Frequently asked questions
The Directors have started up in business again doing exactly the same thing. Can they do this?
There is nothing preventing the directors from forming a new business. However, if the new company has the same or a similar name, or trading name, as that of the liquidated company, the directors can be held personally liable for the debts of the new company, unless they obtain the leave of the court. They can also face a substantial fine or even imprisonment. These are known as the "phoenix company" provisions.
The main exception is where the new company buys the old company's assets from the receiver or liquidator. In this situation the directors must write to all creditors of the old company advising them of the new company's formation.
Also, where directors are consistently invloved with failed companies, they can be barred from acting as directors in future, on application to the Ministry of Business, Innovation and Employment or the Court.
Is it legal for the directors to buy back company assets?
The Liquidator's job is to obtain the best price for the assets. If a director wants to buy assets, the Liquidator has these items independently valued. As long as the sale is at the same price or higher than would be achieved on the open market, there is usually no reason why it should not take place. Such sales often in fact realise more for creditors, as there are no auction or other selling fees invloved.
See also below regarding the "Phoenix company" rules where directors buy the whole business back.
Can I become a shadow director?
The Companies Act definition of director includes 'a person in accordance with whose directions or instructions the board of the company may be required or is accustomed to act'. This is what is commonly known as a 'shadow' or 'defacto' director. The definition goes on to state that this does not apply to a person to the extent that they act only in a professional capacity.
It is therefore essential that professional advisors provide advice only, and do not cross a line whereby they are instructing or directing a company's directors. If a professional advisor becomes invloved in making managment decisions, they run the risk of being held liable along with the named directors in the event of insolvency. If you have any concerns in this area we recommend taking legal advice.
What are the warning signs that my client is facing problems?
Many businesses are facing hard times in current market. Your business might be one of them. Early action is critical in determining whether your business can be rescued or not.
Taking steps to ensure your company remains financially sound will minimise the risk of an insolvent trading action. It may also improve your company's performance.
There are serious penalties and consequences of insolvent trading including civil penalties and criminal charges. Insolvency can be established by either of the Cashflow or Balance Sheet tests. Note, importantly, that the company only needs to fail one of these tests to be insolvent.
- The cashflow test is simply whether the company can pay its debts when they fall due for payment. If you are paying your trade creditors at 90 days plus but the trading terms are 30 days, your company could be insolvent.
- The balance sheet test is whether the company's assets are exceeded by its liabilities. It is important to point out that this test includes contingent liabilities. An apparently solvent balance sheet may include items that are overstated, such as obsolete stock, plant, and work in progress, or debtors that are not really collectable. After deducting these items many balance sheets become insolvent.
Some key pointers to insolvency are..
- Cash flow difficulties
- Excessive debt and under-capitalisation
- Inadequate accounting
- Reliance on small number of customers, suppliers etc
- Net asset deficiency (liabilities greater than assets)
- Exceeding overdraft facilities or defaults on loans or interest payments.
- Increased borrowings
- Statutory demands
- Lack of cash flow forecasts and other budgets
- Change of bank, lender or increased monitoring/involvement by financier
- Loss of long standing suppliers
- No director meetings, no clear objective
- Contract disputes
- Regular late payment or non payments to suppliers
- Issuing post-dated cheques or dishonouring cheques
- Suppliers placing the company on cash-on-delivery terms
- Part payments and installment plans with essential creditors
- Failure to pay GST or PAYE
- Late collection of payments from debtors
- Shareholder disputes and director resignations, or loss of management
- Increased level of complaints
- Injection of directors own resources to provide short term relief
When should I be seeking incolvency advice?
Sooner rather than later is our strong recommendation. We regularly meet directors who have continued trading a business for long periods when it was clearly insolvent and had past the point of no-return. Sadly, in many such cases the directors or their family members have sunk further money into the company, at a time when there was no realistic chance of repayment.
Delay also places directors at risk of action against them personally, especially where PAYE has been deducted but not paid over. The IRD is becoming much more aggressive in pursuing directors personally for non-payment of PAYE. Various examples of recent IRD prosecutions are located on the IRD website.
A company owes me/my client money and I want to get it placed into liquidation.
Are you looking to wind up a company that owes you money? We are happy for your lawyer to contact us to obtain a consent to act as liquidators. If you do not have a lawyer to act for you, we are able to assist you with recommendations.
Blacklock Rose is highly experienced at conducting court-appointed liquidations. The choice of a competent liquidator can often make the difference between recovering a portion of your debt, or nothing at all. The legal costs of the creditor who issued the winding-up application are a preferential claim in the liquidation. It is our policy to aim to pay such claims whenever possible, as quickly as possible.
Can I do anything else to recover what I'm owed apart from just submitting a claim form?
If you have credit insurance, you should check with your insurer whether you are covered for all or part of your loss. If you are on the Invoice basis for GST accounting, you may be able to make a bad debt adjustment in your GST return. Check with your accountant on this. You may also need to make a bad debt adjustment in your income tax return if this has not already been included. Again, check with your accountant.
We recommend always taking the time to submit a claim form, as it is often unclear at the start of a case whether a dividend will be paid. Our six monthly reports are only sent to creditors who sumbit claims, so you may not be aware of developments giving rise to a payout to creditors. We are only permitted to pay dividends to creditors who file formal claims. Please also notify us of any change in address, as dividend payments are made by cheque rather than direct credit.
How long does liquidation take?
It varies from case to case. A simple liquidation will often be completed in six months. Those involving more complex matters can take a year, or sometimes several years. The factors that tend to delay completion of a liquidation are long drawn-out legal matters or sale of high value assets.