Frequently Asked Questions

Below is a sample of various questions we are often asked. If you have any questions specific to you and your company, please visit our contact page.

Is my Company Solvent?
The solvency test plays an important role in the management of companies. While a company is not required to be solvent on every day it trades, the test must be met when certain transactions are proposed. In many cases, as a result of prudent management, companies will meet the test fairly easily. However, directors of companies that are marginally solvent will need to know with certainty whether the test has been satisfied, as this may be difficult to establish at a later date.

The Test
To satisfy the solvency test:
  • A company must be able to pay its debts as they become due in the normal course of business;
  • and
  • The value of its assets must be greater than the value of its liabilities (including contingent liabilities).
What do I do if my business gets a Statuary Demand?
Issues for Creditors

A statutory demand can only be issued in respect of an identifiable sum of money. The sum claimed in the statutory demand must be due and owing to the creditor at the time the statutory demand is issued. The creditor must be satisfied that there is no substantial dispute as to whether the debt demanded is due and owing to the creditor. The creditor must be satisfied that the debtor company does not have any claims against the creditor for an amount equal to or greater to the amount claimed by the creditor.

A statutory demand must be served on the registered office of the debtor company. Once the statutory demand is served, the debtor company has the right to:
  • make an application to set aside a statutory demand must be lodged in court and a copy served on the creditor within ten working days of the date on which the statutory demand is served on the company.
The ten working days does not include the date of service. This is a particularly tight time frame that is strictly applied by the court. The creditor does not have to give notice of this time frame to the debtor company in the statutory demand.”
  • The debtor company also has the right to within fifteen working days to pay the debt or to enter into an arrangement agreeable to the creditor for payment of the debt.
  • If the debtor company does not pay the debt or enter into an arrangement to pay the debt within fifteen working days,
  • The creditor then has another thirty working days during which it can rely on non-compliance with the statutory demand as evidence of insolvency, and begin liquidation proceedings against the debtor company.
What do I do if my business cannot pay its PAYE or GST?
A business should set aside enough money to pay its GST and PAYE when those amounts fall due. If the company is surviving by not paying its PAYE (which, in fact, is not the company’s money at all) and GST, then it should urgently seek professional advice on the solvency of the company.

If the issue is a short term cash flow matter arrangements may be able to be implemented with discussions with the Inland Revenue to pay arrears on specific terms. It is preferable that an independent professional assists you with these discussions. IRD is generally willing to help you, if you ask.
What is a Receivership?
Receivership is where a Receiver is appointed to realise the assets or manage the business of a company for the benefit of the secured creditors.

How does it work?
  • A Receiver can be appointed by the Court or under a Deed or General Security Agreement and may be over specific assets of the company.
  • Qualifications of a receiver are set out in the Receiverships Act
  • A Receiver has specific powers which include the right to;
  • Demand and recover income of the property in receivership;
  • Issue receipts for the income recovered;
  • Manage, insure, repair and maintain the property in receivership;
  • Inspect any books or documents relating to the property.
  • Receivers have a legal obligation to account of all assets and income in their control and all payments and distributions.
A Receivership differs from liquidation as the assets are realised for the benefit of the one secured creditor who made the appointment of a Receiver whereas in a Liquidation the assets are realised for the benefit of all creditors in order of priority (secured creditors, employees and IRD get their money before others).

Receivers can be appointed by secured creditors and or by the High Court.

Trusts can only be placed into receivership by High Court order.
What is a Liquidation?
In a Liquidation the assets are realised for the benefit of all creditors in order of priority as per the 7th Schedule of the Companies Act 1993 (secured creditors, employees and IRD get their money before others).

This applies to companies registered under the Companies Act 1993, rather than individuals.  It can be voluntary or ordered by the High court of New Zealand.  The main reason a company will face compulsory liquidation is if it is unable to pay its debts.

