Being in a position where you can’t pay the debts that you owe is a place that no business wants to be. This is insolvency. When a company is insolvent, the next step is often liquidation. There are a couple of different types of liquidation: voluntary liquidation and liquidation by creditor. When liquidation is entered into, the court or shareholders appoint a professional liquidator to take control and responsibility for the financial affairs of the company. Principle Insolvency is here to talk about he consequences companies face when they enter liquidation.
Voluntary Liquidation
This type of liquidation is when the company’s shareholders decide to place the company in liquidation willingly. There has to be at least 75% of the shareholders in agreement to enter into liquidation. The benefit of this is that the shareholders will have a bigger say in the liquidation process.
Liquidation by Creditor
A court appointed liquidation or liquidation by creditor is a little different. This involves the creditors requesting the High Court to order the company and put them in liquidation. The creditor has to have proof that the company is insolvent before this will happen. Once the process is underway, the court will appoint a liquidator to oversee the process.
Effects of Liquidation for a Company
There are some immediate effects that a company will experience when they enter into liquidation. The liquidator will be given the responsibility to do the following:
– Investigate the company’s finances and director’s actions
– Identify the cause of the company’s failure
– Secure possession all the company’s insecure assets
– Sell assets for funds
– Pay back debts to secured as well as preferential creditors
– Distribute remaining funds to other creditors
Financial Implications for Shareholders
The only thing that shareholders will be able to control when they willingly enter into liquidation is appointing the liquidator that they work with. They may get paid out with distributed funds but not until all the creditors have been paid. If there isn’t enough money recovered, they won’t be receiving any dividends.
Tax Consequences of Liquidation
Sometimes, businesses will regularly fail to pay the taxes they owe. When this happens, they may be subject to Inland Revenue that will request liquidation by creditor. When a business struggles with tax debt, they can work with an expert to negotiate with the IRD.
Liquidation Affects the Business Reputation
There are only only legal consequences to liquidation. The brand name can also take a hit as well. A director who was managing a company that went into liquidation may have a difficult time working with other companies in the future. Customers may also be leery of buying goods from their new company.
Insolvency Services in Auckland, Hamilton, Levin & New Zealand Wide
If your business is in trouble, you may need to turn to Principle Insolvency to help you understand the options that you have. We will work with you through the liquidation and insolvency process. Call us today!