The purpose of liquidating of an insolvent company is to have an independent and suitably qualified person (the liquidator) take control of the company so that its affairs can be wound up in an orderly and fair way for the benefit of all creditors.
The most common type is a creditors’ voluntary liquidation, which usually begins in one of two ways:
- Creditors’ voluntary liquidation, and
- Court liquidation.
Creditors vote for liquidation following a voluntary administration or a terminated deed of company arrangement, or an insolvent company’s shareholders resolve to liquidate the company and appoint a liquidator.
In a court appointed liquidation a liquidator is appointed to wind up a company, following an application, usually by a creditor. Others, including a director or a majority of shareholders, can also make a winding-up application.
After a company goes into liquidation, unsecured creditors can no longer commence or continue legal action against the company unless the court permits it.
The Liquidator’s Duties
When a company is being liquidated because it is insolvent, the liquidator has a duty to all of the company’s creditors. The liquidator’s role is to:
- Collect, protect and realise the company’s assets
- Investigate and report to creditors about the company’s affairs, including: any unfair preferences that may be recoverable, any uncommercial transactions that may be set aside, and any possible claims against the company’s officers
- Enquire into the failure of the company and possible offences by people involved with the company and report to ASIC
- Distribute the proceeds of realisation (after payment of the costs of the liquidation and subject to the rights of any secured creditor) — first to priority creditors, including employees, and then to unsecured creditors.
- Apply for deregistration of the company on completion of the liquidation.
Except for lodging documents and reports required under the Corporations Act 2001, a liquidator is not required to do any work unless there are enough assets to pay their costs.
If the company is without sufficient assets, one or more creditors may agree to reimburse a liquidator’s costs and expenses of taking action to recover further assets for the benefit of creditors.
In this case, if additional assets are recovered, the liquidator or particular creditor can apply to the court for the creditor to be compensated for the risk involved in funding the liquidator’s recovery action.
Recoveries From Creditors
A liquidator has the ability to recover, for the benefit of all creditors, certain payments (known as unfair preferences) made by the company to individual creditors in the six months before the start of the liquidation.
Broadly, a creditor receives an unfair preference if, during the six months prior to liquidation, the company is insolvent, the creditor suspects the company is insolvent, and receives payment of their debt (or part of it) ahead of other creditors. To be an unfair preference, the payment must put the creditor receiving it in a more favourable position than other unsecured creditors.
Not all payments from the company to a creditor in the six months before liquidation are unfair preferences. The Corporations Act provides various defences to an unfair preference claim.
A liquidator may call a creditors’ meeting from time to time to inform creditors of the progress of the liquidation, or to find out their wishes on a particular matter, or seek approval of the liquidator’s fees.
You may also use a creditors’ meeting to ask questions about the liquidation and inform the liquidator about your knowledge of the company’s affairs.
Votes Of Related Creditors
Directors and shareholders as well as their spouses, relatives, and other entities controlled by them are entitled to attend and vote at creditors’ meetings if they are creditors of the company.
If a resolution is passed, or defeated, based on the votes of these related creditors and you are dissatisfied with the outcome, you may apply to court for the resolution to be set aside and/or for a fresh resolution to be voted on without related creditors being entitled to vote. Certain criteria must be met before the court will make such an order (e.g. the original result of the vote being against the interests of all or a class of creditors).
Payment Of Dividends
If there are funds left over after payment of the costs of the liquidation and payments to other priority creditors, including employees, the liquidator will pay these to unsecured creditors as a dividend. Generally, the order in which funds are distributed is:
- Costs and expenses of the liquidation, including liquidators’ fees
- Outstanding employee wages and superannuation
- Outstanding employee leave of absence (including annual leave, sick leave—where applicable—and long service leave)
- Employee retrenchment pay, and
- Unsecured creditors.
Each category is paid in full before the next category is paid. If there are insufficient funds to pay a category in full, the available funds are paid on a pro rata basis (and the next category or categories will be paid nothing).
Directors And Liquidation
Directors cannot use their powers after a liquidator has been appointed. They have an obligation to assist the liquidator by:
- Advising the liquidator of the location of company property and delivering any such property in their possession to the liquidator
- Providing the company’s books and records to the liquidator
- Advising the liquidator of the whereabouts of other company records
- Providing a written report about the company’s business, property and financial circumstances within 14 days of the appointment of the liquidator by the court or within 7 days of the appointment of a liquidator in a creditors’ voluntary liquidation
- Meeting with, or reporting to, the liquidator to help them with their enquiries as reasonably required, and
- If required by the liquidator, attending a creditors’ meeting to provide information about the company and its business, property, affairs and financial circumstances.
A liquidator has the power to apply for the court to conduct a public examination, under oath, of a director (or other person with information about the company).
Conclusion Of Liquidation
Liquidations effectively come to an end when the liquidator has realised and distributed all the company’s available property and made their report to ASIC.
In a creditors’ voluntary liquidation, the liquidator must hold a final joint-meeting of the creditors and members to give an account of how the liquidation has been conducted and of how company property has been disposed. After the final meeting is held, the company is automatically deregistered by ASIC three months after a notice of the holding of the meeting is lodged.
In a court liquidation, the liquidator is not required to hold a final meeting of creditors. After the liquidator decides that the company’s affairs are fully wound up, they may:
- Seek an order for release from the court
- Seek an order for release and that ASIC deregister the company, or
- If there are insufficient assets to obtain a court order for the company’s deregistration, request that ASIC deregister the company.
A company ceases to exist after it has been deregistered.