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Company liquidations have risen 26 percent year on year, according to latest data unveiled by credit reporting service Centrix last month.
More companies were finding themselves struggling to stay afloat due to intensified efforts by authorities to recover taxes after the relaxed policies implemented during the Covid-19 pandemic, Centrix said.
Hospitality businesses have been hit particularly hard, with established Auckland restaurants Imperial Palace, Dragonboat and Sun World Seafood all placed into liquidation between June and the end of August.
In the event of insolvency, stakeholders are notified by a liquidator that a company is under liquidation, with any creditors asked to confirm any outstanding amounts.
The impending liquidation of a company may alarm employees, customers and suppliers over unpaid wages and payments outstanding. Can these amounts be recovered and in what order are creditors paid?
Here's what you need to know about some key aspects of corporate insolvencies.
Can creditors recover any money owed to them by a company once it has been placed in liquidation?
The answer depends on the creditor's relationship with the company.
In New Zealand, losses during a corporate liquidation are compensated based on the order of "preferential creditors" in accordance with Schedule 7 of the Companies Act 1993.
Simply put, entities incurring costs during the liquidation process, including liquidator fees and legal expenses, are given the highest priority.
Secured creditors with fixed charges (for example, a bank holding a mortgage over the company's buildings or equipment) are then paid out followed by preferential creditors such as former employees and Inland Revenue owed unpaid wages and taxes.
Floating charge holders (for example, lenders to a company under general loan agreements) and unsecured creditors such as suppliers and customers rank lower in priority.
Shareholders appear at the very bottom of the list.
What is the maximum compensation former employees can receive from a company that has been placed in liquidation?
Although former employees who are owed unpaid wages appear relatively high in the ranking in terms of priority, their preferential compensation is subject to a cap.
According to the latest judicial interpretation under the Companies (Maximum Priority Amount) Order 2024, effective from 30 September 2024, the maximum compensation for each employee is $31,820.
Any amounts owed to employees that exceed this limit are treated as unsecured.
Can the director of a company that has been placed in liquidation be held personally liable for the amounts owed?
This depends on the specific circumstances of the director.
Under normal circumstances, if a company becomes insolvent, liability for any money owed does not automatically extend to the company's directors.
However, if a director has engaged in reckless trading, improper transactions or incurred new debt while the company was already insolvent, they may be held legally liable.
What's more, if a director has provided a personal guarantee for the company's debt, they are personally responsible for that debt.
If a company has been placed in liquidation, can its director start a new company and be involved in the same type of business?
This relates to the concept of what is known as a phoenix company.
As the name implies, a phoenix company refers to a business that rises from the ashes of a failed one.
New Zealand incorporated regulations governing phoenix companies into the Companies Act in 2007.
A phoenix company is generally defined as a company that uses the same or a similar name as the failed company within five years before or after the liquidation of the original company.
Under the Companies Act, a director of a failed company is prohibited for a period of five years from being a director of, or from promoting, forming, managing or being involved in a phoenix company that continues to carry on a business with the same name as the failed company's pre-liquidation name or a similar name.
Individuals found to have breached such regulations may be held personally liable for some of the phoenix company's debts and could also face criminal charges.
However, if a director starts a new company under a completely different name, with no obvious link to the failed business, phoenix company regulations may not apply.
As a result, consumers are advised to do due diligence and check a company's background before engaging in any business with it.
They can do this by searching the Companies Office website for the director's name to see whether there are any legal issues in their corporate history.
