Hiving down is a corporate rescue technique which originated in England in the 1950s, the rules for which have been established in New Zealand by several pieces of case law*
The term originates from the practice of creating a new honeybee colony, by moving some bees and honey to a new hive. For companies, it is the procedure of selling at least part of a business, at market value, to a wholly owned subsidiary which may then be on-sold.
According to the Ministry of Business, Innovation and Employment; approximately 400 companies a year are engaged in this activity. It does however garner some negative attention when done incorrectly.
Hive down done the wrong way
Let’s say Jack realises his rental car company, Go Cars, is unable to pay its debts as they fall due. He fears having to sell the company’s assets to pay its creditors.
He devises:
- The vehicles will be moved to a new company trading with the same name.
- The future revenue of the business will be directed to that company.
- Payables will continue to get booked to the old company.
Jack goes on holiday to Fiji in the next month to celebrate.
Soon, disgruntled creditors request their lawyers to issue statutory demands for payment. Go Cars Limited is put into liquidation by the High Court.
Liquidators step in and investigations ensue. Jack is interviewed under oath, and eventually his scheme is unravelled. The vehicles are never found, and distributions from the liquidation are minimal.
We won’t go into the consequences for Jack, but they are dire. Had advice been sought beforehand, things could have been different.
Hive down done the right way
Jack sits down with his lawyer and confesses that he isn’t sleeping at night, because his company is beginning to fail. A good insolvency practitioner is referred to explore his options.
It’s revealed the side of the business which specialises in business clientele is still profitable. The side which deals with the young tourist market has been pushed out by a competitor with more affordable prices.
A plan is set:
- Go Cars will cease trading immediately and enter voluntary liquidation.
- The vehicles and the goodwill of Go Cars will be sold to a wholly owned subsidiary named “Corporate Auto”. Valuations will be completed to ensure this is done at market value.
- Corporate Auto will be sold (at market value) to either Jack or another party. The creditors of Go Cars will be mostly paid from the proceeds of the sale.
Hive-downs (the right way) maximise the value of the healthy parts of a company. Although Jack can’t go on holiday in this scenario, the outcome for everyone involved is much better.
If you or one of your clients can benefit from hiving-down, don’t hesitate to reach out.
* (Sojourner v Robb, Warnocks (1992) Ltd v Queensgate Centre Ltd, WHK (NZ) Ltd v Retail Media Ltd (in rec and liq)).
