Selling your business and ceasing trading is a significant milestone, but what happens to the company itself? While some business owners leave the company dormant, others take proactive steps to formally close it. The best approach depends on several factors, including tax efficiency, legal certainty, and cost considerations. This article explores the options available, the benefits of a solvent liquidation, and how to manage post-sale company affairs effectively.

What Are Your Options?

Once you have sold your business and ceased trading, you generally have two primary options for dealing with the company:

1. Short-form removal from the Companies Register

2. Formal solvent liquidation

The choice depends on factors such as outstanding liabilities, retained earnings, tax implications, and the level of certainty you require.

When to Consider a Formal Solvent Liquidation

A solvent liquidation, is a formal process under the Companies Act 1993 where a liquidator is appointed to wind up the affairs of a solvent company. This process provides certainty that all liabilities, including tax obligations, are properly dealt with before the company is removed from the Companies Register.

A solvent liquidation is advisable when:

• The company has significant retained earnings or assets to distribute to shareholders.

• There are potential contingent liabilities (e.g., tax risks, guarantees, or warranties provided as part of the business sale).

• You want legal certainty and finality, reducing the risk of future claims.

• You need to distribute capital in a tax-efficient manner.

When is a Short-Form Removal Suitable?

A short-form removal is a simpler, lower-cost option where a company applies for removal from the Companies Register under section 318 of the Companies Act 1993. This approach is suitable when:

• The company has no outstanding debts or liabilities.

• Retained earnings and assets have been fully distributed before applying for removal.

• There are no anticipated future claims against the company.

However, a short-form removal does not provide the same legal certainty as a formal liquidation. If a claim arises after deregistration, the company can be restored to the register, potentially causing issues for former directors and shareholders.

Why Does a Solvent Liquidation Provide More Certainty?

A solvent liquidation ensures:

• All liabilities, including tax obligations, are settled before the company is removed.

• Proper distribution of assets is conducted under the supervision of a licensed insolvency practitioner.

• Future risks of restoration or unexpected claims are minimized.

• Tax-efficient distributions are managed correctly, reducing the risk of disputes with Inland Revenue.

Reducing the Costs of a Formal Liquidation

Business owners can take steps to minimize liquidation costs by:

• Settling all outstanding liabilities and closing accounts before appointing a liquidator.

• Distributing non-cash assets before liquidation (where tax-efficient to do so).

• Providing clear financial records and ensuring tax filings are up to date.

• Minimizing the number of shareholders, as distributions to multiple shareholders increase administrative work.

Tax Issues in Liquidation

A key consideration in liquidation is the tax treatment of distributions to shareholders.

• Retained Earnings: If the company has accumulated profits, these are generally distributed as a taxable dividend, subject to Dividend Withholding Tax (DWT). Usually an imputation credit balance is available to offset much of the tax liability.

• Capital Distributions: Distributions of capital (e.g., proceeds from selling assets or paid-in share capital) are generally tax-free, provided they are correctly structured.

• Final Tax Returns: The company must file final tax returns with Inland Revenue, including a final GST return (if applicable) and confirmation of the liquidation process.

How Does the Liquidator Distribute Retained Earnings?

The liquidator is responsible for distributing retained earnings and capital however often the company’s accountant can do much of this to save costs. This is as follows:

1. Settling all outstanding creditors – Ensuring all debts, including tax obligations, are cleared.

2. Paying retained earnings to shareholders – Retained earnings are usually distributed as taxable dividends, subject to DWT.

3. Distributing capital to shareholders – Share capital and capital reserves are distributed by the liquidator tax-free on liquidation.

4. Final removal of the company – Once all matters are settled, the liquidator files for the company’s removal from the Companies Register.

Key Takeaways

• A formal solvent liquidation provides legal certainty and tax-efficient distributions, especially when retained earnings are involved.

• A short-form removal is suitable for simple cases but carries the risk of company restoration if claims arise.

• Understanding the tax treatment of final distributions is crucial for shareholders to avoid unexpected liabilities.

• Business owners can reduce liquidation costs by ensuring all financial affairs are in order before liquidation begins.

If you have sold your business and are unsure about the best approach for closing your company, we can provide expert guidance. Contact us today for a consultation on your post-sale company obligations and tax-efficient strategies for finalizing the business.

