Liquidation Frequently Asked Questions

Liquidation is a process for the winding up of a company’s affairs in order to provide for an orderly dismantling of a company’s affairs, the undertaking of appropriate investigations and a fair distribution of the company’s assets to creditors. This occurs either because the company can’t pay all of its debts (it is insolvent), or its members want to end its existence.

What is liquidation?

Liquidation is a process for the winding up of a company’s affairs in order to provide for an orderly dismantling of a company’s affairs, the undertaking of appropriate investigations and a fair distribution of the company’s assets to creditors. This occurs either because the company can’t pay all of its debts (it is insolvent), or its members want to end its existence.

Why choose liquidation?

Liquidation is the only way to fully wind up the affairs of a company. Having an independent party undertake the process protects creditors’, directors’ and members’ interests while the company structure is dismantled.

How can an insolvent company be wound up?

A company can either be wound up by resolution of its members or creditors at an appropriate meeting, or by the Court, usually on the application of one or more creditors.

(i) If it is wound up by the Court (a court liquidation), the applicant must prove to the Court that the company is insolvent or can be deemed to be insolvent. The Court will then appoint a liquidator, usually nominated by the creditor. The Court may also wind up a company when there are irreconcilable disputes between shareholders or members.

(ii) If it is wound up at a meeting of its members or creditors (a voluntary liquidation) the members or creditors will chose the liquidator. This process can begin through the Voluntary Winding Up provisions or the Voluntary Administration provisions.

The liquidation process will be almost identical regardless of how it is commenced.

How do you prove that a company is insolvent?

A company is insolvent if it can’t pay all of its debts as and when they fall due, even though the company may have an asset surplus but no ability to liquidate those assets quickly. A company is deemed to be insolvent when it does or fails to do certain things prescribed in law. Most commonly it will be deemed insolvent if it fails to satisfy a statutory demand issued by a creditor.

Can solvent companies be wound up?

Yes. Solvent companies can be wound up by its members. This is called a Members Voluntary Winding Up and is the subject of another Fact Sheet. Solvent companies can also be wound up by the Court on an application by its directors or members. This usually occurs when there is a conflict in the leadership of the company and the parties are unable to resolve that conflict.

What is provisional liquidation?

The Court may appoint a liquidator provisionally to exercise interim control over the assets and affairs of the company in the period between after a winding up application has been filed, but before a winding up Order has been considered.

A provisional liquidator is appointed when the Court believes the assets may be at risk and that it is in the interest of creditors that these assets be protected until the winding up application is heard. The appointment is provisional as the company may not be wound up at the hearing of the application. Provisional liquidation is the subject of another Fact Sheet.

Who administers a liquidation?

Liquidations are administered by liquidators, who are specialist accountants. There are two levels of liquidators:

(i) registered liquidators are registered with the ASIC and can take all type of appointments, except those ordered by the Courts.

(ii) official liquidators are experienced registered liquidators that has been registered with the Courts.

What are the liquidator’s powers?

The Corporations Act sets out the liquidator’s powers. These include all of the powers that vested in the directors of the company, plus the power to:

  • investigate and examine the affairs of the company,
  • exam the directors and others under oath,
  • realize the assets,
  • undo transactions that are considered void,
  • conduct and sell any business of the company,
  • admit debts and pay dividends.

What does the liquidator do?

The liquidator will:

  • find and protect the assets of the company;
  • realize those assets;
  • conduct investigations into the financial affairs of the company and any suspicious transactions;
  • make appropriate recoveries;
  • issue reports to the ASIC and creditors
  • distribute surplus funds to creditors;
  • make a distribution to shareholders (if possible) and
  • deregister the company.

What is the effect on the company?

The company structure itself survives the appointment, but not the liquidation. The control of all assets, the conduct of any business and other affairs are transferred to the liquidator. The directors cease to have any authority. All bank accounts are frozen, all employment can be terminated, but necessary labor may be rehired by the liquidator. At the end of the liquidation, the company will be deregistered and will cease to exist.

Can a company trade while in liquidation?

The liquidator will continue trading a business if they believe that it will be in the interest of creditors. This is usually done to sell the business as a going concern or to complete and sell work-in-progress. The liquidator has the obligation to end trading and wind up the affairs of the company as quickly, but as commercially, as practical.

What must the directors do to help the liquidator?

The directors must submit information about the company’s affairs in the form of a Report as to Affairs and a Director’s Questionnaire. The directors must also deliver all company books and records and cooperate with the liquidator throughout the liquidation. There are various offense provisions that relate to directors that do not cooperate with liquidators.

What investigations are done?

The liquidator must establish the following:Investigate 1

  1. Why the company is insolvency;
  2. Whether there is a potential insolvent trading claim against the directors;
  3. Whether there are any preferential payments to creditors that may be recovered;
  4. Whether there are any offenses that may have been committed by the officers of the company; and
  5. Whether any void transactions can be overturned and other recoveries may be made.

These powers include holding public examinations, seizing books and records, gaining access to property, and detaining persons relevant to the investigation. Also, the liquidator must identify any offenses committed by the company or its directors and report these to the ASIC.

Can the liquidator recover property sold before the liquidation?

The liquidator will look at any sales or transfers of property that have occurred within the years before the liquidation. If these transactions appear improper, uncommercial or to have been undertaken to defraud creditors, the property or its value may be recovered. The liquidator may also recover money from creditors who have received payments in the six months before the liquidation.

What is Insolvent Trading?

This is a claim for compensation made against a director who allows a company to incur debts when they are, or should be, aware that the company cannot pay them. If the company is wound up and some of that debt remains outstanding, the directors can be made personally liable to compensate the company for that amount. Insolvent trading is the subject of another Fact Sheet.

Can a liquidator attack the director’s personal assets?

No. The liquidator can only take possession of the company’s assets. However, if the liquidator can prove that company assets have been taken by the directors, the liquidator may recover those assets. If the company has loaned money to the directors, the liquidator will seek to recover the monies.

If the liquidator can prove an insolvent trading claim against a director, he may make that director personally liable to compensate the company and, if necessary bankrupt them. This will allow a trustee in bankruptcy access to the director’s assets to satisfy the claim of the liquidator.

What is the effect on personal guarantees?

Personal guarantees are not affected by liquidation, as a guarantee is an arrangement between the creditor and the guarantor personally.

What is the effect of the liquidation on secured creditors?

The rights of secured creditors are not affected by the liquidation. It is common for secured creditors to allow the liquidator to sell the assets whilst he or she recognizes the rights of the secured creditor. The secured creditor may prove in the liquidation for any shortfall after their security has been realized.

What is the effect of the liquidation on unsecured creditors?

Creditors lose their right to recover money from the company, but gain a right to prove for dividends in the liquidation.

Can a liquidator pay dividends?

Yes. The ultimate role of the liquidator is to sell the company’s assets and distribute the proceeds amongst creditors.

Are the dividends paid under certain priorities?

Yes. The liquidator must pay dividends under a set of priorities. These include:Top Priority 1

(a) the costs and expenses of the liquidation; (b) the costs of the petitioning creditor (if any); (c) employee entitlements; and (d) other unsecured creditors.

How long does the liquidation last?

There is no set time limit. A liquidation lasts for as long as is necessary to complete all of the tasks, but the liquidator will usually try to finalize the liquidation as soon as possible.

How does a liquidation end?

The liquidation ends when either:

(a) the company is dissolved by Court Order on the application of the liquidator; (b) the company is struck off the register of companies by the ASIC; or (c) the winding up is set aside or stayed by the Court.