Early intervention can prevent ‘corporate death’

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Contrary to belief, liquidators can be rescuers, not undertakers

Pritesh Patel

As an Insolvency Practitioner, I have learnt to be assertive and serve with a smile.

Liquidators are often referred as ‘Funeral Directors.’

This is sometimes true as we administer the last rites of a company.

Economic cycles are like weather and we are now seeing an upsurge in liquidations and receiverships, orchestrated by fierce competition, high compliance costs, tight lending criteria, increasing popularity of online shopping and many other factors.

If a Liquidator determines that the owners or directors have been reckless, they can be banned from being directors for up to five to ten years and/or serve a prison term not exceeding three years. Continuing to trade whilst incurring significant debts is an offence.

A Liquidator may choose to pursue a delinquent director for losses of the company and often including the cost of liquidation.

Phoenix Transactions

Liquidators come across situations where an insolvent company with compounding debts has been “sold off” to a new company having the same shareholders, placing under liquidation the debt-ridden company.

Under the Companies Act 1993, the Liquidator is duty-bound to investigate this transaction to ensure that it was at ‘arms length,’ that consideration was given and the company was not liquidated to simply move the assets out of the insolvent company, avoiding payment to creditors.

Voidable Transactions

I am witnessing increasing number of cases brought to the courts, where a Liquidator can request payments made by a company within a specified period (2 years) pursuant to Section 292 and 293 of the Act.

Simply put, the Liquidator is tasked with the job of ascertaining as to when the company technically fell into insolvency whereby it could not pay its fixed and variable business expenses in the normal course of conducting business.

Under section 294, this transaction can be set aside; it would then allow the Liquidator to issue a statutory demand for repayment. There is a three-tier test carried out to ascertain if a payment is an insolvent transaction: (a) Did the creditor act in good faith? (b) Was the creditor aware of the insolvency of the debtor? (c) Did the creditor provide value?

Shareholders Current Account: Overdrawn

If the Balance Sheet of a company reflects an overdrawn current account, it may necessitate the Liquidator seeking repayment back from the shareholder.

Liquidation Appointment   

In New Zealand, Liquidators are prevented from appointment if they have an ongoing relationship with the insolvent company and/or secured creditors.

In most cases, appointments are personal; hence, it can be argued that the relationship may be with the employer of the Liquidator and therefore the Liquidator can still take the appointment. It is better that this appointment is not taken as it can lead to a lot of issues including a request for a creditors’ meeting to be called which has the prime objective of ousting the incumbent Liquidator.

Creditors Meeting: Patsy Liquidator

In most liquidations, the Liquidator dispenses the need to call a creditors’ meeting. I believe that the only propose of calling a creditors’ meeting is simply to replace the incumbent Liquidator with another Liquidator.

Creditors assume that an appointment by resolution of the shareholders will be favorable to the shareholders and not the creditor’s.

This is an urban myth!

This right to call a creditors’ meeting is available to any creditor with a valid claim.

Over the past twelve years as a full time Insolvency Practitioner, I have had to call only five such meetings with only one meeting in which I was replaced. The new Liquidator must clear the old Liquidator’s debts incurred before earning any fees themselves.

What some creditors fail to comprehend is that irrespective of who the Liquidator is, the fundamental aspect is that the Liquidator has to work for the benefit of the whole body of creditors (secured and unsecured) and that personalities and idiosyncrasies should be left out of the process.

Some Case Studies :

Sporting Goods Retailer (Palmerston North)

This company sold branded Cricket gear. The company was closed down and assets sold to the highest tenderer. The Liquidator went an extra mile to ensure that he honoured the promise made to the Cricket Association prior to liquidation that its junior Cricketers would receive their gear in time for the Cricket season.

This involved negotiating with the overseas supplier, arranging urgent customs clearance and priority  courier to Palmerston North.

Coffee/Restaurant (Ellerslie, Auckland)

Upon appointment, a Liquidator should ensure that the benefit to creditors would be best served by selling the business as a going concern. To archive this, the business was operated under liquidation for four months during which overheads were reduced, turnover and staff morale increased and sale was achieved with the support of the Franchisor. The secured creditor with a General Security Agreement was paid on pro-rata first and final dividend and the General Security Agreement (GSA) discharged.

Construction Company (Manukau, Auckland)

The Liquidator is currently pursuing a case before the Court to demand payment from a customer for the work performed by the company. The Liquidator has a good case for summary judgment based on an expired claim under the Construction Contracts Act 1993.

Interior Fit Out Company (Wellington and Christchurch)

This company carried out interior fit outs of schools, high rise buildings and other jobs in Wellington and South Island. Some recoveries were achieved by engaging service providers to complete fit outs such as the Taipei Economic and Cultural Office in Wellington.

High End Car Dealer (Grey Lynn, Auckland)

About 30 secondhand European cars ‘disappeared’ upon my appointment. With lateral thinking, all cars were recovered and taken into the control of the Liquidator, pursuant to Section 248 of the Act.

Fast Food (Franchised) Business (Auckland)

The Liquidator in quick succession liquidated four franchised burger outlets which had a total of only 8 in New Zealand. The Liquidator operated one outlet in a mall for some 5 months and to his astonishment found out that raw materials such as chicken pieces and beef patties etc delivered to the store were being stolen on regular basis by the shareholder. This was done in the early morning when deliveries were made. A Section 261 notice was issued to the shareholder and was dealt with appropriately by the Liquidator regarding the misappropriated goods (and other matters)

Importer Perfume  Business (Auckland)

A referral was made to the Police Department by the Liquidator after he discovered that the shareholder had fraudulently taken money from friends and family on the pretext of importing perfumes and mobile phones.

A Private Investigator was appointed and a large warehouse containing perfumes, ladies cosmetic goods, electronic goods were taken into my custody. The shareholder absconded and is believed to be in the USA and has continued to make vile threats to the Liquidator.

Boarding House (Otahuhu, Auckland)

Although I was appointed by the shareholder, it was soon ascertained that there was a significant level of funds remitted overseas leading to  a high degree of asset stripping.

In consultation with Inland Revenue Department, section HD 15 of the Income Tax Act 2007 was invoked to compel the shareholder (who now resides in Melbourne, Australia) to provide records to the Australian Tax Office.

At Patel & Co, I engage a team of talented lawyers (Peter Broad, Barrister, for Litigation and Yashveen Singh Solicitor from Legal Hub). They ensure that matters that need to be referred to the Courts are diligently pursued and execute a settlement of a business if possible.

Like most illnesses, early intervention can prevent the death of a company.

Pritesh Patel is the Principal of Patel & Co, Insolvency Practitioners and Accountants with offices in Auckland and Cook Islands. Email: pritesh.patel@xtra.co.nz; Website: www.patelandco.co.nz

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