There are two types of standard liquidation; solvent and insolvent.
During liquidation, the control of your company is passed from the Director/s to a Liquidator. The liquidator has a statutory obligation under the Companies Act to realise the assets of your 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, i.e. sell all assets/stock to repay outstanding debt.
The liquidator may decide to allow your company to continue trading for a short period to try and achieve a sale of part or all of the business, but, unless all creditors are repaid in full the liquidation of your company cannot be reversed.
Liquidators can be appointed voluntarily by the directors (if their constitution allows it) or, as is more common, by the shareholders making a ‘special resolution’.
The High Court can also appoint liquidators on the petition of a creditor, shareholder or director. The costs associated with taking that action are preferential in the liquidation.
An interim liquidation differs somewhat to liquidation. The appointment is made by the High Court but the powers of the liquidator are usually concerned with protecting the assets rather than disposing of them.
The liquidator must report to the High Court with their recommendations, rather than to the creditors of your company. Interim liquidations usually occur when there is a dispute between shareholders and the company assets could be placed at risk by either Director/shareholder.
Whereas in liquidation, the control is passed from Directors to liquidator, in a receivership, the receiver is appointed by a secured lender to the company, frequently a bank.
The receiver’s object is to realise sufficient assets to repay the secured lender before he is released. The receiver will still take over the powers of managing the business assets during the term of the receivership. However if, after the receiver has realised assets to repay the secured creditor who appointed him, there is still a trading business remaining, it will be returned into the hands of the directors.
If the receiver is released, but there is no trading business remaining, a liquidator may be appointed by the shareholders or on the petition of a creditor. Unlike the receiver, the liquidator has a statutory obligation to review the affairs of the business and events leading up to his appointment.
When a statutory demand is served on your company, you have 10 working days to dispute the debt by filing an application to set aside the demand, or, 15 working days to pay the debt in full.
If the debt is neither disputed, nor paid after 15 working days, the company is deemed to be insolvent and the creditor can apply to the Court to place the company into liquidation. The burden of responsibility is then on the debtor to convince the Court that it is solvent. This will involve Court representation and legal fees.
This is the second step toward liquidation. Where a statutory demand by a creditor (including Inland Revenue) is neither disputed nor paid by the debtor within the requisite period of 15 working days, the creditor may petition to 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, called a “Notice of Proceedings”.
This is a crucial point for your 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.
Although there are no strict requirements listed to become a liquidator, there are a number of prohibitions from accepting appointment.
Prohibited persons include:
The liquidator is given total 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 5 working days in which to prepare a statement of the company’s position and report to creditors. During this time the liquidator will normally decide whether or not to allow the company to continue to trade. This decision is not made lightly, as the Liquidator becomes 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 bank to dishonour all cheques presented after his appointment. The liquidator will either dismiss any remaining staff members, or negotiate arrangements for their continued employment by him, should the company continue to trade.
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. Where assets are secured to creditors, the proceeds from those assets up to the level of the debt secured is 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 their holiday pay. The priority of employees is equal to that of Inland Revenue for GST and PAYE claims. As a result, it is usual for a liquidator to hold off any distribution to other creditors until they are certain that sufficient funds have been realised to meet preferential clams from employees and Inland Revenue.