The following are some issues which tend to crop up on many of our liquidations.
Vehicles claimed by directors
A minor, but often emotive issue, is the car "owned" by the director. The director states it is their car, and it is registered in their name. Registration, however, does not prove ownership and if the car is in the company's accounts and shown on the depreciation schedule, the liquidator will fulfill one of their principal duties by taking possession of the car and selling it.
Share capital not paid up
Under modern company law, shares have no nominal value. Too many times we hear that if a company has 1,000 shares then there is an obligation on the shareholders to pay $1,000. This is not the case. The consideration for shares is determined by the board of directors pursuant to Section 47 of the Companies Act 1993. If a 100 share company goes into liquidation and the directors have not determined the consideration for the shares, there is a risk that the liquidator will take a stance that the consideration for the shares should have been $1,000 each and will instigate legal proceedings accordingly.
Tools of trade - machinery etc
These are a little like the car. The director/shareholder regards them as theirs. They have built them up over the years and owned them in the period when they were a sole trader. Unfortunately, these too may be in the company's accounts, usually for one or more of three reasons:-
- So that the accountant can claim depreciation on them
- To help pay up the share capital
- To wipe out an overdrawn shareholder's/director's current account
Again, the liquidator will insist on taking control of these items and selling them.
Personal guarantees
Unfortunately for directors (but not for creditors), limited liability is often negated by personal guarantees. Few directors are conscious of the guarantees they have signed. Such personal guarantees can lead to a director becoming bankrupt. Some common situations where personal guarantees are required are as follows:-
- The bank
- Hire purchase and leasing agreements - a personal guarantee is usually required
- The landlord - lease documents invariably include a personal guarantee
- Trade creditors - the catch here is in the application for credit. This often has a personal guarantee incorporated into it and the director scarcely realises what they have signed
The big bluff
A creditor states they are holding a personal guarantee. A guarantee to be effective must be in writing. Ask for a copy of it. It may not even exist.
Construction companies
Did the director build themselves a house and charge the kitchen and laundry and roofing material to other jobs? The liquidator tends to find out about such matters.
The accountant's or solicitor's lien
Where an accountant or lawyer is owed money and the liquidator requires their files, that professional can claim a lien over them. The Companies Act 1993 provides that in such circumstances the liquidator must agree to accept a preferential claim of 10% of the total value of the debt, up to a maximum amount of $2,000. The important thing here is to claim a lien before handing over the books. If the books and records are simply handed over on request it is too late afterwards to claim preferential status.
Conclusion
Liquidation is a tricky business, and the issues involved are often more complex than they may appear at first sight. We are always available to discuss with accountants, lawyers and their clients any issues they have in this area.
Note: This article was written by Jonathan Barrett who has subsequently left the firm.
DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.