"Killing Off" a Company - Article by Alison Lemon, Director, Kerikeri Office
I used this heading, as last month I was jokingly referred to by one of the Accountants in the office as the "Company Killer", which quietly made me laugh to myself.
I have recently been doing several voluntary liquidations of Companies and Charitable Organisations for a variety of different reasons.
However, it is not unusual to be asked by people what can they do to get rid of a Company that they no longer need or is no longer trading.
Before I launch into the various options of "killing off" the company I like to have a discussion as to why they no longer need the Company and probably more importantly do a bit of looking into the future as to what they may want to do later on. Unlike "death and taxes" there is an alternative for Companies that are lying idle.
If after having a good discussion and the decision is made to "kill off" the Company there are various different methods in which to perform the execution.
Company starvation, the do nothing at all method. To starve a Company to death is simply ignore the constant requests and threatening letters from the Companies Office and wait them out, until the Company is "struck off" their register. The simplicity of this method has been the cause of many Companies demise.
However there can be a couple of problems with this method. Firstly under the Companies Act 1993 each company Director can be prosecuted and fined up to $10,000 for failure to file the return.
And secondly, even if the Company is successfully struck off the Companies Office register the IRD will not quite so readily go away. The IRD is tenacious. The IRD still wants a tax return so they need to be informed and given the opportunity to see if there is any residual income tax liability.
This is where it can get a bit messy getting rid of the Company corpse, after the event. For instance, if the Company happened to be a Qualifying Company, and many small closely held companies are, then the Shareholders and Directors of that Company have guaranteed the Company's income tax liability to the IRD.
I saw this recently where a Company was allowed to be struck off by failure to file the Company's Annual Return. All the assets had been sold off and all that remained in the Company was a balance of money owed to the Shareholders and other related entities. The Company was also a Qualifying Company so the strike off gave effect to a forgiveness of debt to the Company which is taxable income guaranteed to be paid by the Directors and Shareholders personally.
By following a few simple and structured steps a considerable amount of anxiety and distress could have been avoided. Fortunately for the Shareholders and Directors the Company could be resuscitated back to life but the medicinal costs were considerably more than what they would have been otherwise.
For this Company there is also a happy ever after as it has found a new reason to live and is serving its Shareholders very well as it utilizes a number of taxable losses bought forward from previous years.
For Companies that don't have an off balance sheet history or are "tainted" with residual income tax events, a formal de registration with the Companies Office is our recommended method of execution. There are a series of formal steps that need to be taken which include notification in the local newspapers of the impending death so that other businesses that may have a claim get the opportunity to say something and of course the IRD get to inspect a "clean" Company balance sheet and give their stamp of approval.
A de registered Company just like a Company that has been struck off can be resuscitated by anyone that has a claim against it and generally this will be the IRD, but if de registered properly it is highly unlikely for this to occur.
However for Companies that have some past issues or specific reasons it is best practice to liquidate, which means the Company is permanently put to rest. The process requires the appointment of a liquidator and this is again a formal and structured process in terms of the Companies Act 1993.
The final method which is not quite as deadly that I have used to get rid of a Company is to amalgamate it into another Company. This is not something that is done as often but for the right situation and circumstance it means that a lot of benefits that the amalgamating Company have are transitioned to the amalgamated Company often without triggering an income tax liability.
The moral of this is that if you are considering getting rid of a Company then doing it right and in the right way will get the results and will avoid the unexpected.