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Company Liquidation Notes

Law Notes > Insolvency Law Notes

This is an extract of our Company Liquidation document, which we sell as part of our Insolvency Law Notes collection written by the top tier of University Of Otago students.

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Companies Liquidation: All insolvency/liquidation provisions are in Part 16 of the Companies Act. Procedural provisions are in Part 31 of the High Court Rules. Historically, Company liquidations directly imported bankruptcy principles, still partly so, s302(2). Entering Liquidation: s241. Not dependant on insolvency. Can be a convenient way of bringing a company to an end. Not necessarily even about insolvency, but may be. May also be tax reasons e.g. distribution of capital gains instead of dividends. Can be about a deadlock in a company. Can be without involvement of a court. Liquidation can be instigated by: Shareholders (special resolution), directors (but only if they have this power under the constitution), creditors, the company itself, the registrar of companies, administrator. Restriction, s241AA - if an application has been made to the court, you can still appoint a liquidator yourself, but it has to be within 10 working days. s241(4)(a) "unable to pay its debts", see s289 for definition of this, solvency test: Failure to meet statutory demand, unsatisfied execution, receiver appointed (company turns into Co "in receivership"), compromise not approved. There are far fewer grounds than bankruptcy. They are not exclusive ways of proving that a company can not pay its debts - s288. Contingent or prospective liabilities must be taken into account, but such a creditor needs leave from the court. Statutory Demand: Creates a statutory process or shortcut to proving insolvency. Extremely common and popular. Does not require a judgement. The statutory demand in itself is not a court process, simply a debt that is due and more than $1000, not a disputed debt. Such a creditor may give written demand, served formally on the company, requiring payment, compromise or satisfactory security within 15 working days (court may extend). Failure of the company to comply with this is the evidence required for liquidation. Widely used for debt collection, but not considered entirely "proper" for that purpose. Pioneer Insurance: Breach of ethics to issue notice on a disputed debt. Subject to courts power to set aside, s290 costs can be significant. Application to Liquidate: Part 31 of High Court Rules apply. Advertise in newspapers, file proof of advertising in the court. Not allowed to advertise in the newspaper for a certain amount of time after you've filed for liquidation. Had to be a delay, company can apply to restrain advertising in this time. Provisions for substituted plaintiffs, same as personal bankruptcy, so that other creditors don't need to start immediately from scratch. Liquidators: No special qualifications, but certain restrictions under s280: Have to be over 18, not a company, not bankrupt or disabled, not connected with the company in any way. This catches quite a lot of accounting firms, which causes problems.

Official Assignees Position: Significant restrictions on appointing OA for a noncourt liquidation, s241(3). Court appoints OA by default if no application is made for appointment of a specific liquidator. Even if OA is appointed liquidator, common for substituted liquidator to be appointed soon after. Effect of Liquidation: Liquidation commences on appointment of liquidator and ends when final documents are delivered to the Registrar of Companies. On commencement, s248, liquidator takes control of the company and assets. No vesting here. The practical mechanism of taking control of the company and its assets, acting as the board of directors is that they acquire management powers for the purpose of liquidation. No issue of what vests, or after acquired property, no possibility of second/subsequent liquidations.
- Legal proceedings can not be started or continued without the liquidators or courts permission
- Shares can not be transferred and the constitution can not be altered
- Shareholder rights are restricted Liquidators must: advertise the liquidation publicly, summon a meeting of creditors or dispense with one under s245, file liquidators statements, keep accounts, realise and distribute assets, conclude the liquidation. Meetings of Creditors: Different to committee of creditors. Forms part of the oversight of liquidation. S243, obliged to call a meeting of creditors within 30 working days of appointment for the purpose of: confirming liquidator or appointing a new one, recording the views of creditors. A liquidator can dispense with the meeting under s245, and they routinely do - if it's not worth the cost or not going to be worthwhile. There is an option for a creditor to require a meeting by notice within 10 working days, under s245(1)(b)(iii), in which case they have to have a meeting within 15 working days of the notice. Real impact is the power of attack on the liquidator, they have the secondary power to influence the way the liquidation is carried out. Can appoint a "tame" liquidator, but this may be attacked in a number of ways, but the first way is the creditors meeting. May be when the creditors want a more aggressive liquidator. Liquidator is to have regard for the views of creditors and shareholders, s258. Liquidation Committees: s314, necessary to consider liquidation committees. More than just a meeting, it's ongoing. The kind of thing you would do if you were unhappy with the progress of the liquidation. Both shareholders and creditors are considered, and can be referred to the court if there is a conflict between them. Committee has 3 or more members, process governed by schedule 8. Liquidators Powers: The committee has limited powers, and not used very often. Quite common for shareholders to be disgruntled about the way a liquidator is handling a company. Liquidation committees can call for for reports, call meetings, apply to the court, "assist" the liqudiator. Extensive powers to investigate, to get documents, examine under oath. Special powers - to disclaim, s269, insolvency transactions, sue directors re accounting records, make calls on shares, assign rights to sue subject to the Court's approval.

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