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Liquidation

When all options have been exhausted we help you bring business activities to a close.

What is Liquidation?

Company liquidation brings the company’s life to an end. It occurs because there are no other options for its survival.

During its life, the company’s activities have become woven into the fabric of both shareholders and directors, as well as the suppliers who have provided goods and services to the company.

Liquidation begins the process of bringing those activities to a close.

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When does a company go into Liquidation?

Put simply, a company goes into liquidation when it cannot pay its debts. The company has run out of cash, and while there may be further cash flow coming in and assets to be sold, the value of its debt exceeds this. A decision must be made to formally place a company into liquidation. While this decision is most commonly made by a director, there are three other ways a company may be placed into liquidation.

Liquidation methods

When all other options are exhausted

The liquidation of a company is a last resort after all options have been explored. Before liquidation, alternatives like Voluntary Administration should be considered as a way to find a way through difficult times.

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Appointing a liquidator

Appointing a liquidator is a crucial step in the company liquidation process, where a professional insolvency practitioner takes charge of winding up affairs, selling assets, and distributing funds to creditors and shareholders.

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Consequence of a liquidation

Liquidation impacts only the company – a separate legal entity from its shareholders and directors. Shareholders and directors may face liability only as a consequence of liquidation, not because of it.

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Ways a liquidation commences

By the Shareholders
resolving that the company's life should end

By the High Court
on the application of an entitled party, such as a creditor

By the Directors
if the constitution of the company provides for it

By the Creditors
through the Voluntary Administration programme

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The role of the liquidator

What is a liquidator responsible for?

The liquidator’s job is to gather together all the property of the company and to liquidate that property for the benefit of the creditors – this is often called realising the property interests of the company. This may not be an immediate process – there may be contracts to complete or stock to sell. The liquidator will ensure the best price is obtained.

The liquidator must also consider if any breaches of the law have taken place and whether action may be required. Once all activities are completed, the liquidator will file a report with the Registrar of Companies which brings the liquidation to an end.

Finding the right liquidator

Liquidation must only be undertaken by a registered insolvency practitioner. The Registrar of Companies maintains a list of all insolvency practitioners in New Zealand.

Bryan Williams is a registered insolvency practitioner (Registration Number IP61) and liquidation is an area of expertise for BWA Insolvency.

When all other options are exhausted

Liquidation is terminal for the company. Liquidation often comes after many months of misery and anguish as a result of the company not being able to perform as the directors hoped it would.

It is a last resort measure and should not be considered until all other options have been explored. Voluntary Administration is an alternative to liquidation and should be considered before liquidation occurs.

Appointing a liquidator

Liquidation starts the minute a liquidator is appointed by whoever has decided the life of the company must end. The person that is going to be appointed to be the liquidator must agree in writing before the appointment is made – this is called providing consent to act.

From the time the appointed liquidator is responsible for the affairs of the company. The directors remain as part of the company but have no authority. The liquidator will work in the best interests of creditors, doing whatever is necessary to ensure maximum financial recovery.

As a liquidator is personally responsible for any actions taken going forward, great care is taken to ensure no further loss within an operation. This could mean that a business is immediately shut down or reconsolidated to shed the loss-making parts in preparation for sale. The first few days are a critical time and can require the appointer and appointee to work in close quarters together.

Consequence of liquidation

Who is liquidated? Liquidation is a process that happens only to a company. The company is a legal entity, separate to its shareholders and directors. There may be a situation where shareholders and directors are liable to creditor claims, but if this is so, it will only be as a consequence of liquidation – not because of liquidation.

FAQs

Liquidation
No – the law does not make a shareholder liable for the costs of the liquidation. However, liability may occur for some other reason – such as taking money from the company. There may also be some circumstances in which the shareholders agree to meet some of the costs of the liquidation, but this will be an understanding reached between the appointing shareholders and the liquidator.
No, not automatically. If a director has committed breaches, however, the liquidator may require the director to cover the costs of these.
The liquidator has control of the company and has a legal entitlement to deduct reasonable costs and fees from the sale value of any of the company’s property. However, the liquidator does not have any right in any property that is pledged to a secured creditor.
An unsecured creditor is a person who has provided goods or services to the company which has not been paid for, and they have no right in the property of the company.
A preferred creditor is also an unsecured creditor, but they have some rights in the property ahead of other creditors. This is not a direct right and will be administered by the liquidator. Typical preferred creditors are employees and Inland Revenue. A preferred creditor’s rights are likely to come after the rights of the liquidator to meet costs and fees of the liquidation.
A contract of guarantee sits outside the insolvent circumstance. The insolvency practitioner has no involvement in this matter because the guarantor has effectively said that they would perform the obligation of the company if the company cannot. It is worthwhile to note that a guarantor is protected in Voluntary Administration.
This is entirely dependent upon the issues that the liquidator has to deal with. For simple liquidations, the process can be completed within three months, but in more complicated circumstances it may take years to finalise all matters.
No – not automatically. However, Inland Revenue does have a law that can make another taxpayer liable for the taxpaying obligations of the company. Normally actions of this kind are initiated by Inland Revenue when large sums are involved or when misbehaviour has occurred.
No – not automatically. However, recent law changes suggest liquidators are expected to scrutinise more carefully the activity of the company’s directors. Note that if a director appoints an Administrator and starts the Voluntary Administration process, the directors are partially protected for acting in that responsible manner.
That depends on the arrangements that have been established between the creditor and the company. If the supplier of goods or services has made supply on open terms (supplied without defining any particular rights) then no. However, more and more, suppliers of goods and services are protecting their interests by providing for a right in property (often the very property they have supplied) to recover their losses.