Companies that have been through a formal liquidation process are difficult to restore to the Companies Register.  This can often make liquidation a more attractive option for company closure than the short form removal.  It provides more certainty that the company has been brought to an end.

Any company restoration requires a formal application and good reason. 

Restoring a company to the Companies Register in New Zealand can be necessary when a company has been struck off for various reasons, such as failure to file annual returns, short form removal under section 318(1)(d) of the Companies Act 1993, or following formal liquidation. The process and requirements for restoration depend on the reason for removal.  

1. Struck Off Due to Failure to File Annual Returns

When It Can Be Restored:
• The company can be restored if it was struck off the register by the Registrar of Companies for failing to file annual returns.

The grounds for restoration are that the company was carrying on business at the time of removal or was party to legal proceedings or was in liquidation or receivership or both.

To apply under S328(1)(a) you need to show and provide sufficient evidence that the grounds under which the company was removed did not exist.

Process for Restoration:
• Apply to the Registrar online: The company must apply directly to the Registrar of Companies. The application should include:
o Payment of outstanding fees and a restoration fee.
o Submission of all overdue annual returns.
o Payment of any penalties.

An application made to the Registrar under section 328 of the Companies Act 1993 (the Act).  This application must be made by a :

• shareholder/director,
• liquidator/receiver, or
• creditor of the company. 

Note | This process can take up to six to eight weeks to complete.

Registrar's Decision:
• The Registrar may restore the company to the register if satisfied that all requirements have been met and there are no other reasons preventing restoration.

2. Short Form Removal Under Section 318(1)(d) of the Companies Act 1993

When It Can Be Restored:
• The company can be restored if it was removed under section 318(1)(d) of the Companies Act 1993, which typically involves short form removal due to inactivity, lack of assets, or a request from the company’s directors.

The grounds for restoration are that the company was carrying on business at the time of removal or was party to legal proceedings or was in liquidation or receivership or both.

Process for Restoration:

• Apply to the Registrar: The company must apply to the Registrar of Companies. The application should include:
o Evidence that the company still has assets or business to conduct or is party to a proceeding.
o Any relevant documents to support the restoration request.

Registrar's Decision:
• The Registrar may agree to restore the company if satisfied that the company has a valid reason for restoration and it is in the public interest.  Where the Registrar of Companies is satisfied that a company should be restored to the register, he gives public notice of that intention.  The intention to restore the company is advertised in the  New Zealand Gazette and on the Public notices.  There then follows an objection period of 20 working days for applications made under s328 of the 1993 Companies Act

3. Formal Liquidation and Striking Off

When It Can Be Restored:
• Restoration is more complex if the company was formally liquidated and struck off the register. This can occur when all assets have been distributed and the company’s affairs have been fully wound up.  This may be required if an asset is discovered after the formal strike off or the company continues to own property that otherwise vests in the Crown if the company is not restored or other legal matters arise.

Process for Restoration:
• Application to the High Court: Restoration after formal liquidation generally requires an application to the High Court  under Section 329. The application must be made by a person with an interest in the company, such as a former director, shareholder, liquidator or creditor.  This is a costly exercise and often a reason it is not advanced.

High Court Consideration:
• The High Court will consider whether it is just and equitable to restore the company. Factors include:

o Whether there are assets or liabilities that were not dealt with during the liquidation.
o If there was any procedural irregularity in the liquidation process.
o The interests of creditors and shareholders.

Court Order:
• If the court is satisfied, it will issue an order to restore the company to the register. The order must then be filed with the Registrar of Companies to effect the restoration.

Once the Registrar is in receipt of a signed and sealed High Court Order to restore the company the Registrar can restore the company immediately without the need to give public notice.

If the Court Order stipulates that outstanding documents and/or fees are required then these will also need to be submitted. 

Cases When the Company Can Be Restored

• Registrar's Agreement: The Registrar will agree to restore a company if the application meets all administrative requirements and there are no legal impediments. This applies mainly to cases of failure to file annual returns and short form removal under section 318(1)(d).

• High Court Application: A High Court application is required in more complex cases, such as after formal liquidation. The court must be convinced that restoration is justified and equitable.

Summary

Restoring a company to the Companies Register in New Zealand varies depending on the reason for its removal. Simple administrative failures, like not filing annual returns, can often be resolved by direct application to the Registrar. However, more complex cases, such as those involving formal liquidation, typically require a High Court application and are expensive and difficult.  The proof for restoration is difficult when a company has followed a formal liquidation process - however more simple if the reason for restoration is to distribute more assets.  