For solvent companies that have ceased trading, particularly those that have made a capital gain through the sale of their business, now is the ideal time to consider a solvent liquidation before the end of the financial year on 31 March. Under New Zealand law, specifically Section CD 26 of the Income Tax Act 2007, companies that have sold their business at a capital profit can distribute that profit tax-free to their shareholders upon liquidation, provided the transaction was conducted at arm’s length.

Why Liquidate Before 31 March?

1. Maximising Tax-Free Distributions

o A solvent liquidation ensures that capital profits from the sale of a business can be distributed tax-free.

o Delaying the liquidation may expose the company to changes in tax laws or other regulatory risks.

2. Avoiding Interest on Overdrawn Current Accounts

o If shareholders have overdrawn current accounts, these attract interest and have tax consequences. By completing the necessary winding up resolutions interest can cease to accrue.

o By liquidating before year-end, shareholders can receive distributions and tidy up tax affairs earlier bringing peace of mind.

3. Reducing Ongoing Compliance Costs

o Even if a company has ceased trading, it still has compliance obligations, including filing GST and income tax returns and maintaining financial records.

o A formal solvent liquidation reduces these obligations, costs and administrative burdens for directors and shareholders.

Solvent Liquidation vs. Short-Form Removal

While a short-form removal from the Companies Register might seem like an easier option, it does not provide the same benefits as a solvent liquidation in all cases.

Take Action Now

With the financial year-end fast approaching, now is the best time to act. By undertaking a solvent liquidation before 31 March, you can distribute capital gains tax-free, avoid unnecessary compliance costs, and ensure the company is wound up in a structured and compliant manner.
If your company has ceased trading and you want to explore the best strategy for winding it up, contact our team today to discuss the benefits of solvent liquidation before the financial year-end.

If you have sold your business or business assets and ceased trading and you are considering liquidating your solvent company, there are a number of benefits to completing the process before the end of the financial year. A solvent liquidation, is a process by which a company is wound up and its assets are distributed to its shareholders because it is no longer needed or wanted. The benefits of doing so include:

Tax advantages
By completing your solvent liquidation before the end of the financial year, you can take advantage of tax benefits that are only available to companies that are wound up before the end of the financial year. In particular, you may be able to claim a tax deduction for any losses incurred during the liquidation process, which can help to offset any tax liability that you may have. The Income tax Act 2007 allows a company to make a tax free distribution of capital gains “on liquidation”.
under the short form method.

A formal liquidation can protect against a capital distribution (following that liquidation) being found to be taxable. If a company continues to trade after the winding up resolutions under a short form process or before a formal liquidation, there is a risk a capital distribution in that period is taxable.

Simplified accounting
Completing your solvent liquidation before the end of the financial year can simplify your accounting and bookkeeping, as you'll only need to maintain records for the period up to the liquidation date. This can save you time and money, as you won't need to keep track of expenses and transactions that occur after the liquidation date.

Increased flexibility
By completing your solvent liquidation before the end of the financial year, you'll have increased flexibility in terms of how you can use the assets that are distributed to you. This can help you to reinvest the funds in other ventures, or to use them to pay off debts or other financial obligations.

Protection for directors
Completing your solvent liquidation before the end of the financial year can also provide protection for directors against any unexpected potential claims or legal action that may arise after the liquidation is completed. By winding up the company before the end of the financial year, directors can ensure that they're not held liable for any future debts or obligations that may arise.

Overall, completing your solvent liquidation before the end of the financial year can provide a range of benefits, including tax advantages, simplified accounting, increased flexibility, and protection for directors. If you're considering a solvent liquidation, it's important to speak with a qualified professional to understand your options and to ensure that the process is completed correctly and in accordance with all legal requirements.

The Income tax Act 2007 allows a company to make a tax free distribution of capital gains “on liquidation”.

The IRD issued publication QB20/03 on 11 December 2020. The publication discusses the first step legally necessary to achieve “liquidation” in both the short form (s318(1)(d) Companies Act 1993) and long-form liquidation (s241(2)(a) Companies Act 1993).

IRD have confirmed when “liquidation” occurs under each process. It reinforces BR Pub 14/09 that a short form liquidation commences (for tax purposes) when a valid resolution is passed, when the directors (and/or shareholders depending on the constitution) make the decision to wind up the business, pay all creditors, distribute surplus assets and request removal from the register of companies, and then carry out the short from liquidation process. It also confirms that the first step legally necessary to achieve a long form liquidation is not the same. A long form liquidation commences when the shareholders pass a resolution to appoint a named liquidator.

Can you lose liquidation status?

