovery of the distribution made to the shareholders.

Directors can rely on information and professional or expert advice, but only if they act in good faith, make proper inquiry or have no knowledge such reliance is unwarranted (Section 138 of the Companies Act 1993).

Section 56(3) of the Companies Act 1993 - Recovery of distributions - says:

"If by virtue of section 52(3) or section 70(3) or section 77(3), as the case may be, a distribution is deemed not to have been authorised, a director who -

1. Ceased after authorisation but before the making of the distribution to be satisfied on reasonable grounds for believing that the company would satisfy the solvency test immediately after the distribution is made; and
2. Failed to take reasonable steps to prevent the distribution being made, - 
   is personally liable to the  company to repay to the company so much of the distribution as is not able to be recovered from shareholders".

Under Section 56, a distribution may be clawed back from the shareholders unless the shareholders received the distribution in good faith, without knowledge of the company's failure to satisfy the solvency test, and the shareholder has altered their position in reliance on the validity of the distribution and it would be unfair to require repayment in full or at all.  As the tests are cumulative, failure to satisfy any of the above will likely result in clawback of distributions. 

When can directors be held personally liable?

Directors can be held personally liable in the following circumstances:

• They fail to complete a solvency certificate when it is required;
• The procedure for authorising the relevant transaction has not been followed;
• Reasonable grounds for believing that the company would satisfy the solvency test did not exist at the time the solvency certificate was signed; or
• Between the date of approving the transaction and its date of execution, there has been a change in circumstances in relation to the company's ability to meet the solvency test but the distribution occurs anyway.

Apart from the obvious consequences of clawback, any director who signs a certificate knowing that it is false or misleading commits an offence and is liable on conviction to a fine not exceeding $200,000 or imprisonment not exceeding five years.  A director who votes in favour of a distribution, but fails to sign a certificate to the satisfaction of the solvency test also commits an offence and is liable on conviction to a fine not exceeding $5,000.  The risks are too high to not take reasonable care. 

Conclusion

If a company is marginally solvent, directors need to take particular care to satisfy themselves, for certain transactions, that the transaction is properly authorised and that the company will meet the solvency test immediately after the transaction is implemented.

It seems like a typically Kiwi thing to do - a couple of mates decide to go into business together and start up a company to operate the business.  Everything is split down the middle - each director owning 50% of the shares and all agreed on a handshake.

What could go wrong?

The recent liquidation of a small business shows just what can happen.  Things went well for the first couple of years.  Business was going okay and making a small profit but then things started to go wrong.

The relationship broke down between the shareholders and got to the stage where they couldn't agree on anything to do with the business including staff management and business direction.

Legal advisors became involved and an attempt was made to resolve the issues by one of the shareholders buying out the other's interest.  Unfortunately, they couldn't agree on the value of the business.

As a result, the decision was made and agreed to by both shareholders to liquidate the company.  The liquidation process was made more protracted and costly by the sniping between the shareholders leading to higher liquidation fees and therefore a reduced payment to creditors.

There are no guarantees of course but this situation may have been avoided, or at least the damage mitigated to a certain extent, if there had been a shareholders' agreement put in place at the time the company was incorporated.

Shareholder agreements usually include

A shareholder agreement is like a business pre-nuptial agreement.  It sets out the basis of the relationship between the shareholders and can include matters such as:

• Defining the type of business the company will engage in;
• How the business will be managed and who will be responsible for particular areas of management such as staff employment etc;
• What types of decisions can be made by individuals alone and what types need majority or unanimous agreement;
• How any of the parties leaving the business will be handled - what happens to their shares etc;
• How any disagreements or disputes that arise will be handled.

It can contain confidential information as, unlike a company's constitution, it does not have to be filed with the Registrar of Companies and be available for public viewing.

Shareholder agreements may also include

They may also cover:

• Non-competition restrictions;
• Appointment and retirement of directors;
• Professional indemnity insurance;
• Transfer of shares and pre-emptive rights;
• Disability and insurance - what happens in the case of a trauma or death to insurance proceeds - does it pay company debts or does it go to the estate?  Who is the policy owner?
• Shareholder approvals, consent and voting.

The complexity and size of the shareholders' agreement will depend to a certain extent on the size of the business, the number of shareholders involved and the areas to be covered.

It will be different for every company and shareholders should seek proper legal advice when putting together any such agreement and before signing one.

