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Article:

Navigating Business Liquidation

08 April 2020

As you will be aware the novel coronavirus (COVID-19) pandemic is affecting all types of businesses, large and small, especially now that New Zealand is on Alert Level 4. During these unprecedented times, directors and business owners need to act quickly and urgently based on information known at the time. Forecasting and reforecasting must be done. A business’ financial situation and viability should be assessed and reassessed regularly, as events develop. Decisive action will need to be taken including applying for government assistance like wage subsidies and tax relief, bank support, landlord or other stakeholder support, reducing overheads and staff hours, and / or making staff redundant to right-size the business for the new environment.  

Due to the nature of the crisis, however, some businesses will be experiencing more distress than others and some will not be viable. If, after taking necessary action and considering restructuring tools available, directors determine that the business is no longer viable, liquidation may be an appropriate option.  

If your business needs to be placed into liquidation you will likely need some help navigating this situation. While this is not the best outcome, it may be necessary. Our BDO Auckland accountants and business advisers have laid out the steps that need to be taken below, as well as some tips to help you best prepare for business liquidation.  

How does liquidation occur?

A liquidator is normally appointed by the shareholders or the High Court.  A shareholder appointment is governed by the Companies Act and the company’s constitution.  Usually it requires the consent of 75% of the shareholders effected by a shareholder special resolution, which can be completed quickly. Court appointments occur following an application to Court, usually by a creditor. The process to have a liquidator appoint by Court can take weeks or months.  

A liquidation can be solvent (where there are sufficient assets to meet all liabilities) or insolvent (where there is a deficit to creditors).  

The liquidator’s role and how you can help 

Once a liquidator has been appointed, directors' powers cease and control of the business moves from directors to the liquidator. At this point, no party other than the liquidator can bind the company or enter a contract. While the Directors’ powers cease, some duties continue including providing assistance to the liquidator, for example provide details of the property (including records) and access to those within their control.  Directors can assist the liquidators by providing this assistance to ensure an efficient process to minimise cost and maximise recoveries to reduce losses to creditors. 

The liquidator’s primary role is to realise assets for the benefit of creditors and, if solvent, the shareholders.  That may involve trading the business for a short period, but usually a liquidator will stop trading the business, let employees go, and sell any assets for the benefit of creditors.  A liquidator will also investigate the affairs of the company including any voidable transactions or other avenues of recovery for the benefit of creditors.    

Paying out funds from the realisation of assets 

There is an order in which liquidators pay out any funds from the realisation of assets during liquidation. That is set out in the seventh schedule of the Companies Act.  While this list is quite extensive, in general terms a simplified order of distribution is the costs of the liquidation, then preferential creditors  and secured creditors (depending on the type of assets sold), then unsecured creditors.   

The most common preferential creditors are employees first then the IRD.  . Net realisation from accounts receivable and stock are to be distributed to these creditors ahead of secured creditors. 

Secured parties can either have security over a specific asset (for example stock supplied or equipment) or a general security over the company.  The liquidator should notify secured creditors in order to deal with secured property.  

Once all assets have been realised and distributed the liquidation will end and a final report will be issued.  After then the company will be removed from the Companies Register. 

Get trusted advice for challenging times 

Every business is different, so it is best to take tailored advice from a trusted financial adviser. BDO NZ provides cost-effective corporate and personal business insolvency services that aim to maximise returns for stakeholders. Professional support and trustworthy advice are key to surviving these challenging times. Contact us today.