Following on from the latest edition in our insolvency series, which focused on bankruptcy of individuals, this article turns to company insolvency and, in particular, liquidation. In the current economic climate, liquidation is becoming an increasingly common feature of the New Zealand commercial landscape, making it important for business owners, directors, and creditors to understand what liquidation is, how it works, and what it means in practice.
At its core, liquidation is a legal mechanism for bringing a company’s affairs to an orderly end. While often perceived as a last resort, it plays an essential role in the commercial system by ensuring creditors are treated fairly and transparently when a company can no longer meet its obligations.
What is liquidation?
Liquidation is the process by which a company’s assets are realised and distributed to its creditors. The company ceases to trade, except as necessary to complete the liquidation, and its affairs are brought to a close.
The term “liquidation” reflects the practical reality of the process: the company’s assets are sold or otherwise converted into cash (i.e. turned into liquid assets), which is then distributed to creditors in a prescribed order of priority. Once this process is complete, the company is removed from the Companies Register and ceases to exist as a legal entity.
For directors and shareholders, liquidation marks the end of the company’s operations. For creditors, it provides a structured mechanism to recover at least part of what they are owed.
Legal framework
In New Zealand, liquidation is governed by the Companies Act 1993 (the Act). The Act sets out the circumstances in which a company may be wound up, the process to be followed, and the respective roles of the court, creditors, directors, and the liquidator.
The statutory framework seeks to balance the interests of allowing viable businesses to continue operating, while preventing insolvent companies from trading to the detriment of creditors. It is also important to distinguish liquidation from other insolvency processes, such as voluntary administration or receivership – liquidation is directed towards ending a company’s existence, not rescuing it.
How does liquidation work?
Under s 241 of the Act, there are two main ways in which a company may be placed into liquidation:
Voluntary liquidation
A voluntary liquidation occurs when the company resolves to be wound up, usually by way of a special resolution by the shareholders or directors of a company.
From a governance perspective, initiating a voluntary liquidation while the company is clearly insolvent can be a prudent step, rather than allowing the company to continue trading while unable to meet its obligations, which would otherwise risk directors not complying with their duties under the Act. These duties include not allowing the company to operate in a way that creates substantial risk of serious loss to its creditors (s 135) and not agreeing to the company incurring obligations without reasonable grounds to believe the company will be able to perform them when required (s 136).
Court‑ordered liquidation
In these cases, a creditor applies to the High Court for an order placing the company into liquidation, usually on the basis that the company is unable to pay its debts as they fall due.
Frequently, the process begins with a statutory demand, which is a formal demand for payment issued under the Act. If the company does not comply within the prescribed timeframe, it is presumed to be insolvent. For more detail on statutory demands, see our previous article.
Once that timeframe has expired, the creditor may apply to the High Court for liquidation. If the court is satisfied that the debt is due and the company is unable to pay, it will generally grant the order.
The role of the liquidator
On liquidation, control of the company passes from the directors to the liquidator to independently manage the winding‑up process. The liquidator’s primary responsibilities include:
- taking possession of and protecting the company’s assets
- investigating the company’s financial affairs and conduct leading up to liquidation
- realising assets for the best possible return
- distributing funds to creditors in accordance with statutory priorities
- reporting to creditors and, where necessary, the court
The liquidator has authority under s 261 of the Act to require directors, shareholders or any other person to provide information of the company within their possession to the liquidator to assist with the liquidation. The jurisdiction of a liquidator extends beyond those immediately connected with the company to ensure all information is obtained to facilitate the effective winding up of the company affairs. A liquidator may also compel the attendance of any person listed in s 261(2) be subject to examination on oath or affirmation in relation to any matter relating to the affairs of the company.
Liquidators also have the power to investigate and recover certain transactions made before a company enters liquidation. These are known as “voidable transactions” and commonly include payments or transfers that unfairly favour one creditor over others, or transactions that reduced the company’s assets at a time when it was unable to pay its debts. Generally, transactions entered into within the two years before liquidation may be challenged, although in some circumstances the period can extend to four years where related parties are involved. If a transaction is found to be voidable, a liquidator may seek to recover the money or property for the benefit of all creditors.
What does liquidation mean for directors and creditors?
For directors, liquidation of a company brings their management role to an end. Although directors no longer are in control, there is a residual and ongoing duty to assist a liquidator which may include provision of information, and if required, examination on company affairs.
In addition to co-operating with the administration of the liquidation, directors ought to be mindful that their conduct leading up to the liquidation will be scrutinised, particularly where there may be indications of reckless trading, preferential payments, or breaches of director duties. Directors have a separate legal personality to the company, but may still be pursued by the liquidator for breaches of their duties.
Directors also ought to be mindful that while a company is a separate legal entity, any personal guarantees provided may still be enforced post-liquidation. The debts of a company are generally (although not always) its own. However, this does not absolve any obligations provided under a personal guarantee.
For creditors, liquidation provides a structured and transparent process for debt recovery. While unsecured creditors may not recover all amounts owed, liquidation ensures that assets are distributed fairly and that no creditor gains an improper advantage over others. Creditors are required to submit a proof of debt form which sets out the details of the creditor, the amount owed and the particulars of the claim, including supporting evidence. This information helps assist the liquidators in assessing the distribution of assets, if any.
Key takeaways
It is important, as a director, to recognise when your company is no longer able to meet its obligations and consider whether liquidation is the best option for the company. For directors, early recognition of insolvency, seeking advice and taking appropriate action can provide greater options and mitigate risk.
As a creditor, it is important to understand the available routes to recover the debt owed to you. If debts are going unfulfilled, liquidation of a company may be the only viable option to recover the debt. Liquidation provides a structured and transparent pathway to debt recovery.
In the next articles in this series, we will continue our focus on company insolvency by exploring voluntary administration and receivership. These regimes differ significantly from liquidation in both purpose and outcome and are often directed at business rescue or asset recovery rather than winding up. Understanding how and when these options apply is critical for directors and creditors navigating financial distress.
If you have any questions about liquidations, please get in touch with our Insolvency and Restructuring Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