How McDonald Vague can help

We regularly see the result of fallouts between company directors and shareholders.  We would advise all company directors and shareholders to put together a Shareholder Agreement at the time the company is incorporated to avoid prolonged and unnecessary expense to shareholders and their creditors.

If your relationship with fellow director(s) and/or shareholder(s) is breaking down contact us for free and confidential advice to find out how we can help.

Alternatively, download our Free Guide to Avoiding Business Failure

On 15 September 2014, insolvency and business recovery specialists McDonald Vague advised 288 former employees and unsecured creditors totalling $13.112 million that a total dividend pay-out of 100 cents in the dollar had been made to most of them.

Given that this was a large corporate failure with initial unsecured claims in excess of $25 million this is a significant pay-out.

Early on in the liquidation it looked like creditors would face a nil dividend.  The steps taken to achieve this result include:

1. Engaging in, and winning, a significant arbitration award relating to DML's mining operations at Waihi.
2. Establishing the unsecured creditors' position by disputing and settling several significant unsecured claims for amounts primarily owed by other companies related to DML.
3. Settling all voidable preference claims by agreement where some unsecured creditors were preferred over others when receiving payments prior to liquidation, which led to the establishment of a Preference Trust.
4. Taking High Court proceedings against the directors of DML.  This case settled just before a lengthy trial was to begin.

A novel element to the liquidation which had a positive result on the outcome is the solution to a number of voidable preference claims.  These challenges can be costly and take time to resolve.  The liquidators' advisers had proposed a cost-effective solution to resolve the preference issues, as some parties had been paid (preferred) ahead of the others.  The proposal was accepted by both the liquidators and the preferred parties.  McDonald Vague as a result established and oversaw a Preference Trust.  The operation of the settlement agreements meant that the payments to remaining unsecured creditors have been significantly topped up by funds paid into the Preference Trust from the preferred creditors.  The purpose of that trust has now been met.

The funds received into the liquidation in future will, after meeting liquidation costs and expenses, see dividends paid to the creditors that contributed to the Preference Trust to bring their dividends up.  The expecation is that they will not in the end reach 100 cents in the dollar but they may be close.

"Whilst the liquidation has been a long process the outcome is one McDonald Vague is very satisfied to have reached", says Peri Finnigan, director at McDonald Vague.  "Special thanks go to the liquidators' barrister, Kerry Fulton, who has worked tirelessly on this liquidation".

McDonald Vague would like creditors who have not received a distribution cheque to contact them at This email address is being protected from spambots. You need JavaScript enabled to view it. or 09 303 0506.

It is an unfortunate fact that many companies experience financial difficulties at times.  Often the directors/shareholders do not realise that there are a number of options available to them.  This article provides an overview of the various options for distressed companies.  

A compromise is an agreement between a company and its creditors.  The purpose is to enable a company to trade out of its financial difficulties and thus avoid administration, receivership or liquidation.  In this way the company can survive into the future and provide continuing business to creditors.  

There are two basic features of most compromises:  

• Creditors will be repaid in full or in part over a period.  If creditors are paid in part they write off the balance of their debt;
• During the term of the compromise the company's debts are frozen and no creditor may take any action against the company.

Usually, the directors of a company decide to allow the company to enter into a compromise, subject to creditor approval. Creditors will only approve if they believe that they will receive more money than in an administration, receivership or liquidation.  

Compromises are governed by Part 14 of the Companies Act 1993.  Each class of creditors affected must vote as a class.  Classes can include trade creditors, landlords, employees for preferential wages and holiday pay, Inland Revenue for preferential GST and PAYE, hire purchase creditors and other secured creditors.  

For a compromise to be approved, a majority in number representing 75% in value of each class of creditors must vote in favour of the proposal.  

A creditor's compromise can be a good option for businesses that are fundamentally sound, but are experiencing financial difficulty.  

Voluntary administration   

Voluntary administration is a relatively new rehabilitation mechanism that was introduced into the Companies Act 1993 about seven years ago.  An administrator may be appointed by a distressed company's directors, a secured creditor holding a charge over all or substantially all of the company's property, a liquidator or the Court.  

The aim of voluntary administration is to maximise the chances of the company (or its business) continuing in existence, or if this is not possible, for creditors to receive a better return than in a liquidation.  It is an interim measure during which creditors' rights to enforce charges, repossess assets or enforce guarantees are restricted.  A General Security Agreement ("GSA") holder may, however, appoint a receiver within 10 working days of the administration commencing.  It is therefore critical for the administrator to have the support of any GSA holders.  