The commentary talks of the trigger for losing the “on liquidation” status under the short form method. Quite simply, if the company continues to trade after the winding up resolutions under the short form process or before the formal liquidation, there is a risk a capital distribution in that period is taxable. Also, if a company commences a short form process then there is a significant delay or does not complete the formal strike off, earlier capital distributions may be held taxable.

Directors need to be wary that when they decide to wind up their company and opt for the shortform method that they cannot be held to have traded in the winding up process and they cannot incur significant delay without reason. Refer IRD’s example 3 below. The short form liquidation process must lead to the company strike off.

Can you change process from short form to long form?

Example 1 below shows it can take time to achieve a winding up, even years.

Changing processes from short to long form is less clear. The article suggests “unforeseen processes” as a legitimate reason. It does not specify the common position where companies resolve to wind up their businesses, start to carry out that process and then appoint a liquidator to complete the process down the track. Liquidation for tax purposes starts on the winding up resolution and then the formal long form liquidation starts from the shareholder resolution appointing the liquidators by name later. It seems so long as there is a clear intention and reason to change process that this is acceptable.

These are the key clauses relating to the change of process, from my perspective are at 12 and 13 of QB20/03 :

12. Changing Processes “Sometimes, a company that has embarked on a short-form liquidation may find it necessary due to unforeseen circumstances to appoint a liquidator. This could occur, for example, where a dispute arises in the course of winding-up the business that would be better to have a third-party liquidator resolve. The Commissioner considers that the period known as “on liquidation” began when a valid resolution was passed commencing the short-form liquidation process.”

13. Time Delays “In some cases, there may be an extended period between the first step legally necessary to achieve liquidation and the removal of the company from the register. The period may even span different tax years, so that a distribution is made in a period preceding the removal of the company from the register. The Commissioner will assume that any distributions are made pursuant to a genuine intention to liquidate. However, if the liquidation is not completed or, in the case of a short-form liquidation, the company does not cease to trade after a resolution to cease to trade is passed, then such a distribution will not have occurred “on liquidation” and the distributions will be taxable.”

This suggests that a company may change processes so long as there is a genuine intention to liquidate from the outset and “on liquidation” occurs from the initial resolution (so long as further trading does not disrupt that).

The Examples provided

Takeaway
The key message is, so long as your client can clearly show there was no trading after the winding up resolution then there should be no issue with advancing a short form method. For certainty advancing a formal long form solvent liquidation is recommended – particularly for companies with large capital distributions. It removes the risk.

For advice on solvent or short form liquidations contact our team.

Related Article:  Ceasing to Trade a Company in New Zealand

On 3 April 2020, the Government announced that it would be making changes to the Companies Act 1993 to provide insolvency relief for businesses affected by COVID-19.

Yesterday, 5 May 2020, the first reading of the COVID-19 Response (Further Management Measures) Legislation Bill) took place. That bill introduces, amongst other measures:

• Reducing the voidable transaction and voidable charge period for non-related parties to six months (Schedule 2)
• The safe harbour provisions for directors (Schedule 3)
• The COVID-19 business debt hibernation (Schedule 4)
• Extensions to the periods mortgages and rent can be in arrears before default notices can be issued and enforcement action can be taken under the Property Law Act 2007 (Schedule 14)

Both the Safe Harbour provisions and the Business Debt Hibernation scheme are intended to be used by companies who, but for COVID-19 would not be facing cash flow issues.

Safe Harbour Provisions

The safe harbour provisions allow directors to trade during the safe harbour period (initially 3 April 2020 to 30 September 2020) without breaching section 135 (reckless trading) and/or section 136 of the Companies Act 1993 if:

• The company “was able to pay its debts as they became due in the normal course of business” as at 31 December 2019 (Pre-COVID-19 Solvent); and
• In good faith, the directors are of the opinion that the company:
  
  • has or will have short term, COVID-19 related liquidity problems over the next six months; and
  • will (more likely than not) be able to pay its due debts on and after 30 September 2021.

                (Post-COVID-19 Solvency Opinion)

The bill puts the onus on the directors to show that they are entitled to the protection afforded safe harbour provisions. The bill also contemplates that the safe harbour period could be extended beyond 30 September 2020.

Business Debt Hibernation

The Business Debt Hibernation(BDH)  scheme will allow entities (including companies, partnerships, body corporates, and unincorporated bodies) to delay payment of their debts, whether in full or in part, for a period of up to seven months.

