Liquidations and Receiverships

Liquidations and Receiverships Legal Guide 2 0 1 5 NEW PLYMOUTH 1 Dawson Street Private Bag 2013 Phone (06) 768-3700 Fax (06) 768-3701 INGLEWOOD 92 Rata Street PO Box 28 Phone (06) 756-8118 Fax (06) 768-3701 WELLINGTON Level 4, City Chambers 142 Featherston Street Phone (04) 282-0899 www.thelawyers.co.nz Find us on Facebook LinkedIn Twitter

Contents Introduction... 1 Statutory demand... 1 Liquidation... 1 Voluntary liquidation... 1 Court-ordered liquidation... 2 Who can be appointed as liquidator?... 2 Liquidator s duties... 2 Liquidator s powers... 2 How will liquidation affect you?... 3 Priority of asset distribution... 3 Receivership... 4 Receivers Powers... 4 Receivers Duties... 4 Receivers powers under liquidation... 5 How could receivership affect you?... 5 Contacts... 6 Offices of the New Zealand Insolvency and Trustee Services... 6 Offices of the New Zealand Companies Office... 6 How we can help you... 6

Introduction Depending on the structure of a particular business, involuntary closure can take place in different ways, for companies, this process is typically by receivership or liquidation. Liquidation primarily occurs as a result of efforts to repay unsecured creditors who do not hold any security in a company s assets, the benefit is therefore for the unsecured creditors. Receivership is often initiated by a secured creditor to recover their financial interest in a company s assets, the benefit remains with the secured creditor who made the appointment of a receiver. Statutory demand A statutory demand is a demand made by a creditor in respect of a debt owing by a company made in accordance with section 289 of the Companies Act 1993 ( the Companies Act ). Statutory demands should be used to prove insolvency of a company rather than a means to collecting money owed. It is not necessary for a judgment to be obtained before service of a statutory demand. However, the debt owed must be currently due and presently payable as at the date on which the statutory demand is served. If a statutory demand has been served on you, then you have a number of options, including paying the debt or entering into a compromise. If a company is served a statutory demand, a director should seek immediate legal advice. A failure to pay or settle a statutory demand serves as proof of a company s insolvency. It is an offence for a director to continue trading that company whilst it is insolvent. Any conduct which causes loss to the company, creditors and others is actionable under the provisions of the Companies Act 1993. Liquidation The purpose of creating a legal entity through the Companies Act is to permit the engagement of business activities that entail risk without exposing shareholders to greater liability than the amount of their investment. This privilege is subject to the condition that the company remains solvent, (i.e. it is able to pay its debts). When a company becomes unable to pay debts, certain consequences are triggered. The main purpose of liquidation proceedings is the collection and distribution of the assets among unsecured creditors after payment of preferential debts Liquidation proceedings are immediate and serious. Trading companies will usually be closed down. From the date the liquidator is appointed he/she takes custody and control of all the company s unsecured assets and assists secured creditors where necessary. When the liquidation is complete the company is struck off (removed from) the Register of Companies. Voluntary liquidation When shareholders (that are entitled to vote) place their company into voluntary liquidation, they pass a special resolution (approved by at least a 75% majority of those shareholders entitled to vote) appointing a liquidator to wind up the company s affairs. This usually occurs after the company directors advise the relevant shareholders that this is a prudent course of action. 1

Court-ordered liquidation G O V E T T Q U I L L I A M G U I D E If a statutory demand is not settled then the entity that served the statutory demand is likely to apply to the High Court for the debtor company to be put into liquidation. A creditor or group of creditors, a majority of the company s directors, or the Registrar of Companies may take the step of applying to the High Court to place a company into liquidation. The Court will consider submissions made by the creditor/s and the company about non-payment of debts and make a determination. Applications can be brought on a number of grounds, the most common being where the company is not in a position to pay the debt or enter into an arrangement to pay. In such a circumstance the Court may place the company into liquidation. The Court can either appoint a private liquidator or the Official Assignee as liquidator. Who can be appointed as liquidator? The necessary qualifications of liquidators are set out in section 280 of the Companies Act. However, typically a private sector liquidator is appointed. This is usually in the form of a chartered accountant or specialist lawyer who has experience in the investigation of a company s financial affairs and the sale of company assets and interests for the benefit of company creditors. Where the company is put into liquidation by Court Order the Official Assignee (The Official Assignee works for the Insolvency and Trustee Service and their sole function is to act fairly and independently in the administration of the company s affairs) may be appointed liquidator. Liquidator s duties The effect of liquidation proceedings commencing is that the liquidator has control and custody of the company's assets. The principal duty of the liquidator is to take possession of, protect, realise and distribute the assets of the company (or the proceeds of the realisation of those assets) to the company's creditors in a reasonable and efficient manner. Liquidator s powers The liquidator has the powers conferred by the Companies Act, and also those powers necessary to carry out the functions and duties of the company office. These include powers to: Commence, continue, discontinue, and defend legal proceedings; Obtain documents; Require persons connected to the company to attend upon him/her to assist in liquidation; Pay the reasonable travelling and other expenses of persons called to assist; Carry on the business of the company to the extent necessary for its liquidation; Compromise claims; Sell or otherwise dispose of company property; Act in the name of the company; Borrow money on the security of the company's assets; Void insolvent transactions entered into within a specified period; Take out letters of administration to a deceased shareholder; and Employ an agent to do anything that the liquidator is unable to do. A liquidator is required to produce regular reports throughout the liquidation process. These reports are sent to every known creditor and shareholder as well as to the Company Registrar. 2