Once a company enters into voluntary administration the directors can only act with the written permission of the administrator.  The administrator takes control of the company's business and has 25 working days to complete an investigation and provide an opinion on the most beneficial course of action for creditors.  This will be one of three options:  

• Have the company enter into a Deed of Company Arrangement ("DOCA") with creditors;
• Put the company into liquidation; or
• Return the company to its directors (this is very rare).

A DOCA is an agreement between the company and its creditors.  It is the responsibility of the deed administrator to ensure that the company adheres to the DOCA's terms and conditions.  

Receivership   

A receivership appointment is made by a secured creditor who has been granted a General Security Agreement ("GSA") over the company's assets.  The GSA holder is usually a financial institution or a private lender.  

The conduct of receivers is governed by the Receiverships Act 1993.  A receiver has control over the company's assets subject to the GSA under which they have been appointed.  The receiver's primary purpose is to recover funds for the secured creditor, however, the receiver also has a duty to protect the rights of other creditors.  The receiver provides reports on the conduct of the receivership to the secured creditor and files this report with the Companies Office. 

The receiver ceases to act when the secured creditor has been repaid and at this time control of the company reverts to the directors.  However, a liquidator can be appointed if there are further assets to be realised, funds still owed to unsecured creditors or matters requiring investigation.  

Liquidation   

When the directors/shareholders of an insolvent company become aware that there is no realistic ability to trade out of their financial difficulties they can resolve to appoint a Licensed Insolvency Practitioner of their choice as liquidator.  This is known as a voluntary liquidation. 

In instances where the directors/shareholders do not take any action, a creditor of the insolvent company may apply to the Court for an order requiring the company be put into liquidation.  This is known as a Court appointed liquidation and it is the Court's decision as to who will be appointed as liquidator.  If a company is served with a winding up application by a creditor, the directors/shareholders cannot appoint voluntarily unless with the consent of the applicant creditor. 

The conduct of liquidators is governed by Part 16 of the Companies Act 1993.  Once a company liquidation commences the director's powers are restricted and they must provide the company's records to the liquidator.  They must also co-operate with and support the liquidator. 

The liquidator's main duty is to realise assets belonging to the company and distribute the proceeds to creditors.  The liquidator may also investigate the reasons for the company's failure, set aside insolvent transactions and take legal action where necessary.  The liquidator must report to the company's creditors every six months and file these reports with the Companies Office. 

Upon completion of the business liquidation the company is struck off the Companies Register. 

Every situation is unique and a number of factors should be taken into consideration to determine the best course of action in the event of company insolvency.  If you wish to discuss your situation please contact one of the team at McDonald Vague.

Alternatively, download our Free Guide to Insolvency Services

Question:

Liquidators have different views regarding proxies and representatives of company creditors at creditors meetings. What is the correct procedure?

Legislation:

The legislation which applies is:

• The Companies Act 1993, Section 314
• The Fifth Schedule to the Companies Act 1993, Clause 6 and Clause 9
• The Companies Act 1993 Liquidation Regulations 1994, Regulations 23 and 27.

Answer:

An examination of the legislation shows that a company may be represented at a meeting of creditors in two separate ways (refer the legislation for full details): -

Formally by proxy (in writing):

1. • The company may appoint a proxy.
   • The proxy may be any person including the liquidator or if there is no liquidator, the chairperson of a meeting.
   • Where the person appointed as a proxy is proposed as liquidator, then the person holding the proxy may use the proxy to vote in favour of himself or herself as liquidator, if it is not inconsistent with the terms of the proxy to do so.
     
     

By representation:

1. • A body corporate [company] which is a creditor may appoint a representative to attend a meeting of creditors on its behalf.
   • The chairman of the meeting (in most cases the liquidator) is entitled to ask and receive proof that the company has appointed the representative.
   • If satisfactory proof is not forthcoming then if the person present could show that they were connected with the company most chairpersons would allow that person to remain at the meeting but would not let them exercise a vote.

Summary:

A Company is entitled to attend a meeting of creditors: -

• By appointing a proxy
• By appointing a representative

We enclose a suitable letter which could be used by a representative who attends several meetings. It is to be noted that Clause 19 of the Companies Act 1955 Liquidation Regulations 1994 provides as follows: -

A person shall not be entitled to vote as a creditor unless, by the time the vote has been taken the creditor has filed a liquidation claim form.

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

Question:

How can a liquidator be removed from office?

