What is liquidation?

Liquidation refers to the process by which a company is brought to an end or ‘wound up’. It involves redistributing the assets and property of the company, usually to its creditors. It usually occurs when the company has become insolvent, meaning it can no longer pay its debts as they fall due. An independent person known as a ‘liquidator’ will be appointed to oversee this process to ensure that the interest of the creditors, directors and members are treated fairly. Liquidation can be either voluntary or compulsory. Liquidation ends when the company is dissolved by court order on the application of the liquidator or the company is struck off the register of companies by ASIC.

What is voluntary liquidation?

Voluntary liquidation occurs when the company, through a resolution of its directors and sometimes its members, chooses to enter into liquidation. This may be because it has become insolvent and the members of the company wish to bring the company to an end. In a voluntary liquidation, a liquidator is usually chosen by the company; however, the creditors have the right to change the liquidator. Voluntary liquidation can occur in one of two ways, being either through a creditors’ voluntary winding up or a voluntary administration.

A voluntary winding up occurs where the directors and members decide to place the company in liquidation and a liquidator oversees the process of redistributing the assets and property of the company in order to bring it to an end.

A voluntary administration occurs where the directors resolve to appoint a voluntary administrator to the company. The voluntary administrator will take control of the company and conduct investigations into the company’s affairs. They will then provide options for the company’s future. These options may include:

  • Entering a deed of company arrangement.
  • Placing the company in liquidation.
  • Ending the administration and handing the company back to the directors.

A deed of company arrangement is an agreement between the company and its creditors to satisfy the company’s debts.

Voluntary administration allows the company time to consider its future and options for moving forward whereas voluntary liquidation is purely aimed at bringing the company to an end.

What is a compulsory liquidation or court appointed liquidation?

Compulsory liquidation or court appointed liquidation occurs when the court orders that the company be wound up. In this instance, one or more of the company’s creditors applies to the court for the company to be wound up. This is because the company has become insolvent. In this instance, the court usually appoints the liquidator nominated by the creditor/s.

What is insolvency?

Pursuant to section 95A of the Corporations Act 2001 “A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.” When a person is not solvent, they are insolvent. Insolvency occurs when a company can’t pay all of its debts as and when they fall due. A company will be considered insolvent even if they have an asset surplus (an ‘asset rich, cash poor’ scenario), if they are unable to quickly liquidate those assets. A company will be deemed to be insolvent when it fails to comply with certain requirements set down in legislation, the most common of these being the failure to comply with a statutory demand from a creditor. A statutory demand is a demand in the appropriate form (Form 509H) served by a creditor on a debtor company requiring the company to satisfy the debt within 21 days.

What is insolvent trading?

Insolvent trading occurs when a director allows the company to incur debts when the company is insolvent. Directors have a duty to prevent insolvent trading and therefore can be held personally liable in certain circumstances for debts that were incurred from the date of insolvency to the date of liquidation of the company.

How does a liquidation end?

A liquidation can end by:

  • The company being de-registered.
  • The liquidator appointing an administrator who then arranges a Deed of Company Arrangement.
  • The Court ordering the stay or termination of the winding up.

An administrator might be appointed in circumstances where the liquidator believes that creditors may be given a greater return. This means that the company may be able to continue trading where the liquidator believes the company has prospects of carrying on its business successfully.

What powers do liquidators have?

The liquidator’s powers include:

  • Investigating the affairs of the company.
  • Identifying transactions that are considered void.
  • Examine the directors and others under oath in a public examination.
  • Realizing the assets of the company.
  • Conducting and selling any business of the company.
  • Admitting debts and paying dividends.

What are my rights and options as a creditor?

Creditors are able to apply to the court for an order in relation to a court appointed liquidation in the event that the company is insolvent.

In all types of voluntary liquidation, creditors are able to appoint alternative liquidators or administrators. The creditors are able to vote to appoint an alternative at the first creditor’s meeting which is held within 8 business days of the appointment of the voluntary administrator. If a creditor is seeking to appoint an alternative liquidator, they should secure the alternative liquidator’s consent prior to the meeting. The resolution will be passed if a majority of creditor present at the meeting vote in favour of the resolution.

Where the company’s assets are realized and they are insufficient to pay creditors, creditors will be paid a dividend or percentage of the amount due and owing. Debts of the company are generally paid in order of priority as follows:

The costs and expenses of the liquidation (including the liquidators’ fees):

  • The costs of the petitioning creditor.
  • Outstanding employee entitlements.
  • Unsecured creditors.
  • Members.

Each ‘class’ of creditors must be paid in full before the next class can receive a payment or dividend.

What rights do I have if I am a secured creditor?

A secured creditor’s rights include appointing a receiver to realize some or all of the secured assets (even after liquidation commences):

  • Requesting that the liquidator deal with the secured assets and account for the proceeds.
  • Voting at creditors’ meetings for the amount of the debt which exceeds the value of their secured assets.
  • Receiving dividends for the amount of the debt which exceeds the value of their secured assets.

A secured creditor will generally need to submit a proof of debt form to the liquidator for the amount of the debt which exceeds the value of their secured assets. This will allow them to receive dividends in a similar way to unsecured creditors.

What rights do I have if I am an unsecured creditor?

An unsecured creditor’s rights include:

  • Receiving dividends.
  • Attending creditors’ meetings.
  • Receiving written reports from the liquidator.
  • Inspecting certain books of the liquidator.
  • Informing the liquidator of matters about the company within the unsecured creditor’s knowledge.
  • Complaining to ASIC or the court about the liquidator’s conduct.

An unsecured creditor must submit a proof of debt form to the liquidator proving their debt in order to be paid a dividend. The proof of debt form should be accompanied by supporting documentation such as invoices. The proof of debt will either be admitted by the liquidator or it will be rejected and the unsecured creditor notified within a period of 7 days. If you cannot reach a resolution with the liquidator in relation to your proof of debt, you may be able to appeal to the court. You should seek legal advice as soon as possible as an unsecured creditor will only have 14 days to appeal to the court.

What are my options as a director?

In the event that the company becomes insolvent, the director should immediately arrange for the company to enter voluntary liquidation or voluntary administration. Voluntary administration may allow for the company to get back on its feet.

Directors should be aware that there are a number of ways that directors can be held personally liable for company debts including where there was insolvent trading, unreasonable director related transactions and personal guarantees.

What are my rights and options as a member?

Members have a right to receive any surplus after the company’s assets have been realised and creditors and the expenses of liquidation have been paid.