How will liquidation affect you? G O V E T T Q U I L L I A M G U I D E Employees If you are an employee your employer going into liquidation will likely have serious implications for you. Ultimately the company s business will be dealt with by the liquidator who will handle the business and its assets for the benefit of the company s creditors. If the liquidator decides against continued trading, your employment will be terminated and you will claim any outstanding wages, salary, holiday pay and/or redundancy as a debt in the liquidation proceedings. Guarantors A guarantor is someone who has agreed to repay a debt that another person incurred if that person defaults in repayment. If you are a guarantor a creditor may seek to recover what is owed from you.. If you are a guarantor it is thoroughly recommended you seek professional advice. Directors If you are a director you will remain in office after the commencement of the liquidation process, but with limited powers. Directors are expected to fully co-operate with the liquidator, including providing the liquidator with information regarding the business, accounts and affairs of the company in order to enable the affairs of the company to be fairly and equitably resolved. A director will likely include anyone who holds the position as director and any person who acts in that capacity, whether they are officially appointed as a director or not. Creditors If you are a secured creditor you retain the ability to enforce securities against the company in default. Liquidation proceedings are typically treated as default, this allows secured creditors to uplift and sell company assets over which their security is placed. Once you sell the company assets to which the security is concerned, you become an unsecured creditor for any shortfall. If there is a surplus you are required to pay that to the liquidator for the benefit of other creditors. Once a company is in liquidation, unsecured creditors cannot start or continue any legal proceedings against the company nor enforce rights against any property of the company without permission of the Courts or liquidator. Priority of asset distribution The order in which company assets are distributed is dictated by statute and strictly enforced by the courts. Schedule 7 of the Companies Act sets out the priority of payments to preferential creditors. Secured creditors have the first right to the assets and are usually paid out before any distribution occurs. After these payments are made, any remaining debts are paid in the following order of priority: The costs, charges and expenses involved in the liquidation; All wages and salaries payable to employees, including holiday pay; Unsecured creditors; Any interest that is attached to any debt (but only if the debt became due before the liquidation process began); and, Any debt owed to shareholders of the company, such as dividends or profits. 3

Receivership Receivership describes a process by which a receiver is appointed either under a deed or agreement, or by the High Court, for the purpose of realising assets or managing the business of a company for the benefit of secured creditors. A receiver is usually appointed under the Receiverships Act 1993 ( the Receiverships Act ), and as a condition of the original finance condition, to manage the sale of the secured asset to repay the debt owed to them. A receiver is typically a specialist accountant or lawyer chosen by a secured creditor from the private sector. Unsecured assets are not affected by the receivership and remain with the company. Secured creditors can also apply for court-ordered receiverships. The company s assets over which security is held, can be critical to the operation of the company. Continued trading without them is often not possible, in such circumstances liquidation proceedings will usually commence and the company s operations will cease permanently. If preferential claims exist, such as owed to Inland Revenue or employee wages/salaries, the receiver must prioritise the payment of those debts before the claims of secured creditors. A company does not have to be placed into receivership before it can be placed into liquidation. A receiver can also be appointed before or after liquidation proceedings have commenced. It is possible for two or more receivers to be appointed to act either jointly or severally, unless a deed or agreement states otherwise. Receivers Powers The person over whose property a receiver is appointed is called the grantor. The grantor can be either a corporate or unincorporated entity, but must be a party to the agreement. The receiver has any powers set out in the deed or agreement that govern their appointment, as well as those contained within the Receiverships Act. These include the powers to: Recover income of the receivership property; Manage, repair, and maintain the property; Insure the property; Inspect documents that relate to the property; Change the registered office or address for service of the grantor; Execute all relevant documents in the name of and on behalf of the grantor; and Decide matters regarding shares. These powers offer the basic effect of allowing the receiver to carry on the grantor s business. A receiver is also required to keep money related to the receivership separate from those funds that are received in the course of the receivership. A receiver does not have the power of sale, however the Receiverships Act does regulate the process of an independent power of sale. Receivers Duties A receiver is required to carry out his duties with the interests of the company, and its general body of creditors in mind. In the exercise of powers of sale he must act in good faith with due care, skill and judgment in obtaining the best results reasonably possible in the circumstances. 4

