This relates to a company that was placed in liquidation more than a year after it had ceased trading. The company had operated an early childhood learning centre and had two shareholders each holding 50% of the shares. The shareholders were both the directors of the company.
The company had operated for a number of years, when one of the directors decided to acquire the business of another early childhood learning centre from a company in which that director had an interest as shareholder. This was done without the knowledge or consent of the other shareholder/director meaning that there was no resolution authorising the major transaction in terms of s129 Companies Act.
The intention behind the acquisition was for increased funding by the Ministry of Education (MOE). However, the other shareholder took umbrage at the unauthorised transaction causing a substantial rift between the parties. It should be noted that up until then, the company had been trading profitably.
The aggrieved shareholder and director laid a complaint with MOE in relation to this which led to an investigation being conducted by MOE. MOE suspended funding which meant the company was unable to continue its business and stopped trading not long thereafter. MOE then cancelled the Company’s licence.
At that stage, had the company’s assets been realised by the directors, creditors would have been paid in full. However, bickering between the shareholders continued for over a year before an ex-employee brought a liquidation application for outstanding holiday pay. The company owned the building unit from which it had traded and several motor vehicles.
On appointment as liquidator, we quickly determined that the company was now insolvent. It was due to the accumulation of body corporate levies and rates on the building unit and the deterioration in the motor vehicle values (the motor vehicles had been abandoned in a dead-end street for over a year).
Numerous meetings and correspondences were entered into with both directors/shareholders, each seeking to advance their position at the expense of the other. Claims received against the company had to be properly vetted mainly because of the gap between the company ceasing to trade and date of liquidation. This applied mainly to holiday pay claims received from some of the senior employees which claims were overstated. The claim of MOE also had to be carefully assessed against the background of their audits and overpayment of funding.
After the realisation of assets and liquidation costs, we were able to pay the preferential (holiday pay) claims in full and a distribution of 22.5 cents in the dollar to unsecured creditors. In the circumstances, not a bad outcome. However, this is yet another case of a fall out between shareholders causing an erstwhile profitable company to go out of business causing loss to its unsecured creditors.