Frequently Asked Questions

Absolutely yes! When a statutory demand, also known as a Section 289 Notice, is served on company, it has 10 working days to dispute the debt by filing an application to set aside the demand, or 15 working days to pay the debt.

If the debt is neither disputed nor paid, then on the expiration of the 15 working days, the debtor company is deemed to be insolvent and the creditor can apply to the Court to place the debtor company into liquidation. The onus is then on the debtor to satisfy the Court that it is solvent. This will involve Court representation and the attendant legal fees.

This is the second step towards liquidation. Where a statutory demand by a creditor (including IRD) is neither disputed or paid by the debtor within the requisite period of 15 working days, the creditor may petition the Court to place the debtor company into liquidation.

The petitioning creditor must however first serve at the registered office of the debtor company a notice of its petition to the Court to liquidate the company.

This is a crucial point for the company. Unless within 10 working days of service of the notice of intent to petition, the shareholders of the company appoint a liquidator, no liquidator can be validly appointed until the Court hears the petitioning creditors request to appoint its chosen liquidator.

In a liquidation, the powers of the directors to control the company are passed to a liquidator. The liquidator has a statutory obligation under the Companies Act to realise the assets of the company for the benefit of all of its creditors, subject to certain priorities which are laid down in the Companies Act and the Personal Property Securities Act.

It is unusual for a company to survive liquidation. Although the liquidator may decide to trade on for a short term in an endeavour to achieve a sale of part or all of the business, unless all creditors are repaid in full the liquidation of the company cannot be reversed.

The liquidator is given full control of the assets and undertaking of the company. This control is however subject to the rights of creditors who have securities over the assets and undertaking.

The liquidator has a period of 5 working days in which to prepare a statement of the company’s position and report to creditors. During this period the liquidator will normally determine whether or not to continue to trade. This decision will be coloured by the fact that the liquidator will be personally liable for any debts incurred through trading whilst the company is in liquidation.

The liquidator will take control of all assets of the company including bank accounts, and request the bankers to dishonour all cheques subsequent to his appointment. The liquidator will either dismiss any remaining staff, or negotiate arrangements for their continued employment by him.

The liquidator has powers to disclaim any contracts which he deems to be onerous. This will normally be exercised to terminate rental agreements and other contracts for the provision of services.

When the assets of the company have been realised, the proceeds after the costs of the liquidation will be distributed to creditors in the order of priorities laid down in the Companies Act. Naturally, where assets are secured to creditors the proceeds from those assets up to the level of the debt secured will be passed to those creditors, subject to the priority provisions of the Seventh Schedule of the Companies Act.

Employees are granted priority under the Seventh Schedule up to a designated amount for services provided in the 4 months prior to liquidation and holiday pay. The limit is amended annually by Parliament. However, the priority of employees is equal to that of Inland Revenue for GST and payroll related deductions. As a result, it is usual for a liquidator to hold off any distribution to employees until certain that sufficient funds have been realised from the assets of the company to meet the preferential clams of employees and Inland Revenue.
Funds collected from the liquidation, including sale of any assets, debtors being collected or money collected from shareholders are paid out in the following order:

  1. Payment of the cost of liquidation (including the liquidator fees)
  2. Any money owed to a secured creditor
  3. Any costs awarded by the Court to the creditor who made the application to wind up the Company (not applicable in a voluntary liquidation)
  4. Employee wages; up to a maximum of $6,000 and limited to the last four months prior to liquidation.
  5. Taxes owed to the IRD (IRD and PAYE)
  6. Unsecured creditors and Shareholders.

A liquidator has a large degree of discretion. Although the liquidator must follow the guidelines laid down in legislation and is legally obligated to achieve the best outcome for the creditors, there is a balance between the value of the recovered assets against the cost of pursuing the assets.

Although there is no register of insolvency professionals, there are a number of prohibitions from accepting an appointment. These are set out in Section 280 of the Companies Act 1993.

Prohibited persons include those who have in the two preceding years served as shareholders, directors, auditors or receivers of the company or a related company. Persons who have had a continuing business relationship with the company, its majority shareholder, directors or secured creditors are also prohibited from acting, unless the directors resolve prior to their appointment that the company will be able to pay its debts.

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