Did you know that the liquidator of one company in your group might attempt to claim assets held by other companies within the group? This article sheds light on when a liquidator can pursue such claims and suggests measures to bolster your defense against these challenges.

When Can a Liquidator Target Group Assets?

Despite the legal separation of companies as distinct entities, New Zealand company law, under section 271 of the Companies Act, allows courts to “pool” the assets of related companies during liquidation. Relatedness is determined if you own the majority of shares in both companies.

Factors Considered by the Court (Section 272 of the Act):

1. Management Participation: To what extent the related company was involved in managing the liquidated company.
2. Conduct Toward Creditors: The related company‘s behavior towards the creditors of the liquidated company.
3. Causation of Liquidation Circumstances: The degree to which the related company contributed to the circumstances leading to liquidation.
4. Other Relevant Matters: Any other matters the court deems appropriate.

Instances Leading to Pooling Orders:

1. Joint Management: Companies operating as a single unit with shared management, potentially problematic when directors are the same for both entities.
2. Intermingling of Funds: Considerable borrowing between companies, intertwined funds, and complex financial arrangements.
3. Cross-Payment of Invoices: Payments from one company covering invoices of another.
4. Unified Financial Processes: Single bank accounts for all companies, shared payroll, or intertwined financial structures.
5. Dependence of Subsidiaries: Subsidiary companies relying heavily on their parent company without possessing independent assets.
6. Creditor Confusion: Lack of clarity for creditors regarding the contracted entity.
7. Creditor Benefit: The likelihood that creditors would benefit from a pooling order.

Recommendations to Defend Against Pooling Claims:

1. Independent Operation: Operate each company as a separate standalone entity.
2. Trading Trust Ownership: Consider having group assets owned by a trading trust, not subject to pooling.
3. Standalone Operations: Implement distinct management, independent cash flow, and business models for each company.
4. Robust Accounting Practices: Maintain well-managed, separate bank accounts and detailed financial records.
5. Documentation: Ensure up-to-date contracts (leases, service agreements) between companies.
6. Fair Inter-Group Transactions: Pay market rates for transactions between companies.
7. Diverse Directorship: Appoint additional directors to prevent overlap in directorship.

Engage with legal and accounting professionals to explore tailored measures suitable for your business. Protecting your assets involves a strategic, proactive approach to minimize the risk of pooling orders during liquidation challenges.