Understanding the Liquidation process and why creditors often feel frustrated

When a company enters liquidation, creditors often feel blindsided, frustrated, and unsure of what comes next. Liquidators are seen as the bearers of bad news, yet their role is far more complex—and far more regulated—than many realise. This article explains what a Liquidator actually does, how the liquidation process affects creditors, why funds must be distributed in a strict legal order, and the professional standards every Registered Insolvency Practitioner in New Zealand must meet.

To many, the role of a Liquidator is as misunderstood as that of a repo agent or a parking warden. While some may see Liquidators as the “corporate undertakers” of the business world, swooping in at the end of a company’s life, their responsibilities are far more nuanced and, dare we say, necessary. Far from asset-snatchers, Liquidators are tasked with bringing order to financial chaos, ensuring that the company’s final chapter is managed with diligence, adherence to the law and a steady hand, all while navigating creditor expectations.

How liquidation affects creditors and why tensions arise

It’s no wonder that creditors who are left unpaid when a company enters liquidation view liquidators through a particularly harsh lens. From the creditors’ perspective, they have provided value to the company, and instead of being paid on time and in full, they receive written advice from the Liquidator that only brings disappointment. It is not surprising that anger results.

To aggravate the situation, the creditor is served up a jargon-filled report that appears to say little more than there is no money! No doubt that the report will be compliant and meet best practice standards, but with cold facts and little sympathy, it basically spells out that the chances of getting paid are slim to none.

News that a company has gone into liquidation usually comes as a surprise and can cause real financial hardship for those owed money. The creditor may have placed their trust in repeated promises from the company’s Director and kept supplying goods or services, even when that uneasy feeling suggested something was wrong. What makes matters worse is that, when the Liquidator’s Report finally arrives, it often shows that those assurances were made at a time when there was little to no chance of being paid. In the end, the creditor is left feeling deceived—and unfortunately, that feeling is usually justified.

This makes you wonder what the liquidator’s job really is. Are they there to take the heat, acting as the face of the liquidation and trying to calm angry creditors into acceptance? It can certainly feel that way.

Alongside these feelings toward the liquidator, questions about the role of Directors often arise. Have they simply moved on without regard for the mess left behind? While it may seem like that, it is unlikely to be so. The more likely situation is that the Director, who is also often a major shareholder, has battled insolvency for as long as possible but finally had to concede to overwhelming pressure. While it might be hard to think nice thoughts at this juncture, a broader picture should consider the trying times of the past few years and the efforts that may have gone unseen.

Understanding the role of a Liquidator in New Zealand

Liquidators are brought in to sell the property of a company that is not charged by a secured creditor, distribute the net proceeds in the order prescribed, and finalise its affairs so that it can be removed from the Register of Companies. It is a complex role that is often carried out in unpleasant circumstances due to broken promises or unmet expectations. A Registered Insolvency Practitioner will conduct the activity, and, like any other service provider, expect to be paid reasonable fees for their work.

But here’s where things get tricky: in the world of insolvency, there’s almost never enough money to go around. 

The funds that are available will be contested by many competing interests, especially when payouts now follow a legally mandated pecking order. Instead of paying bills the way the company used to, distributions are now controlled by statutorily declared priority—meaning some creditors who supplied goods and services may find themselves further down the line than they expected.

The Liquidator is in full control of the affairs of the company and the liquidation fund. Creditors have a right to expect, at a minimum, that the Liquidator will conduct the Liquidation in strict compliance with the law and code that regulates the process. What may at times appear to be indifferent to the impact on creditors may be explained by necessity of the Liquidator to be, and to be seen to be, compliant in every respect.

However, a skilled and experienced Liquidator brings other important qualities to the table:

• An experienced Liquidator will be certain about who their duty is owed to, will be knowledgeable of the law, will be committed to meeting its expectations, and will have a sense of empathy while doing so.
• They will know that the core objective of the liquidation is to realise property, minimise cost while doing so and distribute the net proceeds.
• They will not have any control over the extent of that property or the volume of creditors who can claim, but the experienced liquidator will know how to achieve the best price possible in the circumstances.

How Liquidation funds are distributed under NZ law

Understanding who gets paid first—and in what order—during liquidation is essential for creditors seeking repayment.

• First, the Liquidator gets paid for their work from the proceeds of the property that is sold. They are the first-ranking claimants for costs and fees incurred.
• Next, Employee Entitlements will be paid with Inland Revenue as the third-ranking claimant.
• There are other preferential creditors on the list, but they often do not feature as a claimant.
• Funds are distributed in accordance with the waterfall ranking of preferential creditors, then to non-preferential creditors, until the funds run out.
• Frequently the value of the property sold does not go down the list very far.

Restructuring business is a craft and we’re passionate about our outcomes. Bryan Williams is a registered insolvency practitioner, an INSOL Fellow and member of RITANZ. Bryan has over 30 years of experience in the insolvency industry and established BWA Insolvency in 1993. Get in touch today.