More companies went into liquidation in March this year than in any month since March 2015. We suspect that there will be an increasing number of liquidations this year as economic conditions get worse before they get better.

A recent decision to adjourn a liquidation application highlights the approach the courts are taking to failures by companies to pay their debts, and more widely the position of debtors, who are struggling to pay debts, and creditors, who are seeking recovery of a debt.

Recent case: High Court finds that advertising a liquidation application in the face of an application to restrain advertising was an abuse of process 

A creditor seeking to have liquidators appointed to a debtor must advertise the hearing of the liquidation application in the Gazette and a local newspaper. The fact of advertisement in itself can be devastating for the debtor company’s business, so it is not uncommon for the debtor to apply to court for orders restraining advertising. 

In the recent High Court case of Leading Edge v Propeller Property [2024] NZHC 1074, the Court found that it was an abuse of process for Leading Edge to advertise liquidation proceedings when Propeller had applied (albeit late) to restrain advertising.

The primary basis for this decision was that, by going ahead with advertising, Leading Edge had pre-empted the Court’s decision on the restraint application (once the liquidation proceeding was advertised, the harm caused couldn’t be unwound). The Court said that there was a universally recognised convention that, where an application to restrain advertising had been made, advertising will not occur until the Court has made a decision. Leading Edge wasn’t helped by the fact that, even if advertisement had been proper, it would have been too late (advertisement is required five clear days before a liquidation hearing, in this case the advertisements were only published four days in advance), so the decision to advertise seemed designed to cause reputational harm. 

The above reasoning is reasonably orthodox. While there is no formal restriction in place in the period between an application to restrain advertising being filed and it being heard, good reason would normally be required for a party to simply ignore the application and advertise. 

However, the Court did not leave the matter there. The Associate Judge also considered the application to restrain advertising itself. In this context, he commented that:

• the application was more in the nature of a request for an adjournment than an application to restrain advertising;
• Propeller did not dispute the underlying debt (or claim to have paid it); and
• instead, Propeller’s basis for seeking an adjournment was that it was experiencing an upturn in sales and would therefore be able to pay in due course.

The Associate Judge adjourned the hearing until June—in effect, putting Propellor in the same position it would have been in had its application to restrain advertising been dismissed, but it had been successful in a separate application to adjourn.

Key considerations for debtors

The comments in the judgment illustrate the debtor friendly approach that we regularly see the courts take when initially dealing with liquidation applications. 

In theory, a debtor’s only options when served with a statutory demand are:

• to dispute the debt within 10 working days; or
• pay within 15 working days. 

In practice, however, if the debtor takes neither option but then applies to adjourn the subsequent liquidation application (either in advance or at the hearing), the courts are usually sympathetic. So long as the debtor indicates a willingness to pay at some point in the future or even just to talk to the creditor, the courts will normally grant at least one adjournment.    

The main takeaway message for debtors in financial difficulty is to engage. If they do so, even if it is late in the piece, the courts will generally give them a chance to reach a deal.

Key considerations for creditors

For creditors, the message from this case is a bit more frustrating, even if they have done everything right, the debtor is likely to be given several chances. 

Nevertheless, prevention remains as important as cure—businesses need to watch out for warning signs that their customers are in distress and stay on top of unpaid debts so that the amounts at stake don’t become critical. In some cases, pushing towards a formal insolvency process may be appropriate. 

If you would like to read more about liquidation, receivership and voluntary administration options, please see our previous guide on corporate restructuring and insolvency in New Zealand. 

This insight was written with the assistance of Ossama Mohamed, a Solicitor in our Dispute Resolution team.