Did you know that the liquidator of a company can sometimes lay claim to assets held by other companies in your group? This article will outline when a liquidator can do that, and things you can do to increase your chances of defending this challenge.
When can a liquidator of a company lay claim to assets held by other companies in your group?
A key principle of New Zealand company law is that every company is a legal entity distinct from its shareholders. However, under section 271 of the Companies Act (Act) the courts have the ability to ‘pool’ (i.e. consider as one) the assets of related companies when one or more is liquidated, so that a related company which is not in liquidation becomes liable for the claims made against the company in liquidation.
Your companies will be related if you own the majority of shares in both companies.
So, when will a court order the pooling of assets? Section 272 of the Act sets out the guidelines for orders. In deciding whether to make an order, the court must have regard to:
- the extent to which the related company took part in the management of the company in liquidation;
- the conduct of the related company towards the creditors of the company in liquidation;
- the extent to which the circumstances that gave rise to the liquidation of the company are attributable to the actions of the related company; and
- such other matters as the court thinks fit.
Instances where orders have been made
The courts have relied on the following factors to reach the decision that a pooling order should be made:
- Two companies operating as one with each taking part in the management of the other. Issues may arise when the directors are the same for the company in liquidation and the related company.
- Employees working for various companies and paid from whatever source had funds.
- Considerable inter-company borrowing and intermingling of funds, especially if financing arrangements, flows of funds, inter-company lending and cross-guarantees form a web that cannot easily be disentangled.
- Invoices to one company paid by the other.
- One bank cheque account for all companies and one payroll for all employees in the group.
- Companies having separate bank accounts but these being nothing more than channels though which funds passed to and from the principal company’s trading account.
- A subsidiary company being dependent on its parent company for support with no assets of its own.
- Creditors’ confusion as to which company they had contracted with.
- Creditors would or might be better off if a pooling order were made.
- Separating the companies would involve preferring some creditors and shareholders over others.
Take aways and recommendations
The more you are able to run each of your companies as a separate standalone operation, the better your chances of defending a pooling claim.
We recommend you:
- consider whether your group’s assets should be owned by a trading trust and leased to your companies. Trusts are not subject to the pooling regime;
- consider running each company as if it were a standalone entity with its own management, independent cashflow generating ability, and business model;
- have proper accounting practices in place, with separate, well-managed bank accounts and detailed financial records;
- ensure you have current documentation to deal with contractual arrangements between companies e.g., leases and services agreements;
- pay the market rate for inter-group transactions;
- consider appointing additional directors to ensure the directors for each company are not the same; and
- talk to your lawyer and accountant about whether there are other measures you could take, specific to your business.