Legislation:

The legislation which applies is the Companies Act 1993.

Introduction

Apart from the normal procedures, the office of liquidator also becomes vacant if the person holding office dies or becomes disqualified under Section 280 of the Companies Act 1993. This is the section which deals with qualifications of liquidators. For example, the office would become vacant if the liquidator were to be made bankrupt or were to become subject to a compulsory treatment order under the Mental Health Act. In normal circumstances however, a liquidator is removed from office in one of the four ways: -

1.Removed by Resignation

A person may resign from the office of liquidator by appointing another such person as his or her successor in sending or delivering notice in writing of the appointment of his or her successor to the Registrar for resignation.
Reference: Companies Act 1993, Section 283(2)

2.Removal by a Liquidation Committee

The Act provides that the liquidator must have regard to the views of any Liquidation Committee given in writing to the liquidator.
Reference: Companies Act 1993, Section 258(1)(d)

3.Removal by the Creditors

Creditors meeting convened by liquidator at request of creditors

The liquidator has a duty to summon a meeting of creditors forthwith when required to do so by notice in writing given by creditors to whom is owed not less than 10% of the total amount owed to all creditors of the company.

Creditors meeting convened by Liquidation Committee

The Liquidation Committee can also call a meeting of creditors.

General

The meeting must be called in accordance with the 5th Schedule of the Act, the 5th Schedule of the Act provides for postal votes. It therefore follows that the notice of meeting must stage the purpose for which the meeting is being called. Namely, to replace the liquidator by the appointment of some other person as liquidator. The creditors must also have the opportunity to vote on this matter by postal voting.

Reference: Companies Act 1993, Section 315(2)(c)

4.Removal of the Liquidator by the Court

A liquidator has an obligation to comply with his duties. The Act provides that a creditor may make application to a Court in relation to a failure to comply. Notice of the failure to comply must be served on the liquidator not less than five working days before the date of application. At the date of application there must be a continuing failure to comply.

The Court has power to remove a liquidator from office only if the Court has made a compliance order and the person against whom it is made has failed to comply with that order, however, if it is shown to the satisfaction of a Court that a person is unfit to act as liquidator by reason of persistent failures to comply, the Court must make in relation to that person, a prohibition order for a period not exceeding five years. The person to whom a prohibition order applies must not act as a liquidator in a current or other liquidation or act as a receiver in a current or other receivership.

Reference: Companies Act 1993, Section 286

The meaning of failure to comply is defined in Section 285. Failure to comply means a failure of a liquidator to comply with a relevant duty arising under the Companies Act or rule of Law or rules of Court, etc.

Reference: Companies Act 1993, Section 285

OVERVIEW

In practice where creditors wish to replace a liquidator they should discuss the matter with the liquidator. In theory, a liquidator should derive little satisfaction in remaining in office when he/she is not wanted. Hopefully, the liquidator will appreciate the position of a new liquidator. If the liquidator will not resign then one of the other options will have to be used. An application to the Court is difficult and should only be used as a last resort.

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

McDonald Vague provides a specialist service conducting solvent liquidations. Companies are often put into liquidation this way when a business has been either sold, closed down or reorganised for tax and/or management purposes.

Capital gains on company sales

Under current New Zealand law, companies that have sold their business at a capital profit can then, on liquidation, distribute that profit to their shareholders tax free (arm's length transactions only) under Section CD26 of the Income Tax Act 2007.

There is often debate as to whether a formal liquidation process is necessary to distribute tax free capital profits, or whether it is sufficient to simply have the company struck off the Companies Register. When large sums of money are involved, we believe it is prudent to carry out a formal liquidation that cannot subsequently be challenged by potential creditors. Even though the company may have been removed from the register in a strike off, this will not prevent acrimonious third parties from having the company reinstated at a later date. A formal liquidation ensures peace of mind.

Reorganisation of company affairs

McDonald Vague is particularly experienced in reorganisation of companies, especially those with a foreign parent. Amalgamations are commonplace and old entities no longer required are absorbed.

Company "deaths"

For a variety of reasons, a company will often reach the end of its useful life. Whilst shareholders may do nothing (annual returns not filed) and wait for the Registrar of Companies to remove the company from the register, shareholders in some circumstances will want some finality to the process. Although the company may have paid all known debts, the shareholders can rest assured that once the formal liquidation process has been completed they are highly unlikely to be called upon for anything that may arise in the future.

