If your business is struggling post-lockdown you may have sought advice as to how best handle closing your company or dealing with the tax debt you have accrued.
Many of you may have considered liquidating your business as a means of managing the mounting arrears, but do you know the powers of a Liquidator and what you can be held personally liable once your company is liquidated?
Several ways that Liquidators obtain a return for the creditors of your company are by directly suing the Director for; breaches of Director’s duties, overdrawn shareholder current accounts, voidable transactions and more. I’ll explain these below:
Voidable transactions (or ‘clawback’) is one of the more contentious features of insolvency law in New Zealand. It is designed to protect creditors against the tendency of the directors of troubled companies to pay themselves and their favourite, or aggressive creditors before anyone else. That means, if you paid Mitch from the garage before you paid IRD, he can have that money taken from him, so, you might not get to ‘keep’ that relationship after all…
Overdrawn shareholder account:
In simple terms an overdrawn shareholder account is a debt that the shareholder owes to the company. You are especially at risk of running up an overdrawn account if you take drawings instead of being on PAYE through your company.
Many small business owners don’t realise that this debt can be demanded from them in a liquidation, as they treat any money within the company as their own. However, a company is a separate legal entity, and, in a liquidation, this is the Liquidator’s easiest path to recouping some of the debt owed.
Breaches of Director duties:
Directors of a company have what is called a “fiduciary relationship” with the company, – this means that they must generally act in the best interests of the company. Because of this special relationship there are a number of duties, commonly referred to as directors’ duties, with which they must comply.
For directors, when a company is facing insolvency, they are at the greatest risk of personal liability, particularly for a breach of one of these duties.
These duties are found in the Companies Act 1993. The starting point is that a director has a broad duty of good faith to the company.
Directors must act in the best interests of the company. They can take prudent business risks, but they cannot make business decisions that may prejudice a creditor. When a company is insolvent however, it is the creditors who are the residual claimants and their interests will be the subject of this duty.
The Act also provides for creditors in terms of reckless trading. This requires that a director must not cause, agree, or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
A less than transparent liquidator could even use the fact that you liquidated because you knew you were insolvent, against you. Even though they asserted that it was the best option.
If a director acts in bad faith knowing that their conduct is not in the best interests of the company, or that their actions will cause serious loss to the company; or if a director incurs a debt upon the company when the company is insolvent or would become insolvent as a result of that debt, they may be liable for a fine of up to $200,000 or up to five years imprisonment.
So, what should I do?
The above probably will not be explained to you when you explore liquidating your company, and there are currently scant legislations which hold Liquidators to account – although this is changing.
Our experience tells us that many Directors end up worse off after voluntarily liquidating, due to the personal pursuit of them by the Liquidator.
In short, liquidation is not the only option for dealing with a company in debt. We successfully negotiate with IRD to manage your tax arrears and can provide advice and support around how to continue a more compliant business.
Don’t fall into the trap of liquidating when you may be able to keep your business – it isn’t always the best way out.
This blog does not constitute legal advice, as every situation is different but, give us a call to arrange legal advice that could give you another option.