Entities will be able to enter into BDH if:

• The entity was Pre-COVID-19 Solvent;
• At least 80% of the entity’s directors vote in favour of a resolution to enter into BDH; and
• Each director who votes in favour of the BDH:
  
  • Makes a statutory declaration that:
    
    • The entity was Pre-COVID-19 Solvent
    • The director holds a Post-COVID-19 Solvency Opinion
    • Sets out the grounds for his or her Post-COVID-19 Solvency Opinion

                     (Post-COVID-19 Solvency Declaration)

• • Is acting in good faith

The entity will enter into the BDH when it delivers notice of the BDH to the Registrar (as drafted, all entities will deliver the BDH notice to the Registrar of Companies, not just companies registered on the Companies Register). Entities entering into BDH will have an initial one-month protection period during which creditors will be prevented from starting or continuing enforcement action against the entity and its assets while the entity puts forward its proposed arrangement with its creditors. If the proposed arrangement is supported by 50% of the entity’s creditors (in number and value) who vote on the proposed arrangement, the protection period will be extended for a further six months and all creditors who were sent notice of the proposed arrangement will be bound by the proposed arrangement.

During the protection period (including the extended protection period), unless the approved arrangement provides otherwise or only with the court’s permission:

• Creditors will not be able to enforce their charges over the entity’s property;
• Lessors will not be entitled to take possession of the property used or occupied by the entity;
• Creditors will not be able to begin or continue proceedings for a debt or the recovery of property from the entity;
• Creditors cannot start or continue enforcement action against the entity;
• Creditors cannot call on guarantors of BDH debts, if the guarantor is related party of the entity.

The extended protection period will come to an end if at least 80% of the entity’s directors are not prepared to make new Post-COVID-19 Solvency Declarations, if requested to do so by a creditor. Once given, each Solvency Declaration can be supplied to creditors requesting a new Solvency Declaration for a period of up to two months from the date it is given.

The following debts are excluded from BDHs:

• Employees’ remuneration (including PAYE and other deductions)
• Amounts owed to secured creditors with security over all or substantially all of the entity’s assets (after the initial one-month protection period)
• Debts incurred after the company enters BDH
• Excluded debts (the term “excluded debts” is not defined in the bill)

A BDH does not compromise any of the entity’s debts but an entity in BDH can advance a creditor compromise or be placed into voluntary administration during the protection period.

Progressing the Bill

The bill has been referred to the Epidemic Response Committee, who are due to report back to the house on 12 May 2020.

A date for the second reading of the bill has not yet been announced.

You can find a copy of the bill here: 

How We Can Help

Directors wanting to take advantage of the Safe Harbour provisions or entities considering the BDH will need to satisfy themselves that the entity was Pre-COVID-19 Solvent and that they have a good faith basis for their Post-COVID-19 Solvency Opinion. Because of these requirements, if you have any hesitation about your entity’s financial position, we strongly recommend that you take advice.

For entities that cannot meet the solvency requirements of the Safe Harbour provisions or the BDH scheme, there are a number of business restructuring options available that could help directors and shareholders navigate their way through the financial challenges brought about by COVID-19.

If you want to discuss the issues your business is facing, email us on This email address is being protected from spambots. You need JavaScript enabled to view it. to request a phone call from or Zoom meeting with one of our insolvency practitioners.

The Government is introducing legislation to change the Companies Act to help businesses facing insolvency due to COVID-19 to remain viable, with the aim of keeping New Zealanders in jobs.

The temporary changes are outlined here

A safe harbour is granted to directors of solvent companies, who in good faith consider they will more than likely be able to pay its debts that fall due within 18 months. This would rely on trading conditions improving and/or an agreed compromise with creditors. It essentially provides certainty to third parties of an exemption from the Insolvent transaction regime.

The changes allow directors to retain control and encourage directors to talk to their creditors and will if needed enable businesses which satisfy some minimum criteria to enter into a debt hibernation scheme with the consent of creditors.

The following article on the Company Law changes released by Martelli McKegg provides more detail read here 

In summary:

• Debt hibernation is binding on all creditors (we are uncertain about whether related party creditors can vote, or whether their votes are challengeable) providing that a vote of 50% by number and value is obtained
• Creditors will have 1 month from the date of proposal to vote during which time there is a moratorium on the enforcement of debts
• If passed, a further 6 months moratorium will be available
• To access debt hibernation a threshold will need to be met 
• It will not apply to Sole Traders

Warning for insolvent companies and directors

Directors considering trading on their company need to be careful and cautious and should have their decisions supported by accounts as at 31 December 2019 (as a minimum), and reliable cashflow projections. Companies that cannot satisfy the solvency test at 31 December 2019 or pre Covid-19 impacts should not be advancing a debt hibernation scheme and directors of those companies will not have protection from S135 and S136 claims.