Processes involved

The directors of a company must first make and file resolutions as to solvency before the liquidation can commence. The shareholders then pass a resolution to appoint a liquidator. The liquidator deals with any liabilities of the company and distributes surplus assets to the shareholders in accordance with their rights.

With an insolvent company the liquidator realises the assets and distributes the cash in accordance with the various priorities. With a solvent company it is possible to make an "in specie" distribution. That is, the assets themselves can be distributed to the shareholders in proportion to their shareholding.

Solvent liquidations we have undertaken

McDonald Vague has performed numerous solvent liquidations. Some of the many assignments we have undertaken have included:-

• a group of property management companies (no longer trading) with a parent company domiciled in Hong Kong
• a pharmaceutical supplies company where the business was sold for capital profit
• the reorganisation of a group of insurance and financial asset management companies
• a forestry development winding up
• a New Zealand advertising agency sold to a major international group but requiring a lengthy liquidation to allow for transfer of intellectual property
• an investment company (no longer trading) with a US parent company
• an in-store promotions company where the business was sold for capital gain
• a Canadian owned manufacturer and distributor of beverages
• a technology investment company
• a retailer and distributor of industrial and other chemicals
• a company specialising in the development of a prominent software package for accountants where the intellectual property was sold for capital gain

Please contact Peri Finnigan on 09 303 9519 for confidential, no obligation advice on this area.

DISCLAIMER

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

McDonald Vague are solution providers for businesses at risk, and specialists in business recovery. We often deal with liquidations where the director has continued to trade an insolvent company. In many of those cases, prior to liquidation the director/shareholder has increased the mortgage on their house and advanced further capital for a short term cash flow fix without taking out any security for that advance. If funds are advanced to the company, the director/shareholder should seek legal advice on obtaining security and registering that security on the Personal Property Securities Register prior to the advance.

CONCERNED ABOUT YOUR PERSONAL LIABILITY?
TALK TO US IN CONFIDENCE

• If you are concerned your business maybe be trading while insolvent;
• or are worried about you personal liabilities as a director if your company goes into liquidation,
• Contact us now for free, confidential, expert advice.
• The sooner you contact us the more options are open to you.

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Iain McLennan

Director

Phone: (09) 303 9512

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A director must not allow the company to enter into any transaction which could create substantial risk of serious loss to creditors. The penalties for doing so are severe and include making the director personally liable for the debts of the company without any limitation of personal liability. Directors can avoid that personal liability by acting promptly and not increasing the exposure to creditors. Directors may also face prosecution by the Inland Revenue Department ("IRD") for failing to pay over PAYE deductions or GST. The IRD is taking an increasingly tough stance in this area, and bringing numerous prosecutions. Examples of such prosecutions can be found in media releases on the IRD website.

A company director has a responsibility to seek specialist advice if the company fails to meet either of the two limbs of the solvency test. To satisfy the balance sheet test, the value of the company's assets must be greater than the value of its liabilities, including contingent liabilities. The primary focus of the liquidity test is that the company is able to pay its debts as they become due. It is essential to recognise that the company must meet both limbs of the test, not just one.

Often a business facing insolvency can be restructured. In some cases a Creditor Compromise can be entered into, pursuant to Part 14 of the Companies Act 1993. Please see our article Company creditor compromises - worthwhile or not? on this subject.

If a company can not pay debts when they fall due this should trigger action by the directors. A director should not wait for a statutory demand, a winding-up application or for a secured creditor to appoint a receiver.

We deal regularly with companies that not only struggle to pay debts but also have negative net asset positions. Those companies may have suffered from a bad debtor, a downturn in the economy, competition, or lack of capital. Often liquidation is the only option for such companies. Placing a company in liquidation is as simple as liquidators consenting to act and the shareholders signing a resolution. For more information on the liquidation process, please visit our Liquidations page.

We find that businesses subject to risk have common warning signs such as the loss of a key account, unrealistic assets on the balance sheet, increase in staff turnover, slow stock turn, rising debts and slowing growth, price cutting, extended credit terms and large bad debts.

These symptoms do not necessarily mean that a business is on its last legs. If any of these signs are caught early enough, they can be turned around so that the business can end up stronger in the long run.

The director should be wary that he or she will be held accountable if proper action is not taken at the date they knew or should have known that the company was insolvent. It is our recommendation that advice is sought earlier rather than later to reduce the financial culpability of the director for trading recklessly and the risk of financial loss to creditors.

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