How does it work?
  • A liquidator is appointed by the high court or by the shareholders.
  • Shareholders can appoint a liquidator under section 241 of the Companies Act 1993
  • The main purpose of liquidation is to realise the assets of the company and distribute the proceeds to creditors and shareholders.
  • Usually a company is liquidated because it is insolvent or because the shareholders want to cease trading.
  • Although the liquidator has control of the assets, the company retains ownership of them, but holds the assets on trust for the creditors.
  • Once a company is liquidated and distributions made the company is removed the Companies Register.
  • Liquidation is completed when the liquidator files documents with the Companies Register.
What is a Compromise with Creditors?
A compromise is an agreement between a company and its creditors. Most compromises have two basic features.
  • That creditors are paid their debt in part or full over a period.
  • That during the term of the compromise, debts are frozen and no creditor may take any action against the company.
A compromise as perceived by the company
The company perceives a compromise to be an alternative to receivership, administration or liquidation, which gives the company the opportunity to survive. Although the directors may not be able to arrange for the company to pay its debts in full, they anticipate being able to provide continuing business to those creditors who have supported them. 

The legislation
Part XIV of the Companies Act 1993 set out the specifics of a compromise: 

  • sections 227–239
  • Fifth Schedule – proceedings at meetings of creditors.
What is a Phoenix Company?
A phoenix company, as defined by the Companies Act, 1993 is a company which any time before or up to 5 years after the commencement of liquidation proceedings is known by a name which is:
  • A pre-liquidation name of the failed company; or
  • A similar name.
A pre-liquidation name is any name of a failed company used in the 12 months prior to the commencement of the failed company’s liquidation. It is important to note that a pre-liquidation name can include a trading name as well as a registered company name. A narrow range of exceptions may apply to the application of phoenix company provisions:
  • Where those persons whose actions would breach of the phoenix company provisions seek and obtain the leave of the Court in relation to such actions;
  • Where a person is named in a successor company notice, being a notice sent to creditors by a company that acquires the business of a failed company as arrangements made by a liquidator, receiver or pursuant to a deed of company arrangement;
  • For temporary periods where a person has applied for exemption from the Court;
  • Where the phoenix company has been known by the same or similar name for at least 12 months prior to liquidation of the failed company and has not been dormant during that time.
Breaching phoenix company provisions is no minor matter. Penalties are among the harshest under the Act, can be a term of imprisonment of up to 5 years or a fine not exceeding $200,000. In addition, a person who commits one of these offences may be held personally liable for any debts incurred by the phoenix company.
What can I do if my company cannot pay Wages or Employees?
The Employment Relations Act 2000 sets out the basic legal framework for things such as negotiating employment agreements and paying employees.

Employers should seek immediate advice from professional if they determine that as an employer the company cannot pay its staff. It may indicate that the company is insolvent.
What is a Shareholders Current Account?
A Shareholders Current Account records the advances and drawings made by or to the Shareholder. If the drawings exceed the advances then the account is overdrawn and can be collected by the Liquidator as an asset of the company.
What are Personal Guarantees?
Personal Guarantees gives the party (maybe a lender or supplier) permission to pursue personal assets should the recipient of the money, goods or services default on the payment terms.

By signing a Personal Guarantees, guarantors give the lender permission to pierce the corporate veil and gain access to savings accounts, cars, and property – including their family home.

Care must be taken when signing Personal Guarantees. It should be noted that Personal Guarantees can be limited to the amount of the guarantee.
What are the duties for Directors?
In general, directors must:
  • always act in good faith and in the best interests of the company
  • not let any obligations to others, or personal interest, conflict with the interests of the company
Directors' duties are defined in the companies Act 1993 as:
  1. Duty of directors to act in good faith and in best interests of company
  2. Exercise of powers in relation to employees
  3. Powers to be exercised for proper purpose
  4. Directors to comply with Act and constitution
  5. Reckless trading
  6. Duty in relation to obligations
  7. Director's duty of care
What is a Voidable Preference?
Simply put, it is a pre-liquidation transfer that favours one creditor over the general body of creditors. When a preference is given by a debtor company, whatever the motivation, by the action of paying one creditor of the company ahead on another, i.e. giving one creditor a preference ahead of another creditor is they are both owed by the debtor company. The recipient of the preference obtains an advantage because it receives payment of its debt before the other creditor and who may go on to receive little or nothing at all in the company’s liquidation.

The recovery of voidable transactions by a liquidator is governed by sections 292 and 293 of the companies Act 1993.

A recovery of a voidable preference is a “liquidator’s claim” and any recovery must be distributed to all creditors after costs.