Insolvent companies that are now facing further financial harm as a result of the lockdown should be seriously considering ceasing to trade and entering into either a formal company compromise under Part XIV of the Companies Act 1993, liquidation, or in some cases voluntary administration. The options depend on the viability of the business.

We consider directors of companies on the brink of insolvency should seek independent advice on whether the company meets the debt hibernation criteria and as a minimum we would recommend that financial accounts are being prepared now to 31 December 2019 along with forward looking cashflow projections to support the decision to trade. We expect creditors being asked to vote will require that sort of information to be available. We urge directors to get their Chartered Accountants involved.

Directors need to be aware that the safe harbour provisions may not protect you. For example, if your company has not been able to meet a statutory demand immediately pre-covid, then your company may be deemed insolvent.

McDonald Vague Consulting Support Services

The McDonald Vague team offer the following services as a cost-effective and efficient form of employer assistance in these challenging times.

• Independent Assessment of solvency to satisfy the Debt Hibernation scheme (requires financials to 31 December 2019)
• Assistance with Debt Hibernation arrangements, offers and documentation.
• Company Compromise (for insolvent companies) 
• Liquidation 
• Voluntary Administration (recommended for larger companies seeking to compromise with creditors).

CONTACT OUR TEAM 

McDonald Vague provides a specialist service conducting solvent liquidations. Companies are often put into liquidation this way when a business has been either sold, closed down or reorganised for tax and/or management purposes.

Capital gains on company sales

Under current New Zealand law, companies that have sold their business at a capital profit can then, on liquidation, distribute that profit to their shareholders tax free (arm's length transactions only) under Section CD26 of the Income Tax Act 2007.

There is often debate as to whether a formal liquidation process is necessary to distribute tax free capital profits, or whether it is sufficient to simply have the company struck off the Companies Register. When large sums of money are involved, we believe it is prudent to carry out a formal liquidation that cannot subsequently be challenged by potential creditors. Even though the company may have been removed from the register in a strike off, this will not prevent acrimonious third parties from having the company reinstated at a later date. A formal liquidation ensures peace of mind.

Reorganisation of company affairs

McDonald Vague is particularly experienced in reorganisation of companies, especially those with a foreign parent. Amalgamations are commonplace and old entities no longer required are absorbed.

Company "deaths"

For a variety of reasons, a company will often reach the end of its useful life. Whilst shareholders may do nothing (annual returns not filed) and wait for the Registrar of Companies to remove the company from the register, shareholders in some circumstances will want some finality to the process. Although the company may have paid all known debts, the shareholders can rest assured that once the formal liquidation process has been completed they are highly unlikely to be called upon for anything that may arise in the future.

Processes involved

The directors of a company must first make and file resolutions as to solvency before the liquidation can commence. The shareholders then pass a resolution to appoint a liquidator. The liquidator deals with any liabilities of the company and distributes surplus assets to the shareholders in accordance with their rights.

With an insolvent company the liquidator realises the assets and distributes the cash in accordance with the various priorities. With a solvent company it is possible to make an "in specie" distribution. That is, the assets themselves can be distributed to the shareholders in proportion to their shareholding.

Solvent liquidations we have undertaken

McDonald Vague has performed numerous solvent liquidations. Some of the many assignments we have undertaken have included:-

• a group of property management companies (no longer trading) with a parent company domiciled in Hong Kong
• a pharmaceutical supplies company where the business was sold for capital profit
• the reorganisation of a group of insurance and financial asset management companies
• a forestry development winding up
• a New Zealand advertising agency sold to a major international group but requiring a lengthy liquidation to allow for transfer of intellectual property
• an investment company (no longer trading) with a US parent company
• an in-store promotions company where the business was sold for capital gain
• a Canadian owned manufacturer and distributor of beverages
• a technology investment company
• a retailer and distributor of industrial and other chemicals
• a company specialising in the development of a prominent software package for accountants where the intellectual property was sold for capital gain

Please contact Peri Finnigan on 09 303 9519 for confidential, no obligation advice on this area.

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.