What happens when you liquidate a company?

insolvencyCompany Liquidation

A liquidator is appointed, generally because it can’t pay its debts. At the time of appointment, the liquidator  becomes the proper officer of the company. At the same time, the company directors powers are immediately suspended.

The powers of the liquidator are laid out in Section 477 of the Corporations Act. A liquidator must be a registered and licensed insolvency practitioner by the Australian Securities and Investments Commission.

Subject to this section, when a company is insolvent, a liquidator will take control of all the affairs of the company, including all the company’s assets, its business and undertakings as part of the liquidation process. In this regard, the liquidator has the power and authority of the Corporation Act to continue to trade on (if it is in the best interest of the unsecured creditors to do so) or to sell the assets as part of the winding up of the company.

Ultimately, however, the role of the liquidator is to collect and realise the company’s assets for the purpose of distributing the sale proceeds to proven creditors to whom the company owes debts.

Apart from the control, collection and sale of company assets, the liquidator must also undertake a detailed investigation into the reasons for failure of the company and the conduct of the directors.

In this regard, the Liquidator will seek to recover the books and records of the company from the directors.

The liquidators will generally concentrate their investigations on whether the company was allowed to trade while insolvent, or how company funds or assets were used by directors. The liquidators will also examine preferential or uncommercial payments as well as unreasonable director related transactions.

At the conclusion of these investigations, the liquidator will report findings to both the creditors and the ASIC. 

A Liquidator may commence legal claims against a director or other parties on behalf of a company for the benefit of its creditors. In particular, claims are commonly made for insolvent trading, voidable transactions, director loan accounts and other unreasonable director related transaction.

The list below is some of the duties performed by a liquidator;

  • To protect and realise the assets of the insolvent company for the benefit of the creditors.
  • To investigate the affairs of the insolvent company and report any wrong doings such as insolvent trading or any other breaches of the Corporations Act by the directors to the Australian Securities and Investments Commission (“ASIC”).
  • To commence any legal claims in the name of the company. Such actions often involve legal proceedings against directors for unreasonable director related transactions, the recovery of director loan accounts, insolvent trading or breaches of directors duties
  • To distribute any surplus funds, after payment of the liquidators fees and expenses, to the employees and then creditors in accordance with Section 556 of the Corporations Act.

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A Creditors Voluntary Liquidation is for insolvent companies and despite its name is actually instigated by the directors and shareholders of the company who appoint a liquidator.

Once a liquidator is selected, the process of placing a company into liquidation involves;

  1. Minutes of a Meeting of Directors – the directors need to resolve the company is insolvent. They then call a meeting of the shareholders who deal with the insolvency of the company by appointing of a liquidator.
  2. Consent to Short Notice – normally it takes 21 days to call the meeting of shareholders however this period may be waived if 95% of shareholders sign a Consent to Short Notice. This means if the consent form is signed the meeting of shareholders may be held immediately.
  3. Minutes of Meeting of Shareholders – this is the meeting at which a Liquidator is appointed and when the company is actually placed into Liquidation.
  4. Once the company is in Liquidation, the Liquidator is required to write to all creditors advising of the liquidation. A meeting of creditors may also be held shortly after appointment.
  5. The liquidator will provide all creditors with;
    1. Notification of the appointment together with a short report on the company.
    2. Notice of any Meeting of Creditors including the time, date and place it will be held
    3. A Summary of Affairs – effectively a balance sheet position of the company at the date of liquidation together with
    4. A listing of all creditors names, addresses and amounts owed
    5. ASIC information sheets – being guides for creditors and details of a Liquidator’s remuneration.

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