The duties owed by a receiver do not compel him/her to adopt any particular course of action, by selling either in whole or in part company property, nor by carrying on the business of the company, nor by exercising any other powers and discretions vested in him/her. But a receiver commits a breach of their duty if he/she abuses their power by exercising them for any purpose other than the benefit of the general body of creditors. Receivers powers under liquidation Section 31 of the Receiverships Act and section 248 of the Companies Act consider the powers of a receiver upon liquidation or bankruptcy. Read together it is suggested that after liquidation proceedings have commenced the receiver has the authority to continue exercising all the powers of a receiver over the secured property, unless a Court orders otherwise. However, the receiver cannot act as the company s agent without prior approval of the Court or the liquidator. How could receivership affect you? Employees If you are an employee you should immediately get in touch with the receiver. If you are owed salary or wages you should inform him/her of this and lodge a claim in the receivership. It is possible that the entity will be dis-established and this may well affect your employment status. If you are unsure about what to do, you should seek legal advice. Creditors If you are a creditor you will no doubt be concerned to verify the position you have with the debtor, as compared to other creditors. This is because, generally you will want the first right to sell the debtor s asset, or exclusive rights to sell a particular asset. If you have security over personal property, the Personal Property Securities Act 1999 ( the PPSA ) governs your rights to that security as against other creditors. In order to effectively secure your interest in that personal property you should register that interest on the Personal Property Securities Register ( the PPSR ). Generally speaking, the basic rule is that the first creditor to register their security on the PPSR will have first priority. The PPSR is a publicly accessible database that potential creditors and suppliers can check to instantly assess their ability to achieve effective security against a debtor, (i.e. who else has registered interests in what property). There are four requirements of effective security on the PPSR: You need a security agreement with the debtor that offers a description of the property you are taking security over. You need to provide the debtor with value. Once you give the debtor something of value the debtors obligation to pay you back legally exist. The debtor needs to have rights of possession in the property you have provided. The PPSA explains that a debtor has rights in goods leased to them, consigned to them or sold to them under a conditional sale agreement. Such rights arise the moment the debtor takes possession of the property. You must register a 'financing statement' on the PPSR. 5

Contacts Offices of the New Zealand Insolvency and Trustee Services Phone: 0508 INSOLVENCY (0508 467-658) Post: Insolvency and Trustee Service, Private Bag 4714, Christchurch 8140 Website: http://www.insolvency.govt.nz Offices of the New Zealand Companies Office Phone: 0508 COMPANIES (0508 266 726) Post: Companies Office, Northern Business Centre, Private Bag 92061, Victoria Street West, Auckland 1142 Website: http://www.business.govt.nz How we can help you Govett Quilliam is Taranaki s largest law firm. We have the people, the experience and the resources to assist you, whatever your case may be. Our Insolvency team has experience in assisting creditors to apply for liquidation or receivership and advising liquidators, receivers and creditors on issues arising during liquidations or receivership including enforcing secured debts, advising on voidable transactions and other issues. We have prepared this guide as a guideline to liquidations and receiverships. For further information or advice please contact Troy Wano and Lisa Wansbrough: Troy Wano Associate Lisa Wansbrough Lawyer DDI: (06) 768-3710 DDI: (06) 768-3708 Troy.Wano@gqlaw.co.nz Lisa.Wansbrough@gqlaw.co.nz Please call our office if you would like further information on any guides prepared by our firm. Copies are also available on our website. Asset Protection and Residential Care Subsidies Business Grants and Assistance Buying or Setting Up a Small Business Charities Companies Act 1993 Consumer Guarantees Act 1993 Credit (Repossession) Act 1997 De Facto Property Rights Employment Enduring Powers of Attorney Fair Trading Act 1986 Family Trusts Flexible Working Arrangements Franchising Health and Safety in Employment House Buying and Selling Immigration Insolvency and Bankruptcy Intellectual Property and Copyright Law Liquidations and Receiverships Securing Money Lent over Personal Property Subdivisions Traffic Offences and Breath Testing Procedures Wills and Estate Administration All information in this guide is the best of our knowledge true and accurate. No liability is assumed by Govett Quilliam or its partners, or publishers, for any losses suffered by any person relying directly or indirectly upon this guide. It is recommended that clients should consult a representative of the firm before acting upon the information contained herein. 6