The effect of liquidation on a company
The effect on the company
A liquidator is appointed when a company is placed into liquidation. The liquidator takes control of all the company’s unsecured assets, which are sold to repay the creditors.
Trading companies are usually closed down, although sometimes they may continue to trade for a short time so the business can be sold.
When the liquidation is complete, the company is removed from the Companies Office Register.
The effect on the directors
Directors are required to complete a Statement of Affairs form which includes:
- a brief description of the company’s history
- trading details
- details of the cause of the company’s failure
- all company assets
- all company liabilities
- all shareholder information
- any legal claims by or against the company
Directors are also required to help the liquidator locate the business records and assets, and to answer any questions about the company and its business. It is an offence for a director to destroy, hide or remove property, records or other documents. Penalties can include fines and imprisonment.
The liquidator will also check whether the directors or shareholders owe any money to the company, and whether any offences have been committed.
If there is a surplus after all the company assets have been dealt with and the debts and liquidation expenses have been paid, then it will be distributed back to the shareholders.
A guarantor is someone who agrees to repay the debt of a company or person if they default. If the company goes into liquidation or the person enters a personal insolvency procedure, e.g. bankruptcy, the guarantor will have to repay the creditor. Company directors often guarantee their company's debts, which means they have to repay them if the company goes into liquidation.
The effect on employees
The liquidator will decide if the business should continue trading so it can be sold as a going concern. If the business is closed, your employment will end.
If you have lost your job, you can file a claim in the liquidation if you are owed any salary, wages, holiday pay or redundancy. Your claim may be considered preferential, which means you will be paid out before the unsecured creditors if there are funds available.
Emergency financial assistance may be available from Work and Income New Zealand (WINZ), your local City Mission or the food bank. WINZ can also provide food vouchers to help with your immediate needs.
The effect on creditors
Unsecured creditors can’t take legal action against a company in liquidation or deal with its property unless they have permission from the Court or the Liquidator.
Secured creditors can deal with the company’s secured assets. The creditors may decide to appoint a receiver if one hasn’t been appointed. They can claim as an unsecured creditor for any shortfall. If there is any surplus after the assets have been valued or sold, it will be paid to the liquidator.
If the liquidator recovers money the Companies Act 1993 sets out the priority of payments to include:
- liquidator fees, expenses and remuneration
- costs awarded by the court to the applicant creditor
- costs and claims of a creditor who has assisted the official assignee in the recovery of assets
- actual ‘out-of-pocket’ expenses of any liquidation committee
- wages owed to employees for the four month period prior to the liquidation and all holiday pay and redundancy payments up to a specified maximum amount
- preferential taxes collected for inland revenue including gst, paye, employee deductions for child support and other taxes
- all other unsecured creditors.
The liquidator must send a report to all creditors outlining the company’s financial position at the date of liquidation within 25 working days from the date of liquidation. In a voluntary liquidation the report is sent within five working days.
The report will explain how the liquidator intends to manage the liquidation, and how long it will take to complete. If a dividend is likely to be paid then six-monthly update reports will also be sent. A final report is sent at the end of the liquidation.
If the Official Assignee is the liquidator, creditors can log in to the Insolvency and Trustee Service website to access regular updates on the progress of the liquidation at any time after the first report has been filed.