Many companies find themselves facing financial distress and unable to sustain operations. Voluntary liquidation is a viable option for directors and shareholders to wind up the affairs of the company in an orderly manner. It is imperative to understand the process and implications in the legal landscape, governed primarily by the Companies Act 1993 and the Personal Property Securities Act 1999.
Understanding Voluntary Liquidation:
Voluntary liquidation is a process initiated by the directors and shareholders of a company when it is deemed insolvent or unable to meet its financial obligations. This process involves the appointment of a liquidator, whose primary role is to realize the company's assets, distribute proceeds to creditors, and ultimately dissolve the company.
Steps of Voluntary Liquidation:
1. Appointment of Liquidator: The directors convene a meeting of shareholders to pass a special resolution for the appointment of a liquidator. The appointed liquidator must be a licensed insolvency practitioner.
2. Realization of Assets: The liquidator takes control of the company's assets, which are then liquidated to generate funds for the settlement of outstanding debts.
3. Payment of Creditors: Creditors are paid in a specific order of priority as outlined in the Companies Act 1993. Secured creditors with registered security interests under the Personal Property Securities Act 1999, are typically paid first, followed by preferential creditors, such as employees for wages owed. Finally, any remaining funds are distributed among unsecured creditors. Specific Security holders have super priority to their unpaid and traceable stock/equipment and possibly into proceeds thereof.
4. Distribution to Shareholders: If any funds remain after the payment of creditors, they are distributed among shareholders in accordance with their rights and interests.
Liquidator's Remuneration:
Liquidators are entitled to remuneration for their services typically determined based on the time spent on the liquidation process and vary depending on the complexity of the case. Chargeout rates vary depending on the practitioner engaged and how work is allocated amongst team members. The remuneration may be limited to the unencumbered company assets and/or an agreed advance from the shareholders. Not all companies have assets available to fund the liquidation.
Recovery of Overdrawn Current Accounts:
Directors often have current accounts with the company, which may become overdrawn due to loans or advances taken (drawings) and sometimes arising from the failure to declare a salary at the end of the financial year where tax is paid personally. In the event of liquidation, these overdrawn amounts are generally treated as loans to the directors and are recoverable by the liquidator. These are often negotiated and sometimes can lead to bankruptcy proceedings when a director makes no attempt to cooperate or repay funds.
Pursuit of Personal Guarantees and Other Avenues of Recovery:
Often directors have provided personal guarantees for company debts. In this case the guarantee and shortfall may be pursued directly by the supplier/creditor.
Liquidators investigate other forms of recovery for the benefit of creditors such as transactions conducted prior to liquidation, including insolvent transactions and transactions at undervalue. Directors duties are also considered.
Limitation Periods and Sanctions:
Liquidators are subject to limitation periods for initiating actions to recover assets or challenge transactions. These limitation periods vary depending on the nature of the claim and are outlined in relevant legislation. If a liquidator is successful in a claim, sanctions may be imposed on the responsible parties, including directors and third parties involved in transactions that are deemed improper or fraudulent.
Directors obligations:
Directors have an obligation to assist the liquidators and to provide books and records and information on the affairs of the company. Directors have been found liable for breaching their duties by failing to assist the liquidator in the collection of outstanding debts, highlighting the importance of proactive cooperation with the liquidation process.
By adhering to these duties, directors can mitigate risks and contribute to a smooth and orderly wind-up process, ultimately maximizing the outcomes for creditors and stakeholders and reducing personal guarantee exposure (the greater return in the liquidation reduces the shortfall on the guarantee).
In conclusion, voluntary liquidation is a significant step for directors and shareholders of financially distressed companies in New Zealand. Understanding the legal framework, responsibilities, and potential outcomes is crucial for navigating this process effectively and ensuring compliance with regulatory requirements. By seeking professional advice and guidance from licensed insolvency practitioners, directors and shareholders can navigate the complexities of voluntary liquidation with confidence and integrity.
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