Insolvency Q & A
Your questions answered
The common warning signs of insolvency are cashflow difficulties including increase in use and size of overdraft, default in Inland Revenue compliance payments i.e. PAYE, GST, FBT and Income Tax, unable to pay creditors as they fall due or within an arranged payment period and unable to purchase product/service on credit. Finally when wage and salary payments cannot be met.
If your company is showing signs of insolvency you need to urgently seek help as The Companies Act 1993 dictates that directors must act responsibly when a company is facing financial difficulties. An insolvency specialist can quickly assess whether survival or rehabilitative mechanisms can be put in place to avoid a liquidation process. However if the fiscal health of the company is such that the company requires a formal appointment you will be advised of the process, consequences and how it affects you.
Section 241 of The Companies Act allows for a shareholder or directors to pass a resolution to place the company in liquidation. A shareholder resolution requires approval by 75% of the shareholders. The resolution must be signed, dated and timed and the appointee liquidator(s) must consent to the appointment.
A receiver is appointed by a security interest holder. Although a receiver has a duty of care to all creditors, their focus is to satisfy the secured creditor’s indebtedness. A liquidator is appointed either by shareholders, directors or by a creditor pursuant to a petition to the High Court. A liquidator’s powers as defined by The Companies Act 1993 are much greater than those of a receiver.
If you are a director you maintain your directorship without the associated powers. You will be required to provide information and assistance to the liquidator/receiver. A liquidation or receivership may trigger a personal guarantee claim where a personal guarantee has been given to a supplier/creditor, lender or landlord.
The costs of liquidations are borne by the company from asset realisations. The shareholders and/or directors are not usually required to settle a shortfall where there are insufficient funds from the company’s assets. Receivership administrations are also funded by the company but the receivers often accept an indemnity from the appointee for any extraordinary costs that can arise, which may for example include funding litigation. Our costs are on a time engaged basis at our court approved rates.
The length of a liquidation process differs for each company due to the vagaries and variables of each administration i.e. the number of assets to be realized, the size and complexity of the receivables ledger and whether any litigation is required. In general the liquidation process is completed within six months.
Liquidation relates to the insolvency of a company whereas bankruptcy relates to the insolvency of an individual.