Liquidation, also referred to as winding up, is a process whereby a Liquidator is appointed to collect and realise the assets of a company and then distribute those funds in accordance with the Corporations Act and bring the company’s existence to an end.  There are three different types of liquidations – Court Liquidation, Creditors’ Voluntary Liquidation and Members’ Voluntary Liquidation.

Here we consider Creditors’ Voluntary Liquidation.

How does the Creditors’ Voluntary Liquidation commence?

Where the directors and shareholders of the company recognise that the company is insolvent and cannot continue its operations or be rehabilitated, the directors may resolve to seek a resolution of shareholders and to place the company into liquidation.

It is more usual however for Creditors’ Voluntary Liquidations to follow a Voluntary Administration if a Deed of Company Arrangement is not proposed or approved at the second meeting of creditors in a Voluntary Administration.

Who is the Liquidator?

The Liquidator must be a Registered Liquidator (i.e. a liquidator registered with ASIC).  He or she must not be a significant debtor or creditor of the company and must be independent of the company and its officers.

Liquidator’s powers

The Liquidator’s main task is to take possession of the company’s assets and realise them so that the funds can be distributed to creditors.  The Liquidator may continue operating the business of the company to enable the beneficial disposal or winding up of that business.

In addition to realising the company’s assets the Liquidator may:

§  take action against directors for insolvent trading;

§  seek appropriate restitution for voidable transactions entered into by the company prior to the appointment of the Liquidator; and

§  publicly examine any person who has been associated with the company.

The Liquidator also has extensive other powers that are set out in the Corporations Act which enables the Liquidator to displace the directors and have full control of the company’s affairs.

Points to note

A Committee of  Inspection, comprising a number of creditors, may be appointed by the general body of creditors to assist the Liquidator.  A Committee of Inspection has the same power as the body of creditors in a general meeting.

The Liquidator cannot perform certain functions without the authority of either the Court, the Committee of Inspection or creditors.  Two of the more significant functions which require this authority are:

§  to enter into contracts on the company’s behalf, that may run for more than three months; and

§  to compromise a debt due to the company, where the debt exceeds $20,000.

The Liquidator is obliged to report certain matters to ASIC, including offences committed by officers or employees of the company, reasons for the company’s failure and whether a detailed investigation should be conducted by ASIC into the affairs of the company.

§  Liquidation: a guide for creditors

§  Liquidation: a guide for employees

Case study

§  Kastabon Novena Syndicate Scheme

 

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