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As a company director, you may begin to notice that your company is no longer serving its intended purpose. In such circumstances, it may be time to close or wind up the company. The formal process for winding up a solvent company is known as short-form liquidation. This article will outline the formal procedure you should follow when you undertake a short-form liquidation.
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Is My Company Solvent?
Before engaging in the winding-up process, you should ensure that your company passes the solvency test. A company will be solvent if:
- it can pay its debts when they are due; and
- the value of its liabilities is less than the value of all of its assets.
If your company does not pass this test, it will be considered insolvent, and you will not be able to engage in the short-form liquidation process.
Resolution of Shareholders
The first step to winding up your company is to secure approval from the shareholders by special resolution, a decision approved by at least 75% of shareholders. You should check the shareholders agreement and company constitution to confirm the threshold for a special resolution to pass (as it may be higher than 75%, but cannot be lower).
If a shareholder initiates the winding-up process, they must provide this resolution to the Companies Office when submitting the removal application. However, if you or another director are responsible for closing the company, you do not have to provide this resolution to the Companies Office. You should check your company constitution before proceeding to ensure that you follow the correct process.
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Intellectual Property
A company must consider what will happen to its intellectual property after winding up. For companies where the majority of value is its tangible assets, this may not be a big consideration. However, for companies (such as software companies) whose value is in their intangible assets, the company will need to consider how it will distribute its key assets.
As the company will no longer exist, it may be difficult to stop an existing shareholder from using its intellectual property to start their own business venture. Similar to how tangible assets would be distributed, the shareholders should come to an understanding as to how the intellectual property will be distributed, whether:
- IP is assigned (or sold) to a new company (with the proceeds then distributed to the shareholders to ensure no cash or assets sit in the company); or
- certain shareholders can use the intellectual property after the company is wound up.
Obligations for Closing Your Company
There are certain obligations your company must first complete when it is looking to wind up. In practice, these can take time. You should ensure that:
- your company is no longer engaged in business;
- you have discharged all outstanding liabilities;
- parties to key contracts come to an understanding that these contracts will end before proceeding with winding up (for example, your company’s lease or any contracts with employees);
- you have distributed the company’s assets in the manner specified in your company’s constitution; and
- no creditors have taken steps to place your company into liquidation.
Additionally, ensure that the company’s filing requirements are up to date on the Companies Register. These filing obligations require the company to confirm each of the following details on the Companies Register are up-to-date and correct:
- company’s address;
- directors’ details;
- shareholders’ details;
- information concerning the shares in the company; and
- company constitution.
Before applying for the removal of your company from the Companies Register, double-check that your company has filed any audited financial statements that are due.
Once the above steps are complete and you have a written and signed shareholder resolution, you can begin to complete your company’s tax obligations. We explain these obligations below.
File a Final Tax Return
You are legally required to file a final company tax return at the end of the tax year. The end of the tax year in New Zealand is 31st March. Unfortunately, you cannot file this early. It will only be due after the end of the financial year in which you closed your business.
This return must include all of the company accounts up to the date when your company ceased operations.
Complete Other Tax Obligations
Alongside these obligations, you must also:
- pay any outstanding business tax and GST;
- pay any employer-related or income tax;
- file your last employer monthly schedule;
- cancel your company’s GST registration;
- cancel your employer registration; and
- set up any depreciation recovery.
Once you fulfil these obligations, you must write to Inland Revenue and request a ‘no-objection’ letter. This letter ensures that the Inland Revenue Department does not object to the removal of your company from the Companies Register. Your company’s accountant or solicitor can write and send this letter to Inland Revenue. Note that it can take up to four weeks to receive a response from the Commissioner.
Apply to Be Removed From the Companies Register
The final step to the winding-up process is requesting to have your company removed from the Companies Register. Upon removal, your company will officially be closed down.
The application to the Companies Office must include your shareholder resolution (if applicable) and letter from the IRD and state the:
- company has ceased trading;
- grounds for the request to be removed from the Register;
- company has discharged all of its liabilities to known creditors; and
- company has distributed any surplus assets.
Once you make your request, the Companies Office will give public notice in the New Zealand Gazette that it intends to strike the company off the register. The Companies Office will only remove your company from the register if no objections are received during a 20 business day period from the publication of that notice.
Key Takeaways
A range of factors may contribute to you and the shareholders of your company deciding to wind up the company. If you are going to close your company, you may wish to conduct a short-form liquidation. This procedure involves:
- confirming that your company is solvent;
- distributing all surplus assets and discharging all liabilities;
- securing a written and signed resolution from 75% of your company’s shareholders (or all of the company’s shareholders if the company constitution requires this) affirming the company’s closure;
- ensuring filing and tax obligations are up to date; and
- applying to have your company removed from the Companies Register.
If you wish to wind up your solvent company, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
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