A recent case in the Hamilton High Court looked at the requirements on a liquidator to accept the claims of creditors and to call a meeting of creditors to decide if a replacement liquidator should be appointed. The Law on Calling a Meeting with Creditors Where a liquidator is appointed by shareholder resolution they are required to call a meeting of creditors within 10 working days of their appointment pursuant to section 243 (1)(a) of the Companies Act 1993 (“the Act). This requirement can be dispensed with, pursuant to section 245 of the Act, if the liquidator considers, having regard to the assets and liabilities of the company, the likely result of the liquidation and any other relevant matters, that…

The Solvency Test The Companies Act 1993 requires directors to focus on the financial state of the company and to consider whether the company meets the solvency test before permitting distributions and certain other actions by the company. The statutory Solvency Test is set out at section 4 of the Companies Act 1993. The Solvency Test requires that both the liquidity limb and the balance sheet limb of the test are satisfied immediately after a distribution or other action. Distributions are widely defined and include the direct or indirect transfer of money or property and incurring a debt for the benefit of shareholders. In making a distribution, directors who vote in favour of the distribution must sign a solvency certificate…

In our article published in April 2017, Internal Fraud – The Threat from Within, we discussed the issue of fraud committed on an organisation by its own officers and staff, the types of offending and some basic steps that can be undertaken to reduce the risk of internal fraud. These steps included the need to have robust and durable systems and procedures in place to lessen the opportunities for fraud to be committed or, if they are committed, increase the chances that they will be discovered before they can cause irreparable damage to the business. A case that our firm was involved in highlights what fraud can cost a director of a company personally if another member of the business,…

As a business owner, have you been kept awake at night trying to work out why your business is struggling to pay its bills on time when you know that you are doing more work and earning more income. The answer could be that someone within your organisation is taking advantage of their position and is defrauding your business. It is a sad fact of life that some people will abuse the trust placed in them by their business associates or employer and use their position to obtain personal profit.  This can have a devastating impact on a business, putting its ability to continue to operate in jeopardy, and also putting its creditors and directors at risk because of the…

With financial year end, one of the considerations fresh in the minds of business owners and their advisors is the decision regarding appropriate directors’ remuneration. In a previous article we reviewed the case of Madsen-Ries and Vance v Petera [2015] NZHC 538. In this article, we consider an issue on appeal by the liquidators of Petranz Limited (“the company”) as to whether salaries paid by the company to the directors were fair to the company when they were paid (Madsen-Ries v Petera [2016] NZCA 103). This article will also cover where creditor considerations fit in with such decision making, and the appropriate remedies for creditors if things go wrong. Background Mr and Mrs Petera were the sole directors and shareholders…

There is risk and responsibility that comes with being a director. Sections 131 to 145 of the Companies Act 1993 (the Act) set out directors’ responsibilities and duties owed to both the company and third parties. In the event of business failure by liquidation or other means, if any action is taken for breach of these sections of the Act, it generally falls to insolvency practitioners to act. Whether the insolvency practitioner decides to take any action for breach of directors’ duties is commonly assessed on a case-by-case basis, taking into consideration the likely recovery weighed against the cost of the action and the evidence available to support the action. The ability to pursue a director, however, is not limited…

Global Textiles Limited (In Liquidation) We were appointed liquidators of Global Textiles Limited (“Global Textiles”) on 13 March 2015 and are now in the final stages of the liquidation. Prior to our appointment, Global Textiles had been in business for nearly 20 years.  It supplied textiles to a number of brands in New Zealand and Australia from Jean Jones to small businesses.  It was also the designer and wholesaler of a popular clothing brand. With the emergence of globalisation and technology allowing easy access to markets outside of New Zealand, the local textiles industry has moved into the sunset phase of its life cycle. With cheaper imports from overseas coming into the market, Global Textiles’ traditional customers were increasingly demanding…

Businesses get into difficulty for a range of reasons. When directors have acted in good faith and react to the situation early enough, and where there is a good prospect of recovery, a compromise may be acceptable to the company’s creditors. The purpose of a compromise proposal is to increase the likelihood of some classes of creditors receiving more than they would if the company were put into liquidation. Often, voting outcomes rely on the creditors’ opinion of the director(s) but issues can arise when related parties, who may be seen as voting to protect their own interests, are involved. Statutory Requirements The statutory requirements of a compromise are set out under Part 14 of the Companies Act 1993 (“the…

If you're a typical small business owner, your business lending is likely secured against your family property (or your family trust’s property). If your business is going well and the market is booming, securing your business lending against your property gives you the benefit of a good interest rate and the increasing equity in your property can give you the opportunity to borrow more so you can smooth out any bumps in the road.  The question is: What happens if you hit a bump in the road and the property market is on its way down? Over the last few years, the property market has been on an upward cycle but, like all market cycles, at some point the market…

In the words of Fredrick Nael: “It takes both sides to build a bridge.” An Alternative to Bankruptcy – Part 5 Subpart 2 Proposals Insolvent individuals are often unaware that there are alternatives to bankruptcy and what the impact of those alternative options will be, so they are ill equipped to make informed decisions. This article focuses on Part 5 Subpart 2 Proposals. There are other bankruptcy alternatives such as Debt repayment orders (DRO) formally known as the summary instalment orders (SIO) and no asset procedures (for debts less than $50,000) as well as informal settlements, none of which are discussed here. Resolving personal insolvency issues using a Part 5 proposal requires the insolvent to put his/her best foot forward…

The Court of Appeal has upheld the decision of the High Court in Lewis Holdings Limited v Steel & Tube Holdings Limited, and held the parent company responsible to pay the debts of its subsidiary.   In this case the level of involvement of the parent compromised the independence of the subsidiary.  There was no clear distinction between parent and subsidiary.  The parent treated the subsidiary as an economic division of itself, akin to a "de facto amalgamation".  The cumulative factors supporting lack of independence led to this decision. The case relied on a rarely used section of the Companies Act 1993 ("the Act").  It highlights the importance of subsidiary companies maintaining independence from their parents.  Failure to do so may…

One of the first tasks facing liquidators after their appointment is to ascertain and communicate with those people and entities who can rightly register a claim in the liquidation as a creditor. Generally, this information will be provided by the directors of the company, along with copies of unpaid invoices or statements on the individual accounts, but not all eligible creditors are that easily identified. Section 303 of the Companies Act 1993 ("the Act") sets out the admissible claims in a liquidation - Claims admitted - Subject to subsection (2) of this section, a debt or liability, present or future, certain or contingent, whether it is an ascertained debt or a liability for damages, may be admitted as a claim…