When a company in New Zealand undergoes liquidation, its financial priorities shift to settling debts in a structured order. Understanding the hierarchy of payments is essential for creditors, employees, and business owners involved in the process. This article will provide a comprehensive explanation of how payments are prioritised during liquidation in New Zealand.
Payment Priorities During Liquidation
When a company’s assets are liquidated, the proceeds are distributed according to a legal hierarchy. This ensures a fair process that prioritises the most critical debts while providing transparency for creditors and stakeholders. Each category of payment has specific legal protections and implications, which we will explore below.
Liquidation Costs and Expenses
The first priority is to cover the costs and expenses incurred during the liquidation process. These costs are critical because they ensure the liquidation is carried out in an orderly and lawful manner. Liquidation expenses include:
- Liquidator’s Fees: The liquidator is tasked with managing the entire process, including realising assets, distributing funds, and adhering to the Companies Act 1993. Their fees are a first-priority payment.
- Legal Costs: Any legal assistance required during the process, such as resolving disputes, is included in this category.
- Asset Preservation Costs: These are costs incurred to secure and maintain the value of company assets before they are sold, such as storage or insurance expenses.
Without covering these essential costs, the liquidation process would be unable to proceed efficiently or fairly.
Secured Creditors
Secured creditors are next in line. They hold a legal claim over specific company assets, such as property, equipment, or inventory, as collateral for their loans. Common examples of secured creditors include banks, financial institutions, and equipment financiers.
What Happens if the Secured Asset is Insufficient?
If the value of the secured asset does not fully cover the debt, the secured creditor may become an unsecured creditor for the remaining balance. For example, if a company owes $200,000 on a loan secured by a piece of machinery worth $150,000, the creditor can recover $150,000 through the machinery’s sale but must compete with other unsecured creditors for the remaining $50,000.
Secured creditors are prioritised because their loans are often critical to the company’s operations and are backed by collateral.
Preferential Creditors
Preferential creditors are individuals or entities granted special status under the law. In New Zealand, the Companies Act 1993 identifies two primary categories of preferential creditors:
- Employees: Employees are prioritised for unpaid wages, holiday pay, and redundancy entitlements. However, there are caps on how much each employee can claim as preferential.
- Inland Revenue Department (IRD): Certain tax obligations, such as unpaid GST and PAYE deductions, are also given preferential status to ensure compliance with government regulations.
By prioritising employees and tax debts, the liquidation process aims to protect workers and ensure public obligations are met.
Unsecured Creditors
After secured and preferential creditors are paid, unsecured creditors receive the remaining funds. This category encompasses a wide range of entities and individuals who do not have a claim secured by company assets. Examples include:
- Suppliers who provided goods or services without requiring collateral.
- Contractors who were owed payment for work completed.
- Lenders who extended credit without securing it against specific assets.
Unsecured creditors often face the highest risk in liquidation, as their claims are only addressed after higher-priority creditors are satisfied. The amount they recover depends heavily on how much is left after secured and preferential creditors are paid.
Shareholders
Shareholders are the final group to receive payment in a liquidation. As owners of the company, they are entitled to any surplus funds remaining after all debts and obligations are settled.
However, in most cases, there are no funds left to distribute to shareholders, as the company’s assets are typically exhausted by creditor payments. Shareholders understand this risk when investing, as equity investments rank lowest in the hierarchy.
Factors Impacting Payment Order
Several factors can influence the prioritisation of payments during liquidation. These considerations are critical for creditors and other stakeholders to understand.
Priority Adjustments for Secured Creditors
While secured creditors have the right to claim proceeds from the sale of specific assets, adjustments may occur. For example:
- Agreement Between Creditors: Secured creditors may negotiate with liquidators or other creditors to adjust payment timelines or amounts, especially if doing so benefits the overall recovery process.
- Asset Depreciation: If the value of a secured asset declines significantly, the secured creditor’s recovery amount may be lower than expected.
These adjustments demonstrate the importance of flexibility and negotiation in some liquidation cases.
Voidable Transactions
Voidable transactions can significantly impact the distribution of funds. These are transactions made before liquidation that may unfairly prioritise certain creditors or reduce the company’s available assets. Examples include:
- Preferential Payments: Payments made to one creditor over others shortly before liquidation can be challenged and reversed.
- Undervalued Transactions: If a company sold assets for significantly less than their market value, the liquidator may void the transaction and recover the assets for fair distribution.
The ability to void these transactions ensures all creditors are treated equitably.
Cross-Border Insolvency
For companies with operations or creditors in multiple countries, cross-border insolvency rules come into play. New Zealand adheres to the UNCITRAL Model Law on Cross-Border Insolvency, which promotes cooperation between jurisdictions. This ensures that assets and creditors in different countries are treated fairly while respecting local laws.
Need Help with Liquidation?
Navigating the complexities of liquidation requires expert guidance. At InSolve, our experienced liquidation lawyers in New Zealand provide comprehensive support to ensure the process is handled legally and efficiently.
Whether you are a creditor, employee, or business owner, we can help you understand your rights and obligations. Contact our team today by calling 021 844 806. We are here to assist you in resolving your financial concerns effectively.
