Insolvency and company liquidations

Insolvency and company liquidations

Background law

Corporate/company insolvency

An insolvent company (one that can’t meet its obligations on time) can be subject to a receivership and/or liquidation process.

Receivership

A receiver can be appointed to an insolvent company if a creditor (someone to whom the company owes money) has the contractual right to make the appointment in the event of default or potential default. It is common for such a right to be included in commercial contracts.

Once appointed, the receiver’s role is to act for the benefit of the appointer as controlling agent of the company. The receiver will take control of the assets and income of the company and manage those assets (including by selling them) for the benefit of the appointing creditor. The receiver’s duties to the appointing creditor are greater than any owed to the company.

Liquidation

A liquidation is the final “winding up” of a company; the ending of the company by the final sale of its assets to repay creditors (to the extent that is possible), with the remainder (if any) paid to shareholders, and the removal of the company from the registry of the Companies Office.

A voluntary liquidation is commenced by the company’s shareholders passing a resolution. A compulsory liquidation is commenced by the Court making an order for liquidation. The liquidator has total control of a company on the commencement of its liquidation.

The Companies Act 1993 determines the priority of payments to creditors made by company liquidators. Creditors remaining unpaid at the end of the liquidation process do not get paid. It is unusual for unsecured creditors to be paid in a company’s liquidation.

Compromises

There is a formal voluntary administration procedure in the Companies Act 1993 that can be employed as an alternative to putting a company into liquidation. This basically involves the company’s creditors agreeing to write off a large part of their debts to allow the company to trade on under an administrator. This procedure requires the agreement of the company’s creditors.

A Court-approved compromise of creditors of the company can also be made binding on the company or a liquidator, but as the name implies the compromise arrangements must be satisfactory to both creditors and the Court.

Personal insolvency

Individuals who are insolvent and cannot make satisfactory arrangements with their creditors can (on the application of a creditor or the individual him or herself) be put into bankruptcy by the Court, under the Insolvency Act 1967.

In bankruptcy (which normally lasts 3 years), the financial affairs of the bankrupt person are managed by an Official Assignee. Any money earned by the bankrupt over the 3 year period over a certain threshold for living costs is supposed to be paid to creditors by the Official Assignee. The bankrupt is excused from the debts he or she had at the start of the bankruptcy, at the end of the 3 year period if the rules have been followed.

Bankruptcy can have a significant ongoing effect on an individual, however, because bankruptcy is a matter of public record.

A bankrupt is not permitted to be a company director, manage a business, borrow money without advising the lender of his or her bankrupt status, or go overseas (without the Official Assignee’s permission) for the period of the bankruptcy.

A Court-approved compromise of the insolvent's creditors can avoid bankruptcy, but again as the name implies the compromise arrangements must be satisfactory to both creditors and the Court.

Frequently encountered issues

Whether liquidators can use void and voidable transaction provisions in legislation to invalidate earlier insolvent transactions, thereby claiming back to the insolvent company or individual money paid earlier to creditors. A transaction with a company is “void” according to the Companies Act 1993 if made within 6 months before the company’s liquidation commencement date (and “voidable”, at the option of the liquidator, if made within 2 years before that date). A transaction with a bankrupt person is “void” if made within 6 months before the date of the adjudication of bankruptcy.

Legal competition over property and priorities of rights in property owned or possessed by the insolvent company or individual by or between people who want to be paid by the insolvent company or individual.

Whether terms of arrangements and bankruptcy or liquidation have been observed or breached.

The extent of powers of a receiver or liquidator, Official Assignee or other office holder.

The extent of the obligations of directors in the circumstances of insolvent companies.

Issues about access to relevant documents the the power to interview.

What you should provide when instructing us

A narrative of what has happened, your situation, the relevant parties, your point of view, and your objectives;

Copies of any relevant contracts and correspondence;

Details and copies of any relevant interests that have been registered on any register (the land register, the Personal Property Securities Register, the Intellectual Property Register); and

Copies of any documents that have been filed at Court to date.

About Us

Peter McCutcheon is a Barrister and Solicitor, specialising in commercial and relationship property litigation. Peter has an economics degree, a post graduate banking diploma (with distinction), and a law degree from the University of Auckland (with honours). Peter's more general litigation practice areas are commercial litigation, relationship property litigation, shareholders' disputes, insolvency and company liquidations, caveat disputes, estate disputes and criminal law. Peter is committed to providing excellent legal services to companies and people who understand value.