Liquidation is a process that marks the end of a company’s existence. It does this by winding up its affairs, selling off its assets and distributing the proceeds to creditors. In New Zealand, liquidation can be initiated voluntarily or made compulsory by court order, usually at a creditor’s request. <\/p>\n\n\n\n
Both types of liquidation come with legal risks and implications, which is crucial information for company directors, shareholders, and creditors to understand. This article will explain the differences between voluntary and compulsory liquidation in New Zealand and the legal risks associated with each.<\/p>\n\n\n\n
Voluntary liquidation occurs when a company\u2019s shareholders or directors choose to wind up its affairs. This is typically because the company is insolvent. Voluntary liquidation allows a company to control its winding-up process<\/a>. However, significant legal risks are involved, some outlined below.<\/p>\n\n\n\n Directors must ensure they meet their fiduciary duties. This includes continuing to act in the best interests of creditors once the company becomes insolvent. Failure to do so can lead to personal liability for the company\u2019s debts. <\/p>\n\n\n\n Directors must carefully consider the timing of the liquidation. Continuing to trade while insolvent can result in directors being accused of reckless trading. This can occur even during liquidation<\/a> and may result in personal liability. Directors may also be banned from acting as a director in other companies.<\/p>\n\n\n\n Payments made to certain creditors before the liquidation process<\/a> starts may be considered preferential. The liquidator can claw back these payments. Directors must be careful when managing creditor payments leading up to liquidation to avoid legal issues.<\/p>\n\n\n\n The liquidator can set aside any transactions intended to defraud creditors. Directors participating in such activities will face serious legal consequences, including fines and imprisonment.<\/p>\n\n\n\n Compulsory liquidation occurs when a court orders the liquidation of a company. This is usually done at the request of an unpaid creditor. In such cases, the creditor must prove that the company is insolvent. If successful, the court will appoint an official liquidator to wind up the company\u2019s affairs.<\/p>\n\n\n\n Compulsory liquidation carries its own set of legal risks. Let us outline these below.<\/p>\n\n\n\n The <\/strong>company\u2019s directors lose control as soon as a compulsory liquidation order is made. After that, the liquidator makes all the insolvent company’s decisions, including the sale of assets and the distribution of the funds. <\/p>\n\n\n\n In a compulsory liquidation, the liquidator is required to investigate the company\u2019s affairs, including the directors\u2019 conduct. If the liquidator finds evidence of misconduct, they may take legal action against the directors. This can lead to personal liability for company debts and fines. There may also be bans from holding directorships.<\/p>\n\n\n\n Compulsory liquidation will be on the public record. This can damage the reputation of the company\u2019s directors and shareholders and may have long-term consequences. This is particularly detrimental for those wanting to start new businesses.<\/p>\n\n\n\n Compulsory liquidation can be very costly, particularly if complex legal matters are involved. The company usually covers these costs, which further reduces the amount available to pay creditors.<\/p>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\nDirectors\u2019 Duties<\/h3>\n\n\n\n
Insolvency Risks<\/h3>\n\n\n\n
Preferential Payments<\/h3>\n\n\n\n
Fraudulent Transactions\u00a0<\/h3>\n\n\n\n
Compulsory Liquidation<\/h2>\n\n\n\n
Loss of Control<\/h3>\n\n\n\n
Director Investigations<\/h3>\n\n\n\n
Public Record<\/h3>\n\n\n\n
Legal Costs<\/h3>\n\n\n\n