Liquidation

If a company is in financial difficulty, its shareholders, creditors or the court can put the company into liquidation.

Who is a creditor?

You are a creditor of a company if the company owes you money. Usually, a creditor is owed money because they have provided goods or services, or made loans to the company.

An employee owed money for unpaid wages and other entitlements is a creditor. A person who may be owed money by the company if a certain event occurs (e.g. if they succeed in a legal claim against the company) is also a creditor, and is sometimes referred to as a 'contingent' creditor.

There are generally two categories of creditor: secured and unsecured.

A secured creditor is someone who has a security interest (as defined in s12 of the Personal Property Securities Act 2009), such as a charge or a mortgage, over some or all of the company's assets, to secure a debt owed by the company. Lenders usually require a security interest over company assets when they provide a loan.

An unsecured creditor is a creditor who does not have a security interest over the company's assets.

Employees are a special class of unsecured creditors. In a liquidation, some of their outstanding entitlements are paid in priority to the claims of other unsecured creditors.

The purpose of liquidation

The purpose of liquidation 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.

There are two types of insolvent liquidation:

• creditors' voluntary liquidation, and
• court liquidation.

The most common type is a creditors' voluntary liquidation, which usually begins in one of two ways:

• 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. Within 11 days of being appointed by shareholders, the liquidator must call a meeting of creditors who may confirm the liquidator's appointment or appoint another liquidator of the creditors' choice.

In a court liquidation, a liquidator is appointed by the court to wind up a company, following an application, usually by a creditor. Others, including a director, a shareholder and ASIC, 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.

The liquidator's role

When a company is being liquidated because it is insolvent, the liquidator has a duty to all 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 which may be recoverable, any uncommercial transactions which 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
• after payment of the costs of the liquidation, and subject to the rights of any secured creditor, distribute the proceeds of realisation, first to priority creditors, including employees, and then to unsecured creditors, and
• apply for deregistration of the company on completion of the liquidation.

Except for lodging documents and reports required under the Corporations Act 2001 (Corporations Act), a liquidator is not required to do any work unless there are enough assets to pay their costs.

If a liquidator suspects that people involved with the company may have committed offences and the liquidator reports this to ASIC, the liquidator may also be able to apply to ASIC for funding to carry out a further investigation into the allegations.

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).

Other creditor rights

As well as the various rights involving meetings and participation in dividends discussed above, the other rights of unsecured creditors include the right to:

• receive written reports to creditors about the liquidation
• inspect certain books of the liquidator
• inform the liquidator about your knowledge of matters relevant to the affairs of the company in liquidation, and
• complain to ASIC or the court about the liquidator's conduct in connection with their duties.

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 to the court to conduct a public examination, under oath, of a director (or other person with information about the company).

Compensation proceedings for amounts lost by creditors as a result of the company trading while insolvent can be initiated against a director personally by ASIC, a liquidator or, in certain circumstances, a creditor.

Conclusion of liquidation

A liquidation effectively comes 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 how company property has been disposed of. 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.

Source: ASIC, Liquidation: a guide for creditors. Link Read the full ASIC guide.