How liquidators distribute funds depends on where the money came from in the first instance.
There are four possible sources of revenue in a liquidation, and each one is treated differently.
- Secured Assets
The most obvious example here is a vehicle. If a car has a ‘hook’ or a registered finance charge on it, the liquidator, upon selling the car, must give the funds back to the secured party. Sometimes the secured party simply takes the asset. If there is a surplus, ie: the car is sold for more than the debt owing on it, the surplus becomes available for unsecured creditors.
In some cases a secured creditor will have a General Security Agreement (GSA), also called a debenture, over the entire company. In this case all of the companies assets are secured, and the secured party can lay claim to all of the assets.
- Unsecured Assets
In this case unsecured assets, which often includes the debtors, are collected and this is where the liquidators will try and get paid. Liquidators have a priority claim over all unsecured assets for their costs, and it is not uncommon in small liquidations where the liquidator is the only party paid.
If the liquidator is trading the business on, they can use funds from the unsecured assets to cover trading costs post liquidation before paying out any other debts.
After the liquidator’s costs, come any court costs associated with the liquidation, if these have been agreed to by the court. Usually two to three thousand dollars only.
Then come unpaid staff wages and holiday pay, up to a maximum of $16,640 per staff member. There are a number of rules and time frames around this calculation.
Next in priority is the Inland Revenue, for unpaid GST and PAYE. The IRD does not have a priority claim over unpaid income tax. This is the largest hurdle. It is rare for a liquidation to overcome this hurdle and for any funds to reach the unsecured creditors.
- Trading Activity
Liquidators can trade firms on in liquidation. Where they elect to do this any revenue that comes from trading activity is allocated initially to costs, including liquidators costs, from the ongoing running of the business.
- Funded Action
A recent change to the legislation allows unsecured creditors to fund action to recover the liquidation firm’s assets. If an unsecured creditor chooses to take up this option they will be the beneficiary of any funds recovered from this activity, up to the level of their unsecured debt.