In New Zealand, the roles of shadow directors and de facto directors hold significant importance, especially when a company faces insolvency. Both these roles can carry substantial legal responsibilities and liabilities, often surprising individuals who may not even realize they are acting as directors. This article discusses the definitions, differences, and potential risks associated with these roles.

Definitions and Differences

Shadow Directors
A shadow director is a person who is not formally appointed as a director but whose instructions or directions are typically followed by the officially appointed directors of the company. Essentially, a shadow director operates behind the scenes, influencing the company's decisions without holding an official title.

De Facto Directors
A de facto director, on the other hand, is someone who acts as a director without having been formally appointed. This individual undertakes the duties and responsibilities of a director and is involved in the company’s governance and decision-making processes. The key distinction here is their active participation in the company's affairs, which aligns with the role of a formally appointed director.

Examples to Illustrate

Shadow Director Example:
Consider a scenario where a major shareholder of a company, who is not officially listed as a director, regularly advises the board on strategic decisions, and the board typically acts on these suggestions. Even though this shareholder does not hold a formal directorial title, their influence on the board's decisions could render them a shadow director.

De Facto Director Example:
Imagine an individual who, without formal appointment, regularly attends board meetings, makes key business decisions, and represents the company in negotiations. This person functions as a director in every practical sense, despite the lack of formal appointment, thereby qualifying as a de facto director.

Risks Associated with Insolvency

When a company becomes insolvent, the risks for shadow and de facto directors are substantial. Both can be held liable for the company's debts and may face legal consequences similar to those faced by formally appointed directors. Some specific risks include:

1. Personal Liability: Shadow and de facto directors can be held personally liable for the company’s debts if it is determined that they failed to act in the best interests of the company, especially in the lead-up to insolvency.

2. Breach of Directors' Duties: Under the Companies Act 1993, directors (including shadow and de facto) have statutory duties, such as acting in good faith and in the best interests of the company. Breaches of these duties can result in significant legal penalties.

3. Voidable Transactions: Transactions entered into by the company during the period leading up to insolvency can be voided if they are deemed to have unfairly benefited certain parties, potentially implicating shadow and de facto directors who influenced these decisions.

An employee or contractor can be found to be a de facto director based on significant involvement in a company's affairs, including making critical financial decisions and dealing with creditors.   This can lead to potential liability for breaching duties as a director, demonstrating the serious consequences of assuming directorial responsibilities without formal appointment.

Conclusion

In the context of New Zealand law, the roles of shadow and de facto directors carry substantial legal responsibilities, particularly when a company faces insolvency. Understanding these roles and the associated risks is crucial for individuals who influence or manage company decisions without formal directorial titles.  It is important to clearly define and understand your role within a company.  If you are in a role that could be deemed to be a director role and have concerns that with the company's solvency gain advice.  Our team is here to help.

Limited liability is a foundational concept in corporate law that protects the personal assets of shareholders, including directors, from being used to satisfy the debts and obligations of the company. This principle means that a company's liabilities are limited to its assets, and shareholders' risk is confined to the amount they have invested in the company.

A Painting Company in Financial Difficulty

Imagine you own a painting company, are the sole employee and director, and the company faces liquidation due to financial difficulties. You owe customers prepaid deposits and have incomplete work. Here's how limited liability and potential personal liability play out in this scenario:

Limited Liability Protection

As the sole director and employee of the company, you are generally protected by limited liability, meaning that your personal assets (such as your home and personal bank accounts) are not at risk for satisfying the company's debts. The company's obligations fall to the company itself, and only the company's assets can be used to pay off its debts.  A liquidator however will recover any funds that you as director owe the company under an overdrawn current account or unpaid shares.

Exceptions: When the Corporate Veil Can Be Lifted

There are certain circumstances under which the protection of limited liability can be set aside, and the "corporate veil" can be lifted, potentially holding directors personally liable for the company's debts. These circumstances include:

1. Fraud or Misrepresentation: If the director has engaged in fraudulent activities or intentionally misrepresented the company's financial status to creditors or customers, personal liability can be imposed.

2. Trading While Insolvent: Under the Companies Act 1993, directors have a duty not to allow the company to trade if it is insolvent (unable to pay its debts as they fall due). If it is proven that the director knowingly allowed the company to continue trading while insolvent, they can be held personally liable for the company's debts incurred during that period.  Liquidators do however have to consider the cost/benefit of such actions as these can be costly pursuits.

