Official and Voluntary Liquidations

How is a liquidator appointed to a company?

There are two ways to appoint a liquidator to an insolvent company. They are:

(a) by an Order of the Court (an official liquidation); or
(b) by resolution of the members or creditors of the company (a voluntary liquidation).

There are a number of ways that a voluntary liquidation can begin:

(i) under the voluntary liquidation provisions of the Corporations Act (Part 5.5) where the members resolve that the company should be wound up;
(ii) under the voluntary administration provisions of the Corporations Act (Part 5.3A) where the directors appoint a voluntary administrator and the creditors resolve that the company be wound up; or

(iii) after the default of a deed of company arrangement (Part 5.3A) when the company is either automatically would up under the terms of the deed, or by resolution of the creditors.

Can the company keep trading during a liquidation?

The liquidator will only continue trading if they believe that they can sell the business as a going concern, or to complete and sell work-in-progress. The liquidator has an obligation to end trading and wind up the affairs of the company as quickly, but as commercially, as practical.

What happens to leases in the company's name?

The liquidator will only keep leased assets if they are needed to trade the business, and this will usually only be for a short period. They will determine whether there is any equity in the leased asset and, if not, hand it back to the finance company. If there is equity in the asset, the liquidator may sell the asset, payout the finance company and retain the equity. Often, if there is no equity, guarantors of the leases will continue the payments so that a demand is not m

Will a director be liable for company debts?

There are a few ways that a director could be liable for the company's debts.

(1) through a personal guarantee given by that person guaranteeing payment of a company's debt to a particular creditor.
(2) under the insolvent trading provisions of the Corporations Act. These provisions can only be activated in a liquidation and may make the director liable for some unpaid company debts.

(3) under the unreasonable director-related transaction provisions of the Corporations Act. These provisions will only be activated in a liquidation and may require the director to refund money or return assets to the liquidator.

(4) when the company is a corporate trustee, and where it is not entitled to be fully indemnified out of trust assets, solely because of the following:

(i) a breach of trust by the corporation;
(ii) the corporation acting outside the scope of its powers as trustee;
(iii) a term of the trust denying, or limiting, the corporation's right to be indemnified against the liability.

What is a Preferential Payment?

This is a payment made to a creditor:

(a) within six months of the winding up (or a longer period in certain circumstances);
(b) at a time when the company was insolvent;

(c) when the creditor should have suspected that the company was insolvent; and

(d) where the creditor received a better return than would have been obtained through a dividend in the liquidation.

The creditor may need to refund these payments to the liquidator.

What is an Insolvent Trading claim?

This is a claim that may be made by a liquidator against a director for payment of compensation, based on the amount of unpaid debt that the company incurred after it became insolvent. A director may be liable for this claim when they breached their duty to stop the company from incurring debts whilst it is insolvent.

What is an Uncommercial Transaction?

This is a transaction conducted while the company is insolvent that a reasonable person knowing the circumstances would not have entered into, given the detriment to and benefits received by the company and other parties. These transactions may be overturned by the Courts.

Do creditors need to attend creditors meetings?

No. Creditors can ignore the meeting process and still prove for a dividend. Creditors can appoint proxies to represent them if they do not want to attend meetings but want their voice heard. But creditors are bound by any resolution passed at a meeting, whether they attend or not.

Do Directors need to attend creditors meetings?

No. Nothing in the Corporations Act obliges a director to attend a meetings of creditors, with the exception of the initial meeting of creditors in the Creditors Voluntary Winding Up process.

Can the liquidation of a company be stopped?

There are two ways of ending liquidation before its natural conclusion.

1. The first is to have the liquidator appoint a voluntary administrator to the company and have a deed of company arrangement proposed and accepted. A court appointed liquidation will also require an application to the court to end the official liquidation.
2. The second is to make an application to the Court for an order that the liquidation be stayed. This requires proof that the company is actually solvent or that the initial winding up process was flawed.

Disclaimer
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

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Last updated: 11.1.2008