Myth 1: A director of a company in liquidation can’t be a director moving forward
Right or wrong, it is true that a director can place a company into liquidation and immediately establish a new company.
A director can be banned from being a director by MBIE, or if they are made bankrupt, they cannot be a director for a period of time.
Myth 2: Directors are automatically personally liable
Directors of a company placed into liquidation are not automatically liable for the debts of the company placed into liquidation.
It is possible for a director to held personally liable for debts of the company. Examples include: if a director has signed a personal guarantee for a specific debt, if a director has breached their duties (i.e. they have traded recklessly) or if the director has an overdrawn current account.
Myth 3: Secured creditors are entitled to payment ahead of unsecured creditors
This is partly true, but for the most part a myth.
When thinking of secured creditors, its important to understand that secured creditors are secured over specific collateral (for example a car, or inventory they have supplied). For example, if a finance company has a hire purchase agreement to finance a car; they can sell the car, but once the car is sold, they are no longer ‘secured’. Other examples include, a supplier supplying goods on a Romalpa (retention of title) clause; they can uplift unsold inventory, but not anything else.
Please note this is separate to preferential creditors (i.e. staff and Inland Revenue), who are entitled to be paid ahead of unsecured creditors.
Myth 4: Liquidation and receivership are the same thing
Liquidation is a statutory process which results in the end of the company. Liquidators are appointed primarily by the shareholders by special resolution or creditors (by court application). Liquidators have strong investigative powers (for example interviewing directors under oath or affirmation) and specific legal claims (transaction undervalue or voidable transactions). Liquidations can involve litigation which can take years to resolve.
Receivership is a much more focused process where a receiver is appointed by a secured creditor with the primary purpose of selling assets of the company to pay the secured creditors debt. Once the receivership is finished, the company will be taken out of receivership but remain on the register. Receiverships are typically shorter in duration when compared with liquidations.
Myth 5: Only poorly managed businesses end up in liquidation
While there is a strong correlation between poorly managed businesses and liquidation, businesses can fail for a variety of reasons. Examples include: a construction company being placed into liquidation because a project goes wrong (for example if a subcontractor does a poor job), or a hospitality business simply not making enough sales to continue trading.
