What is liquidation?
Liquidation, or “winding up”, is the name of the formal, orderly process of dismantling a company’s affairs, including undertaking appropriate investigations and making a fair distribution of the company’s assets to its creditors. This may happen either when the company can’t pay all of its debts (it is insolvent), or alternatively, when the company’s owners or members want to end its existence — see also “Can Solvent companies be wound up?” under Company Insolvency

Why would anyone choose liquidation?
Liquidation is the only way to fairly and properly wind up the affairs of a company, and in the case a hopelessly insolvent business, it is in the best interests of all concerned; the members, directors and creditors; to have an independent party undertake the process.

How are companies liquidated?
In most cases, the decision to liquidate or wind up a company begins with a resolution of the company’s members or its creditors at an appropriate meeting, or else when a creditor or creditors bring an “application” to the Court.
In a “Court liquidation” the applicant/s must prove to the Court that the company is insolvent or may be deemed to be insolvent, and the Court then may appoint a “liquidator”, usually nominated by the creditor. Court liquidations may also be ordered when there are irreconcilable differences between members or shareholders, but this is less common.
“Voluntary liquidations” occur when a decision to wind up the company is made at a meeting of its members or creditors and the liquidator is then chosen. This process can begin through the provisions for a “Voluntary Winding Up”; see the Section — Voluntary Administration

What is Provisional Liquidation?
The Court may appoint a provisional liquidator in order to take “interim” control over the assets and affairs of the company, in the period between when a winding up application has been filed and before a winding up order has been considered. Provisional liquidators are appointed when the Court believes that assets may be at risk and that it is in the interest of creditors that these assets be frozen until the winding up application has been heard. The appointment is said to be “provisional” as the company may not be wound up at the hearing of the application.

Who are appointed liquidations?
Liquidators are specialist accountants, officially appointed to administer liquidations. There are two categories: (1) Liquidators registered with ASIC who can take all type of appointments except those ordered by the Courts; and (2) Liquidators registered with the Courts.

What are the liquidator’s powers?
The powers of the liquidator are defined in the Corporations Act. They include all the powers normally vested in the directors of the company, and in addition the power to:

  • Investigate and examine the affairs of the company
  • Examine the directors and others under oath
  • Realise the assets of the company
  • Undo invalid transactions
  • Conduct and sell any business of the company
  • Pay dividends and admit debts.

What are the liquidator’s duties?
The liquidator will work to:
• Find and protect the assets of the company
• Liquidate those assets
• Undertake investigations into the affairs of the company including suspicious transactions;
• Take appropriate recovery actions
• Issue reports to creditors and ASIC
• Distribute surplus funds to creditors
• If possible, make distributions to shareholders, and
• De-register the company.

What effect does liquidation have on the company?
The company structure survives the appointment of a liquidator, but not the liquidation. In liquidation, the conduct of the business and control of all the company’s assets and affairs are transferred to the liquidator, and the Directors cease to hold any authority. Company bank accounts are frozen and, while the liquidator may rehire essential labour, all employments are terminated. At the end of the liquidation, the company will be deregistered with ASIC, and will effectively cease to exist.

Can a company continue trading when it is in liquidation?
The liquidator’s duty is to act in the best interest of stakeholders while at the same time winding up the affairs of the company as quickly as possible. Therefore, a company may continue to trade if the liquidator believes that continuing will be in the best interest of the creditors and other stakeholders. Continuation mostly occurs when the liquidator has decided to sell the business as a going concern, or else so that work-in-progress may be completed and sold.

What are directors’ obligations to help the liquidator?
Company Directors are required to disclose the company’s affairs to the liquidator by submitting a Report as to Affairs and a Director’s Questionnaire. They are also required to cooperate with the liquidator, and produce all of the company’s company books and records. Directors who fail to cooperate with liquidators may be subject to prosecution.

What investigations must the liquidator carry out?
The liquidator’s duty to formally determine and report on the following:
• Why the company is insolvent
• Whether there may be a claim against the directors for insolvent trading
• Whether any preferential payments may have been made that may be recovered;
• Whether the officers of the company may have committed any offences, and
• Whether any other recoveries may be made or void transactions can be overturned.

What powers does the liquidator have?
Liquidators may hold public examinations, seize company books and records, gain access to property, and if necessary detain people who are relevant to the investigation. In addition, the Liquidator must identify and report any offences that have been committed by the company or its directors.

Can the liquidator recover property that was sold before the liquidation?
Liquidators are obliged to examine any sales or transfers of property that have occurred within the years before the liquidation. If any of these transactions appear to be improper, non-commercial, or to have been undertaken to circumvent creditors, the property or its value may be recovered. The liquidator may also seek to recover money from creditors who have received payments in the six months prior to the liquidation.

Can liquidators access a Director’s personal assets?
Liquidators are obliged to take recovery action where it can be proved that the directors have removed company assets. Liquidators will also seek to recover money where the company has made loans to directors.

What is Insolvent Trading?
Insolvent trading is said to have occurred when a director allows a company to incur new debt at a time when the company is insolvent or cannot pay, or where there are reasonable grounds for suspecting that the company is insolvent, or may become insolvent as a result of incurring the debt. When the company is wound up, the directors can be made personally liable to compensate for the amount where part of all of that debt remains outstanding.
Refer to Section — Insolvent Trading

Can insolvent trading put directors’ personal assets at risk?
If a liquidator can prove an insolvent trading claim against a Director, the director may be made personally liable to compensate the company. If necessary to satisfy the liquidator’s claim, the Director may be declared bankrupt to enable a Trustee in Bankruptcy to access the director’s personal assets.

Are personal guarantees affected by liquidation? ?
Personal guarantees are not affected by liquidation because they are personal arrangements between a creditor and guarantor. See the Section — Personal Guarantee

Are secured creditors affected by liquidation?
The rights of secured creditors are not affected by liquidation. Secured creditors usually allow the liquidator to sell the assets whilst the rights of the secured creditor are recognised, after which the secured creditors may prove for any shortfall in the liquidation.

Are unsecured creditors affected by liquidation?
In the event of liquidation, unsecured creditors lose their right to recover money from the company but gain a right to prove for dividends in the liquidation.

Can a liquidator pay dividends?
It is the liquidator’s duty to realise the company’s assets and distribute the recovered proceeds amongst creditors and stakeholders.

Are there priorities in the payment of dividends?
The liquidator applies the following priorities in paying dividends:
1. The liquidator’s costs and expenses
2. The costs (if any) of the petitioning creditor(s)
3. Employee entitlements, and
4. Any unsecured creditors.

How long do liquidations take?
The liquidation process continues for as long as is necessary to finish all of the tasks, but liquidators will normally try to finalise the process as quickly as possible.

When do liquidations end?
Liquidations end when either (1) the company is dissolved by Court Order on the application of the liquidator, or (2) the company is struck off the ASIC register of companies, or (3) when the process is stayed or set aside by the Court.

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