3. Breach of Directors' Duties: Directors have specific duties, such as acting in good faith, in the best interests of the company, and with due care and diligence. Breaching these duties can lead to personal liability. Examples include:

o Not acting in good faith or for a proper purpose.
o Failing to exercise the degree of care and diligence that a reasonable director would exercise.
o Using the company to carry out personal business at the expense of the company’s interests.

4. Personal Guarantees: If you have provided personal guarantees for any of the company’s debts or obligations, those specific debts may fall to you personally if the company fails to meet them.  Unpaid creditors will likely call on your personally for amounts the company cannot pay under guarantees given.  If you are in no position to pay then this can lead to personal actions against you.

5. Phoenix Activities: Under the Companies Act, directors of a failed company are prohibited from being involved in a new company with a similar name or business within five years of liquidation without court approval or taking appropriate steps defined in the Companies Act. Breaching this can result in personal liability for the new company's debts.

Practical Steps to Mitigate Risk

To minimize the risk of personal liability:

• Maintain Transparency: Ensure all financial dealings and representations to creditors and customers are honest and accurate.

• Monitor Solvency: Regularly assess the company’s financial health to ensure it remains solvent. If insolvency is imminent, seek professional advice and consider ceasing trading to prevent incurring additional debts.

• Adhere to Duties: Diligently fulfil all directors’ duties, including acting in the company’s best interests and avoiding conflicts of interest.

• Avoid Personal Guarantees: Where possible, avoid giving personal guarantees for company debts or limit those guarantees. If necessary, understand the implications fully before proceeding.

In summary, while limited liability offers significant protection, it is not absolute. Directors must act responsibly, transparently, and within the bounds of the law to avoid personal liability. Understanding the conditions under which the corporate veil can be lifted is crucial for managing and mitigating risks associated with running a company.

In our 42^nd Insolvency by the Numbers, we look at our data set for May 2024. We review how the month has tracked compared to prior months and years.

In the last month the Reserve Bank has continued with no change to the OCR and indicated not to expect any reductions until 2025.

We are now beginning to see a further tightening being covered in certain sectors particularly construction where new work has become scarce and those that are not busy finishing off existing projects are beginning to look to the renovation space.

 The government has released their latest budget showing cuts to a number of ministry’s and projects that are not deemed essential, there has also been some tax relief in the moving of the personal income tax brackets. How these budget changes will affect our stubborn non-tradable inflation is yet to be seen.

 Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

 May 2024 appears to have fallen back into the traditional corporate insolvency patterns we have seen in prior years just at slightly elevated levels over past years. On this basis we would normally see a drop in June but the appointment levels remain consistently higher than the last 6+ years.

Overall total insolvencies for the year remain high, almost double the appointments seen as recently as 2022. Month on month May had 238 total appointments 83 above the long term average of 150 and well above past Mays (2023: 158, 2022: 138, 2021: 151, 2020: 158). We expect that these higher insolvency appointment levels will continue into 2025 given the back log of debts currently sitting with the IRD and other creditors.

For May shareholder appointments increased and there was a decrease in court appointments as a comparative percentage. There was also a spike in Voluntary Administrations and Receiverships due to group appointments. As mentioned in prior months we have also seen a rise in personal receiverships by 3^rd and 4^th tier lenders in attempts to recover their debts (not recorded in the above corporate appointment figures)

We expect increases across all types of appointments to continue throughout 2024 and into 2025.

 Winding Up Applications

 We have now seen 3 months in a row of consistent applications just under the 100 marks being made driven largely by IRD and their recovery efforts. While the winding up applications are normally driven by those made in the Auckland High Court making up 2/3^rds of the total applications, May saw other courts around the country take up a larger share for the month making up around 50% of the applications, a sign that the regions outside of Auckland are also beginning to get their share of insolvency pressures.

 Personal Insolvencies – Bankruptcy, No Asset Procedure and Debt Repayment Orders.

 We can see a slight increase in April personal insolvency figures driven largely by bankruptcy applications but not a huge change over all. As outlined in the past I would expect that numbers will continue to increase slowly as job losses, increasing interest rates and cost of living continues to pressure people over 2024 and 2025.

 Where to from here?

Much like last month the signs continue to point to the NZ economy being in for continued pain for the foreseeable future with it likely to get worse before it gets better, we foresee continued rising appointments when compared to prior years. The OCR is unlikely to be dropped in the next 6 months potentially 1 year and inflation continues to be above the target of 2% and may be for some years with non-tradable inflation refusing to come under control.

 If you want to have a chat about any points raised or an issue you may have you can call on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..