Easing the anguish of liquidation

In troubled economic times some businesses, despite their best efforts, simply cannot continue and management must make the tough call that there is no longer a core, sustainable business. At that point, the inevitable outcome is the appointment of a liquidator.

Company directors have a responsibility, enshrined in statute, to not continue ongoing trade of a business in a manner that is likely to cause loss to its creditors. They must do the responsible thing and cease trading, or they could face personal liability for losses incurred.

The appointment of a liquidator – typically by shareholder or High Court appointment – will see the company’s assets sold and the proceeds paid out in the statutory order of priority to the company’s unpaid creditors.

In New Zealand, most businesses are classed as small and medium enterprises (SMEs) and are owner-managed. This means that when a liquidator is called in the impact is typically direct and personal. It is very painful for people who have invested blood, sweat and tears into their business to see it all crash and burn.

Indeed, many business failures can be attributed to inept management, but in times like these, where Covid-19 has come from left field, it will be a bitter pill to swallow.

In a liquidation the covers are ripped aside and the liquidator is obliged to investigate the affairs of the business and that of its management. Here are some tips to make that journey as painless as possible.

Fronting up: A liquidation often takes creditors and staff by surprise and it is advisable for the directors to communicate with them (in conjunction with the liquidator) and at the very least, explain what has happened. Communication and sincere contrition go a long way in making the stakeholders realise that the management is hurting just as much as they are. Accounting records: Ensure that the records are as tidy and complete as you can get them before handing them over to the liquidator.

The less of a forensic exercise the liquidator has to perform, the better and the less arduous it will be for management who will otherwise have to endure hours of questioning. Forthrightness: Liquidators have extensive powers of investigation and will need to know what has gone before. Assist them rather than being obstructive, or they will believe there is something being hidden.

A stressful formal examination can be avoided if the liquidator perceives full cooperation.

Tax compliance: Certain types of tax such as GST and PAYE enjoy preferential status in a liquidation and get paid before most of the creditors can expect a distribution. Failure to account for PAYE can constitute criminal action under the Tax Administration Act. Personal liability: If the business has been traded through a limited liability company the directors are only personally liable to meet claims of creditors to whom they have given personal guarantees or where they have been deemed to have traded the business recklessly.

A guaranteeis not the province of the liquidator; it is a matter between the guarantor and the creditor.

Where such guarantees are called, the personal assets of the guarantor are at risk but there is a mechanism under the Insolvency Act whereby a scheme of arrangement may be entered into to avoid bankruptcy and loss of the family home.

Reckless trading: There is a misconception that if a company has traded under insolvent conditions, the directors are personally liable for its losses.

They will only be liable to the extent it can be proven that their reckless trading actions caused the loss, and it is not the prerogative of the liquidator to make that call.

Only a High Court judge can make such a ruling. However, it is something a liquidator must investigate and it is recommended that all board resolutions, file notes and other relevant documentation in support of the governance decisions made in the preceding two years be made readily available.

In a liquidation, perception is very important, and company directors will be judged not only by their true actions, but also how they are seen to have conducted themselves.

It is a good idea to let the bank manager know about the difficulties that have led to the situation, before the liquidator is actually appointed.

Know that there are procedures available to help deal with claims under personal guarantees and seek advice before it is too late.

Most importantly though, you must be prepared to forgive yourself for what has happened. As long as your conscience is clear that you did your best for all concerned you can move on and pick up the pieces.

Gareth Hoole is a director of Ecovis KGA and a member of the Restructuring and Turnaround Association of New Zealand.