Liquidations

27 Nov 2024

LIQUIDATION

If you’re a customer, supplier, business owner or a company director you have probably heard of the terms administration, receivership and liquidation. These three concepts refer to the specific status of companies that are close to being, or are, insolvent and have entered a period of external management.

This paper discusses the liquidation of a company. Liquidation differs from that of administration and receivership, as it indicates an end of a company’s existence. Once a company is in liquidation, it usually means the company will permanently stop trading and cease to exist. While there are potential ways for a company to return to trading from administration and receivership, liquidation will generally result in the liquidator realising the company’s assets and then distributing the proceeds among creditors before deregistering the company.

The main purposes of liquidation are:

• Fair distribution for creditors – liquidation provides a procedure that allows for an equitable and fair distribution of the assets of a debtor company to its creditors;

• Public interest – there is a public utility gained from winding up an insolvent company so that it does not continue to trade and incur further debts that it is unable to pay; and

• Allows for the investigation of a company’s affairs – liquidation allows for such investigation, with particular emphasis being placed on the circumstances that led to the winding up. Company officers and directors can be held accountable for any improper or dishonest conduct, and as a result there is a chance for possible recovery.
   

GENERAL PROCESS

Company liquidation follows a series of defined steps that are outlined in the Corporations Act 2001 (Cth). Winding up an insolvent company is a complex procedure that involves:

• The directors or the company secretary calling a meeting of the members (shareholders), at the members meeting the shareholders resolve that the company is insolvent.

• ​Shareholders appoint a liquidator, who must be approved by a 75% majority.

• The liquidator may not call a creditors’ meeting and may choose instead to lodge a progress report to the Australian Securities and Investment Commission (ASIC). The report must include the liquidator’s acts and dealings, the conduct of the winding up, a summary of the tasks to be completed, and an estimate of when the liquidator will be finalised.

​The liquidator may also ask creditors whether they wish to appoint a committee of inspection, where the committee assists the liquidator and approves fees.
 

​INSOLVENT TRADING

A company is considered to be insolvent when it is unable to meet its financial commitments or pay its debts when they fall due.  Even if the company has a surplus of assets, it is considered to be asset rich but cash poor. A company will be deemed to be insolvent when it fails to comply with certain requirements set down in legislation, the most common scenario is the failure to comply with a statutory demand from a creditor.
 

VARIOUS TYPES OF LIQUIDATION

The various types of liquidation include:

• Creditors Voluntary Liquidation is initiated by the company's directors when they are concerned the company can't pay its debts.

• Members Voluntary Liquidation is a way for solvent companies (i.e. those not in financial difficulty) to shut down.

• Court Liquidation starts as a result of a court order, usually made after an application by a creditor of the company.

• Simplified Liquidation - in September 2020, the Federal Government enacted a Simplified Liquidation process in order to create a cost-effective and time-efficient liquidation alternative with small businesses in mind. However, there is an eligibility criterion, such as a requirement that the proposed company to be wound up has not previously undertaken a restructuring or simplified liquidation in the prior 7 years and taxation lodgements are up to date. There is a reduced level of investigation and formal reporting undertaken subject to creditors opting out of the process.

• Provisional Liquidation (“PL”) – when you need to safeguard a company’s assets from potential harm or loss, you can make an application for a Provisional Liquidation. Provisional Liquidation does not result in an immediate liquidation, a court appointed liquidator takes charge of a company’s financial affairs in the interim as an independent expert to provide a view of the company and to ensure assets are likely to be preserved pending an assessment of the company’s affairs.

DIRECTORS

A director can declare insolvency of their company through the voluntary liquidation process. The consequence of a corporate insolvency is:

• the directors cease their role in the company;

• a liquidator realises any assets of the company for the benefit of creditors;

• the liquidator investigates the affairs of the company, and reports any breaches of duties by the directors to ASIC;

• the liquidator makes a dividend distribution to creditors if sufficient funds have been realised in the liquidation; and

• the liquidator deregisters the company once their duties and obligations are fulfilled.

Directors need to be mindful that it is illegal to trade when insolvent, and continuing to do so will result with the risk of a director being personally liable. Directors may be held liable for new debts incurred by a company trading while cash flow insolvent. This potential liability does not extend to debts incurred prior to the date a company became cash flow insolvent.

As a director of a liquidated company, it is important for directors to be aware of legislative changes as they provide additional options. This includes safe harbour provisions which have been designed to provide directors additional time while protecting them from personal liability for insolvent trading.
 

CREDITORS

There are 3 types of creditors:

• Secured creditors are those who hold a security interest in some or all the company’s assets, such as a bank or other lender.

• Priority Creditors are those who have priority, such as employees, even though they are considered to be an unsecured creditor when it comes to liquidation they are a priority creditor.

• Unsecured creditors are those who are owed money but do not hold a security interest in the company’s assets.

Once a company enters into liquidation, creditors other than secured creditors are prevented from commencing or continuing legal action unless they obtain permission from a court. Creditors can arrange and attend creditor’s meetings, vote on resolutions at the meetings and even act to remove and replace the liquidator.
 

DISTRIBUTION

Once a liquidator has realised the company’s assets and/or successfully recovered funds from various litigation claims (such as insolvent trading and voidable transaction claims) and determined there are sufficient available funds to enable a distribution to creditors, they will declare a dividend. The liquidator must advertise their intention to declare a dividend on the ASIC Published Notices website affording creditors once last opportunity to lodge a proof of debt. A proof of debt is a form submitted to the liquidator by a creditor that details the amount of the debt and provides evidence supporting the creditor’s claim.

Debts of the company are generally paid in order of priority:

• the costs and expenses of the liquidation (including liquidators’ fees);

• secured creditors;

• priority creditors;

• unsecured creditors; and

• members.

FINALISING THE LIQUIDATION

Once the creditor dividends have been distributed and all affairs of the company have been concluded, the liquidator will apply to ASIC to deregister the company, effectively bringing the liquidation process to a close.

The creditor dividend process in Australian insolvency law ensures that creditors are treated fairly and in accordance with their legal rights. The liquidator is responsible for managing the distribution of assets and adhering to the statutory priority of payments set out in the Corporations Act 2001 (Cth). Unfortunately, not all creditors, particularly unsecured creditors, may recover the full amount of what they are owed, especially if the company’s financial situation was dire by the time the liquidator was appointed.

Insolvency is one of Murfett Legal’s key areas of practice. Our insolvency team are experienced in all aspects of corporate insolvency.  If you are a director, creditor or other stakeholder of a company that you consider could be in financial distress, please contact Murfett Legal on (08) 9388 3100.

Note: The above is a summary for general information purposes only. It is not intended to be comprehensive or constitute legal advice. You should seek formal legal or other professional advice in relation to your particular circumstances before relying on the content of this article.

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