What is liquidation?

A liquidation is the orderly winding up of a company’s affairs. It involves realising the company’s assets, cessation or sale of its operations, distributing the proceeds of realisation among its creditors and distributing any surplus among its shareholders.

The three types of liquidation are:

  • Court

  • Creditors’ Voluntary, And

  • Members’ Voluntary.

What is 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.

Except for lodging documents and reports required under the Corporations Act, 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. 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 under the Assetless Administration Fund to carry out a further investigation into the allegations.

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.

Creditors’ meetings during liquidation

A liquidator may call a creditors’ meeting from time to time to inform creditors of the progress of the liquidation, 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. In a court liquidation, the liquidator is not required to call a creditors’ meeting unless a matter requires creditor approval or creditors pass a resolution requiring a creditors’ meeting to be called, or at least one-tenth in value of all the creditors request the liquidator in writing to do so. In a creditors’ voluntary liquidation, the liquidator may choose to hold an annual meeting of the creditors or lodge a report with ASIC on the progress in the administration. If they choose not to hold the meeting, the liquidator must tell creditors that the report has been prepared and give them a copy free of charge if asked. The report must set out:

  • an account of the liquidator’s acts and dealings and the conduct of the winding up in the preceding year

  • A summary of the tasks yet to be done in the liquidation, and

  • an estimate of when the liquidation is expected to be finalised.

The liquidator in a creditors’ voluntary winding up must also hold a joint meeting of the creditors and members at the end of the winding up. Creditors can require the liquidator to call a creditors’ meeting at other times, the same as in a court liquidation, as long as they pay the associated costs. The chairperson of a creditors’ meeting (usually the liquidator or one of their senior staff) must prepare minutes of the meeting and a record of those who were present at the meeting and lodge them with ASIC within one month. A copy may be obtained from any ASIC Business Centre on payment of the relevant fee

Voting at a creditors’ meeting

To vote at a creditors’ meeting you must lodge details of your debt or claim with the liquidator. Often, the liquidator will provide you with a form called a ‘proof of debt’ to be completed and returned before the meeting. Proofs of debt are discussed further below. You may appoint a proxy to attend and vote at a meeting on your behalf. You can specify on the proxy form how the proxy is to vote on a particular resolution and the proxy must vote in accordance with that instruction. This is called a ‘special proxy’. Alternatively, you can leave it to the proxy to decide how to vote on each of the resolutions put before the meeting. This is called a ‘general proxy’. You can appoint the chairperson to represent you either through a special or general proxy.

How will I get paid in a liquidation?

Before any dividend is paid to you for your debt or claim, you will need to give the liquidator sufficient information to prove your debt. The liquidator will notify you if there are likely to be funds available for distribution and must call for formal proof of debt forms to be lodged. At least 14 days notice of the deadline for lodging the proof must be given. This notice must be given to each person claiming to be a creditor whose debt or claim has not already been admitted by the liquidator. It must also be published in a daily newspaper in the states where the company carried out its business. A copy of the formal proof of debt form will be sent to you with the notice. You should attach copies of any relevant invoices or other supporting documents to the proof of debt form, as your debt or claim may be rejected if there is insufficient evidence to support it. If a creditor is a company, the proof of debt form must be signed by a person authorised by the company to do so. The completed proof of debt form must be delivered or posted to the liquidator. When submitting your claim, ask the liquidator to acknowledge receipt of your claim and advise if any further information is needed. The liquidator must notify you within seven days if they reject your claim. If you are dissatisfied with the decision, your first step should be to promptly contact the liquidator to see if you can resolve the matter. If you can’t resolve the matter with the liquidator, you may wish to seek your own legal advice, as you have a limited time to appeal to the court. The liquidator will notify you of this time in the notice of rejection. It must be at least 14 days after you receive the notice. The court has the power to extend the time to appeal. If you don’t appeal within this time, the liquidator’s decision on your claim is final. 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:

  1. costs and expenses of the liquidation, including liquidator’s fees
  2. outstanding employee wages and superannuation
  3. outstanding employee leave of absence (including annual leave, sick leave – where applicable – and long service leave)
  4. employee retrenchment pay, and
  5. 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). If you have a query regarding the calculation of your claim, or the timing of the payment, discuss this with the liquidator.

What information will I receive in a liquidation?

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.

What is the role of a committee of inspection?

In both types of liquidation, the liquidator may ask creditors if they wish to appoint a committee of inspection and, if so, who will represent the creditors on the committee. A committee of inspection assists the liquidator, approves fees and, in limited circumstances, approves the use of some of the liquidator’s powers, on behalf of all the creditors. Committee meetings can be arranged at short notice, which allows the liquidator to quickly obtain the committee’s views on urgent matters. Shareholders may also be members of the committee.

A member of the committee of inspection must not, without permission from the court, accept a gift or benefit from the company or any other person, including another creditor, or purchase any of the company’s property. A committee of inspection acts by a majority in number of its members present at a meeting, but it can only act if a majority of its members attend.

A liquidator must consider any directions given by the committee of inspection, but is not bound to follow them. Minutes of committee of inspection meetings must be prepared and lodged with ASIC within one month. A copy may be obtained from any ASIC Business Centre on payment of the relevant fee.