Liquidation

Liquidation

Liquidation is the process of winding up a company’s financial affairs, comprising of the realisation of any assets and the fair distribution of monies to creditors and, in some instances, its shareholders.

An insolvent liquidation occurs when a company cannot pay all of its debts from its available assets (i.e., it is insolvent). Sometimes, a company can pay all of its debts. However, it might have reached the end of its useful life, so its members decide to wind up the company’s financial affairs formally – this is called a solvent liquidation.

Why choose liquidation?

The liquidation process ensures that the company’s affairs are fully wound up by an independent expert registered with ASIC.

The process may assist directors who:

• Are experiencing mounting pressure from creditors for payment. This process will ensure that creditors’ claims are correctly dealt with during the liquidation.
• Have received a Director Penalty Notice (DPN) from the Australian Taxation Office as it may limit personal liability.
• Have received a statutory demand or judgement debt from a creditor and cannot pay that debt in full.

How can an insolvent company be wound up?
An insolvent company can be liquidated in one of two ways. This can be either:

A winding-up order by the court, usually after one or more creditors submit an application to the court to wind the company up, or by a special resolution of the company’s members at a relevant meeting. In this instance, the directors firstly resolve to commence the process.

What is a court liquidation?

A creditor who is owed money and has obtained a judgment via the appropriate court process is entitled to obtain an order to wind up a company where the continued non-payment of the judgement debt persists. The applicant creditor must demonstrate to the court that the company is insolvent or can be deemed to be insolvent. This typically involves a creditor’s statutory demand being served and not complied with. The court will then appoint a liquidator, usually one nominated by the applicant creditor.

The court may also wind up a company when there are irreconcilable disputes between shareholders or directors. This would usually involve an application being made to the court by one (or more) of the directors or shareholders.

What is voluntary liquidation?

Voluntary liquidation is a process whereby the company voluntarily appoints a liquidator. In practice, the directors resolve to call a meeting of members seeking a special resolution to place the company into liquidation. Creditors have the right to change the appointed liquidator at any time.

What is a members’ voluntary winding up (MVL)?

A member’s voluntary winding up is the process for members to deal with a company that can pay its debts but has reached the end of its useful life. There are often taxation issues to consider when undertaking this sort of liquidation.

What is a creditors’ voluntary winding up (CVL)?

A creditors’ voluntary winding up is a process where the directors determine that the company is insolvent and resolve to ask its members to pass a special resolution placing the company into liquidation.

A creditors’ voluntary winding up is commonly used when a company is insolvent and the company simply needs to be liquidated. If a wind-up application has been filed with a court, or if a court has ordered that the company be wound up, a creditors’ voluntary winding up is not possible.

Who administers a liquidation?

Liquidations can only be administered by specialist accountants who are registered liquidators with ASIC. They can take all types of corporate insolvency appointments, including those ordered by the courts.

What powers do liquidators have?

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

• Investigate and examine the affairs of a company.
• Identify transactions that are considered void.
• Examine the directors and others under oath (public examination).
• Realise the assets.
• Conduct and sell any business of the company.
• Admit debts and pay dividends.

What does the liquidator do?

The liquidator will:

• Identify and protect the assets of a company.
• Realise those assets.
• Conduct investigations into the financial affairs of a company and any suspicious transactions.
• Make appropriate recoveries.
• Issue reports to ASIC and creditors.
• Make a distribution to creditors.
• Make a distribution to shareholders (if a surplus exists).
• Apply to ASIC to deregister a company.

What is the effect of liquidation on a company?
When a company is liquidated, its structure survives the appointment of a liquidator, but not the liquidation. Control of assets, conducting its business, and other financial affairs, are transferred to the liquidator. All bank accounts are frozen; employment can be terminated or, if necessary, maintained by the liquidator for a period of time.

The liquidator realises the company’s assets for maximum value and then distributes the monies to creditors. At the end of the liquidation, the liquidator applies to ASIC for the company to be deregistered, after which the company will cease to exist.

Can a company trade while in liquidation?
A liquidator may continue trading a company if it is in the creditors’ best interests. A trade-on is considered if there is a prospect of selling the business as a going concern or to complete and sell any work-in-progress.

What investigations are undertaken by the liquidator?

• The liquidator must investigate:
• Why the company is insolvent.
• When the company became insolvent.
• Whether insolvent trading has occurred.
• Any recoverable preferential payments.
• Any possible offences committed by the company’s officers.
• If any voidable transactions occurred.
• If any other recoveries may be made.

There are many options to save distressed businesses. The key is to act quickly.

What must the directors do to help the liquidator?

The directors must give all information about the company’s financial affairs and provide a Report on Company Activities and Property (detailing the assets and liabilities of the company as at the date of appointment of the liquidator) and assist the liquidator when reasonably asked to do so. The directors must also deliver all company books and records and cooperate with the liquidator throughout the liquidation process. The Corporations Act contains various offence provisions that apply to directors who do not cooperate with liquidators.

These powers include holding public examinations, seizing books and records, and gaining access to property. The liquidator must also identify any offences committed by the directors and report these to ASIC.

Can a liquidator pay dividends?

Yes. The ultimate role of the liquidator is to realise the company’s assets and take all possible steps to recover sufficient funds to distribute the proceeds among creditors.

How long does a liquidation last?
There is no set time limit for a liquidation. The liquidation lasts for as long as necessary to complete all the required tasks of liquidation, however, a liquidator will usually try to finalise the liquidation as soon as possible. As a guide, a simple liquidation, completed quickly, would take six months.