Queen City Law have published a new commercial law article to the Law Library by Ross Dillon . The author Ross has been a partner and litigator in a leading mid-sized Auckland firm for almost a quarter century. In this article Ross examines the ways a company can die, and in particular liquidation. Read Ross’s full article as a tablet and print friendly PDF here.
It can be hard to recognise when a company is failing and even harder to make the decision to cease a companies operations, however it is better to take preemptive action rather than have outcomes forced upon you by creditors. If you have a company in distress please don’t hesitate to contact our team and get our team on your case. Contact Us. To read more articles by Ross click here.
Death is usually the end of the story. There are few instances in the natural world where this is not the case. In the legal world, which deals with fictitious entities, this is surprisingly available, even if not very common. The Companies Act 1993 specifically provides for the resurrection of a “dead” company. A company can die in two principal ways. One is by Liquidation, where a liquidator is appointed to wind up the company affairs, and then requests that the company be removed from the register. This is analogous to putting the patient into the hands of the doctor, who finds that there is no cure and therefore makes the passing as painless as possible. The second way is simply allowing the Registrar of Companies to strike a company off the register (usually for failing to file an annual return). This is analogous to the patient simply wasting away. Once the company has been stuck off the register, it ceases to exist. Any property it still holds at that time, vests in the government by operation of the wonderfully titled principal of bona vacantia.
While it is rare for the company to still own something at that stage, it does happen. Queen City Law recently dealt with a case where the company had registered an interest against a title to land, but subsequently had been struck off. The interest passed to the government, who then had to approve any dealings with the land.
It is more likely that the company has outstanding unsatisfied claims against it when it is struck off. If a company is struck off after a liquidation, any such claims fall to be dealt with in that liquidation. Unsecured creditors in a liquidation often have little prospect of any payment, but that can depend on how vigorously the liquidator has pursued any rights the company may have.
Often a company in liquidation may have rights against one or more directors of the company, for allowing the company to get into the position of insolvency. The company directors may be keen to see the liquidation concluded and the company struck off, without those rights being fully explored. Creditors of the company will, however, want exactly the opposite.
One problem that can arise is that the company creditors have not been diligent in pursuing their debtors and did not realise the company had been placed in liquidation, and since been struck off. The Companies Act does provide a process that allows a Court to order that the company be restored to the register. A recent case (Register of Companies v Body Corporate 307730) has established that if a company in liquidation has been struck off on the close of the liquidation (which is a process that requires the liquidator to file a final report, which closes the liquidation process), restoring the company to the register must be accompanied with an order reversing that final report, so that the restored company remains in liquidation. Once those orders are made, the creditors can require the liquidator to follow up any outstanding issues (and challenge any failure to do so in the Court).
It is also possible in special circumstances to obtain an order at the close of a liquidation, allowing the company to continue in operation. This could be beneficial to a company (i) that has significant goodwill, notwithstanding a period of insolvency, or (ii) had other assets even after paying all creditors. Insolvency is when current assets do not cover current debts. Some entities can have sufficient total assets, which can not be converted to ready cash in time to meet its debts. An impatient creditor is then entitled to place the company in liquidation, but the Court could restore the company following the liquidation process and payment of creditors. Where a company has simply “faded into the night” by being struck off by the Register for failure to file an annual return, the process of resurrection is remarkably simple. A letter to the Register with the reasons of restoring the company may be sufficient. The Registrar needs to be convinced that there are good reasons to do this, and if the request is refused, it can be challenged in Court. Given the range of options and alternatives available notwithstanding a liquidation, it is always worth spending some time analysing whether a resurrection is desirable and possible. Queen City Law is, of course, ready willing and able to assist you with that analysis.
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