Insolvency and involuntary closure Te pēkerapu me te katinga tē kōwhiritia

To be insolvent means that either:

• you can’t pay debts when they’re due
• total debt is more than the value of all assets.

This is different to operating at a loss, particularly when a business is new or growing fast.

If you become insolvent, make use of the support services available.

There are two types of involuntary closure, and they both apply to companies.

Liquidation

If a company can’t pay its debts, it may be put into liquidation. This means all its unsecured assets are sold to repay creditors. 

A liquidator is often a specialist accountancy firm or occasionally, the Insolvency and Trustee Service. They are appointed to investigate the company’s financial issues and sell any assets to help repay creditors.

A company can be put into liquidation by its:

• shareholders
• board of directors
• creditors.

Receivership

If a company doesn’t repay debt it has secured against an asset or assets, the creditor can appoint a receiver to sell the asset to repay the loan. 

Receivership is often a condition of a loan agreement. It doesn’t affect assets that haven’t been used to secure a loan.

A receiver is appointed to sell assets or manage the company, to make enough money to pay its secured creditors. The receiver is responsible for paying highest priority debts first, like unpaid wages or tax. These are known as preferential claims.

There are two kinds of creditors.

Secured creditors  

Secured creditors have the right to repossess and sell a debtor’s assets that they have a security over, if the debtor falls behind on payments. For example, a car yard might have security over a debtor’s car they’re paying off, or a bank may have security over a property as part of a mortgage.

Unsecured creditors

Unsecured creditors don’t have the right to repossess or sell any of the debtor’s assets if they fall behind on payments. They can only recover money owed if the debtor goes into involuntary closure or becomes insolvent.

If you have employees and become insolvent, their wages or salaries must be paid before you pay debt owed to general unsecured creditors.

The maximum amount an employee can claim as a preferential payment is $31,820 – but this figure doesn’t guarantee the amount that employees will receive if an employer becomes insolvent.

Once all the secured creditors are paid, and then the preferred categories of creditors like employees, there’s often little (if any) left over to pay the remainder of the debts to unsecured creditors.