Liquidation is the process of winding up of a company and involves the redistribution of the company’s assets and property. Liquidation may occur where a company becomes insolvent, or where the company’s members look to bring the company to an end and have it struck off the company register.
Appropriate investigations and distributions to dismantle the company are undertaken by an independent third party liquidator to protect the interests of the company’s creditors, directors and members.
There are two ways in which a company may be wound up. By resolution of the company members (voluntary liquidation) or by application to the Court, usually by one or more creditors (court liquidation).
Voluntary Liquidation
This process begins through either the Voluntary Winding Up provisions or the Voluntary Administration provisions of the Corporations Act. At a meeting of the company members, the liquidator will be chosen. After the members have resolved to wind up the company, creditors may arrange a meeting to change the chosen liquidator.
Court Liquidation
For this process to begin, the applicant must prove to the Court that the company is insolvent or can be deemed insolvent. A liquidator will then be appointed by the Court. The Court may also wind up a company for a limited number of other reasons, including situations where there are irreconcilable disputes between directors and the company shareholders.
A company is deemed insolvent where it is unable to pay all its debts as and when they fall due. This may occur in situations where the company has a surplus of assets but has no ability to liquidate those assets quickly. It is common for a company to be deemed insolvent where it fails to satisfy a statutory demand issued by a creditor.
Liquidators are specialist accountants. ‘Registered liquidators’ have registration with ASIC and can take all types of appointments, except Court ordered appointments. ‘Official liquidators’ are experienced liquidators who are registered with ASIC and the Court and may accept all corporate appointments including orders by the Court.
The liquidator’s powers are set out in the Corporations Act and include all the powers vested in the company’s directors. A liquidator also has the power to investigate and examine the affairs of the company, examine the directors and members under oath, realize the company assets, identify void transactions, conduct or sell business’ of the company and admit debts and pay out dividends.
In their investigations a liquidator may hold public examinations, seize books and records, gain access to property and detain persons relevant to the investigations.
Once the liquidator is appointed, the directors cease to have any authority. Control of all assets and the conduct of any business or financial affairs transfer to the liquidator.
A liquidator may be provisionally appointed by the Court to exercise control of company assets during the period between the winding up application being filed and the time when the application is heard by the Court. A provisional liquidator will be appointed where it is believed the company’s assets are at risk and need protection in the interests of the creditors.
If the company is not wound up at the application hearing, control may pass back to the directors of the company.
Co-operation with liquidator
The company directors must cooperate with the liquidator throughout liquidation and provide the liquidator with all the information in relation to the company’s financial affairs. This will include a Director’s Questionnaire and Report as to Affairs which should detail the assets and liabilities of the company at the date of the liquidator’s appointment. If a director does not comply with these obligations this may constitute an offence under the Corporation Act.
Secured creditors rights are unaffected by liquidation and may prove in the liquidation for any shortfall of security. However, unsecured creditors lose their right to recover money from the company. Unsecured creditors have a right to prove for dividends in the liquidation.
There is no set time limit, however the liquidator has an obligation to wind up the affairs of the company as quickly and commercially as practical. The liquidation will be finalised when either:
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