What are the advantages of liquidation?
This is a question we get asked a lot. “What are the advantages of liquidating?” It is usually followed up with something like: “Wouldn’t it be better to just allow the Company Registrar to strike the company off when no annual return is filed?”
As every situation is different, there isn’t a universal solution for every company’s problems. Liquidation, however, is one solution that seeks to bring finality to a situation and have a company struck off the companies register.
Just leave it to the Registrar?
If the annual return for the company is not filed, the registrar has the right — if they believe the company is no longer trading — to seek to have the company removed from the register. This is clearly a cheaper solution than liquidation, but it does mean the directors are breaching their duty to the company as set out in the Companies Act 1993 (the “Act”).
Additionally, a creditor also has the right to object to the company being struck off or have it reinstated which can leave the directors and shareholders with no other option.
Most directors and shareholders, however, are tempted to allow the registrar to strike the company off if they believe they won’t be able to pay a liquidator’s fees. What they should realise is that, in accordance with Schedule 7 of the Act, a liquidator is entitled to take their fees and expenses from the proceeds of the sale of the company’s assets.
Only if the company has no assets at all do the liquidators usually ask the shareholders to contribute towards their costs before accepting appointment.
This possible outcome usually makes liquidation a cost efficient way to successfully exit a business and can solve a lot of problems.
In any liquidation, whether or not a declaration of solvency has been signed by the directors, if the company is determined to be solvent and a capital distribution is made by the liquidator to the shareholders, this should not be taxable income.
This is a great advantage of liquidation and makes it a suitable option when shareholders are seeking to find an exit solution after the sale of their business. If, however, the shareholders determine to distribute the funds before the liquidation, the distribution may be deemed income and therefore fully taxable.
Irrespective of whether the company is insolvent or not, what we usually see from the directors and shareholders is relief that their problems have been dealt with and a suitable exit solution organised. A peace of mind found.
We always recommend that an experienced (and independent) insolvency professional be appointed as liquidator – even if the company is solvent.
If you have a potential restructuring problem or would like to seek an efficient exit from your business, email Simon at sdalton@gerryrea.co.nz. We’d be happy to help steer you in the right direction.