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STEPHEN IORNS
Phone: +64 4 974 9121
Email: stephen@iornslegal.co.nz
RODERICK MULGAN
Phone: +64 4 974 9089
Email: mulgan@iornslegal.co.nz
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Company Liquidations and Director Liability

October 4, 2014

A sad phenomena we have seen since the Global Financial Crisis of 2007-2008 has been the common theme of small business owners getting in trouble with creditors, being liquidated, then being chased personally by liquidators. Despite the claims of a rock star economy, we see small business owners still struggling on a regular basis. Many come to us too late to be of the most use, having either buried their heads in the sand when cash-flow got too tight, or having thought they could not afford a lawyer to get them out of the mess, at a time they could not pay their debts as they fell due.

 

Our goal is not to add pressure but to relieve it. When businesses get us on board early enough, we save more than we cost. We enter negotiations with creditors, including the Government, with a view to trading out of the situation. This eases the cash-flow issues. We liaise with chartered accountants and financial advisors who can help put the business back on course, and advise through any re-structuring. We negotiate payment plans with the creditors who have issued statutory demands. In the worst case scenario, we have a friendly liquidator appointed. We do this while mindful that if we do not provide a cost-effective service, our fees will not be paid. Our ultimate goal is to keep your business running, and, if that goal is not attainable, winding it up with the least possible fall-out to directors and shareholders.

 

Sadly, though, it’s the exception not the rule that sees us instructed from the outset. All too often, we are contacted after liquidation, when the Court has appointed one on the big outfits as liquidator. To be frank, it is much easier for us to deal with a friendly liquidator than one appointed by the Court. Let me contrast this with three recent examples.

 

In the first example, we had been instructed by a company that was facing proceedings chasing a debt of around $80,000.00. The debt was partially disputed, but, there was no ability to pay in any event, and instead of defending the application, the company was placed in to voluntary liquidation. We nominated the liquidator, whose fees were paid out of the companies tax withholding account. They were easy to deal with and did not pursue the director personally for expenses leading up to liquidation, or the $80,000.00 (alleged) debt.  

 

In the second example, we were instructed by the directors after their company had been liquidated on application by the IRD, for a tax debt of around $90,000.00. Within the two years immediately prior to liquidation commencing, they had been repaid a loan from the Company, of around $80,000.00. The Court appointed liquidators were relentless in chasing the monies that had been repaid, as it had enabled the directors to recover more than they would have in liquidation. The difficulty here lies in the seventh schedule to the Companies Act 19993, which gives liquidators fees priority over all other expenses, when distributing assets of a liquidated company. There was no legal defence. On receiving the liquidators report, we established that their fees were up to the $35,000.00 mark. They had instructed their lawyers to pursue our clients in the High Court. We made a without prejudice offer for $40,000.00, which was about half of what was claimed. This offer was accepted, quite likely, as it allowed the liquidators to be paid. Had they gone to Court, there was a risk they would a) lose (the risk was slim) or b) bankrupt my clients in the process and see nothing. They accepted our offer as it made commercial sense to them – the sole creditor, namely, the IRD, would not have seen a bean. Our clients survived, just.

 

The third example illustrates the “better late than never” principle of contacting a lawyer. This director waited until liquidation had been commenced, the liquidators had made a demand for repayment of nearly $100,000.00, taken the matter to Court, and were in the process of obtaining judgment by default. All we could do here was buy time to raise funds to meet the judgment entered against the director personally, allowing them to keep their family home and prevent bankruptcy. Better late than never.

 

In all three of these examples, we have been of immense benefit to our clients. In all three of these examples, our clients would have been significantly better off had they contacted a lawyer as soon as the proverbial hit the fan. In the first example, we may have been able to avoid the $80,000.00 claim in the first place. In the second example, we may have been able to appoint a friendly liquidator and avoid the personal claim. In the third example, we may have been able to avoid the liquidation proceedings altogether.

 

While we are not cheap, we are affordable. Quite frankly, when your business is in jeopardy of liquidation, you can’t afford not to get help. If you need it, contact us today – we won’t bill you for picking up the phone or sending as an email to enquire about your situation. Or, you could keep doing what you’re doing…

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