Liquidation
Understand what liquidation means for a New Zealand company and how the process works.
December 2023 | Published by Xero
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Liquidation is the process of selling a company's assets to turn them into cash, repaying creditors, then closing the company.
- In New Zealand, companies are liquidated under the Companies Act 1993, while individuals are made bankrupt under the Insolvency Act 2006.
- A licensed insolvency practitioner acts as the liquidator, taking control of the company to realise its assets and pay creditors.
- Creditors are paid in a set statutory order, with the liquidator's costs first and shareholders last.
What is liquidation?
Liquidation is the process of winding up a company by selling its assets, converting them to cash, and using the proceeds to repay creditors. Once the process is complete, the company is removed from the Companies Register and stops trading.
The word also carries a more general sense of selling assets to free up cash. You might hear a retailer talk about a liquidation sale, where stock is cleared quickly at reduced prices to release the cash tied up in it.
What does liquidation mean for a New Zealand business?
In New Zealand, liquidation applies to companies rather than to people. It is the formal way a company is wound up so its assets can be gathered, sold, and shared among those it owes money to.
Companies are liquidated under the Companies Act 1993. Individuals are treated differently: a person who cannot pay their debts is made bankrupt under the Insolvency Act 2006, so it is not correct to say a company goes bankrupt.
Liquidation vs bankruptcy, receivership and voluntary administration
Liquidation is one of several insolvency processes in New Zealand, and each one does a different job. Knowing how they compare helps you understand what is happening to a business and what it means for its liabilities.
- Bankruptcy applies to individuals, not companies, and is dealt with under the Insolvency Act 2006
- Receivership is where a secured creditor appoints a receiver to take control of and sell secured assets under the Receiverships Act 1993
- Voluntary administration is where an administrator reviews the business to try to save it or get creditors a better return than liquidation would
How a company is put into liquidation in New Zealand
Under section 241 of the Companies Act 1993, a company can be put into liquidation in four ways. The route taken depends on who starts the process and why.
- A special resolution passed by the company's shareholders
- A board resolution made when an event set out in the company's constitution occurs
- A High Court order, for example on the application of a creditor
- A creditors' resolution passed at a watershed meeting
Liquidation can be either solvent or insolvent. A solvent liquidation follows the directors' declaration of solvency and is sometimes called a members' voluntary liquidation, while an insolvent liquidation happens when a company can no longer pay its debts.
What happens when a company is liquidated?
Once liquidation begins, a liquidator takes control and works through a set process. The liquidator must be a licensed insolvency practitioner, and the steps below outline how it usually runs.
- The liquidator is appointed and takes control of the company and its assets.
- They notify the Companies Office and advertise the liquidation so creditors know to make a claim.
- A meeting of creditors may be held to review the company's position and the liquidator's plans.
- The liquidator realises and sells the company's assets to turn them into cash.
- They report on the liquidation and distribute the funds to creditors in the statutory order.
- The company is removed from the Companies Register after a public notice, with 20 working days allowed for objections.
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During liquidation, the directors remain in office but their powers are limited, and the liquidator runs the company's affairs. Annual returns are no longer required once the process is under way.
Who gets paid first? The order of priority
When a company is liquidated, its funds are paid out in a set order under section 312 and Schedule 7 of the Companies Act 1993. Secured creditors generally sit outside this order, realising their security separately.
- The liquidator's fees and the costs of the liquidation
- Preferential employee claims, covering 4 months' wages, holiday pay and redundancy, capped at $31,820 per employee from 30 September 2024
- Inland Revenue claims, such as GST and PAYE deductions
- Unsecured creditors
- Shareholders
Employee claims rank above Inland Revenue in this order, so staff are paid before the tax department. Shareholders come last, and often receive nothing if a company is insolvent.
What is liquidation in accounting?
In accounting, liquidation refers to converting assets into cash and settling a company's debts before it closes. The figures involved are drawn from the company's balance sheet, which shows what it owns and owes.
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FAQs on liquidation
Here are answers to some frequently asked questions about liquidation for New Zealand businesses.
What is the difference between voluntary and compulsory liquidation?
Voluntary liquidation is started by the company itself, usually through a shareholders' special resolution. Compulsory liquidation is ordered by the High Court, often after a creditor applies.
What happens to company assets during liquidation?
The liquidator takes control of the company's assets and sells them to turn them into cash. That cash is then used to pay creditors in the statutory order of priority.
Does liquidation mean the company is closed down?
Yes, liquidation ends with the company being removed from the Companies Register and ceasing to exist. The process winds up its affairs before that removal takes place.
What is the difference between liquidation and bankruptcy?
Liquidation applies to companies under the Companies Act 1993. Bankruptcy applies to individuals under the Insolvency Act 2006.
Who gets paid first in a liquidation?
The liquidator's fees and the costs of the liquidation are paid first, followed by preferential employee claims. Inland Revenue, unsecured creditors and shareholders come after that.
Related terms
Learn more about liquidation
Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.