How liquidation works

Due to the different types of liquidation, the process can vary. The speed and complexity of the process can also vary, depending on the size of the company or the scale of the situation.

Whether the process is a Creditors Voluntary Liquidation, a Members Voluntary Liquidation or a Court Liquidation, the process is coordinated by the appointed liquidator and typically involves:

  • Lodgement of various appointment documents at ASIC;
  • Advise various government organisations, such as the Australian Tax Office and state government revenue offices, of the appointment of the liquidator;
  • Completion of a questionnaire by directors who will also deliver the books and records of the company to the liquidator;
  • Collection and sale of company assets;
  • Preparation of a Creditors Report;
  • Scheduling and holding a Creditors’ Meeting;
  • Reviewing the books and records and reports findings to ASIC;
  • Commencement of a recovery process if there are hidden assets or assets that should be recovered;
  • Payment of a dividend to creditors if funds are available;
  • Finalising the liquidation by preparing a Final Report for Creditors, lodge various documents with ASIC and request that ASIC deregisters the company.

Why put a company into liquidation

Officially dissolving your company may not be a desired outcome, but company liquidation can often provide certain relief for directors and board members who are struggling with insolvency. Directors can benefit from liquidation for the following reasons.

How liquidation works

The liquidator takes control

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Directors lose their company powers when a liquidator takes control. Not only does it prevent insolvent trading, but it means that someone else is handling the stressful administrative tasks associated with paying off creditors. External liquidators appointed to wind up an insolvent company is responsible for communicating with creditors and holding the necessary meetings to discuss outcomes and to keep creditors appraised of the situation. Directors are still required to be available to supply company information to assist in the process, but their broader involvement is taken care of by liquidators.

Risk of insolvent trading is lifted

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Insolvent trading refers to the act of trading and incurring new liabilities by an insolvent company which is unable to pay its debts as and when they fall due. Insolvent trading is illegal and carries serious consequences like civil penalties, compensation proceedings and even criminal charges. Insolvent trading can worsen the insolvency process but when a company is in liquidation, control of the company is given to the liquidator, and as a result the director has no opportunity trade while insolvent.

Company liquidation can also benefit by:

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  • Relieving stress by legally finalising the company’s affairs and facilitating de-registration of the company and cancellation of its Australian Business Number (ABN); and
  • Suspending legal proceedings in progress against the company and preventing new legal proceedings from being commenced.
How liquidation works?

How liquidation works for creditors

How liquidation works is to not only wind up company affairs but to ensure all debts are realised and creditors are given what they’re owned. It is important that debts are realised and as a result the liquidator is obligated to remain connected to creditors and keep them up-to-date with every stage of liquidation.

The first action of keeping creditors in the loop is often through the Committee of Inspection. The function of the Committee is to supervise the conduct of the liquidation and advise and assist the liquidators. While final decisions regarding the liquidation process fall the liquidator, the Committee is entitled to express views that must be taken into account. The Committee also has the power to replace a member, approve or reject liquidator’s remuneration and authorise the liquidator to enter into long term arrangements over three months. It also has the power to direct investment of surplus funds or, if needs be, compromise a debt that is due to the company and is greater than $100,000.

Once a committee is formed and the process is underway, liquidators must keep creditors updated on the progress or any new or unforeseen developments. This may include creditors’ meetings and regular report.

Liquidators will send at least two reports to creditors. This may begin with an ‘initial report’ written to briefly introduce the liquidator and to outline the procedure, but subsequent reports will include more detail on topics like:

  • Strategy of realisation of assets;
  • Success in realisation of assets;
  • Statement of the liquidation’s receipts and payments;
  • The liquidator’s fees and outlays incurred; and
  • The outcome of investigations.

Meeting with creditors

Creditors’ meetings provide an opportunity for liquidators to find out creditors’ wishes on a particular matter or seek approval of the liquidator’s fees. They also provide a platform for liquidators to report on matters of substance, obtain funding or approval of remuneration, seek information, or obtain authority to enter into long term agreements longer than three months. Liquidators can also use meetings to reach a debt compromise with creditors for debts due to the company exceeding $100,000.

To ensure all creditors have the chance to attend meetings and have their say on important matters, meetings cannot be brought up last minute. Creditors must be given a meeting notice of 10 business days.

Before a creditors’ meeting can commence, a quorum of at least two or more people attending must be present before a meeting can start. Creditors can however appoint any person over 18 years of age to act as the proxy. The meeting’s convenor can require proxies to be lodged prior to the commencement of the meeting, but not more than 48 hours before its commencement.

Liquidators aren’t the only individuals who can call a creditors’ meeting during company liquidation. Creditors can also call for meetings, as long at least 25% in value of creditors are on board to pass a resolution to direct the liquidator to do so in writing. Less than 25% in value of creditors can still call for meetings, as long as more than 10% in value of creditors direct the liquidator to do so in writing and they provide security for the costs of calling and holding the meeting.

Any potential outcome of a creditors’ meeting must be voted on – liquidators may be responsible for the taking care of the liquidation but they do not have dictatorial authority on decisions that may affect creditors. For the right to vote on a decision during the meeting, creditors must have lodged with the meeting’s Chairperson details of their debt to prove they have a stake in the liquidation process. The Chairperson must admit the debt for voting purposes, before the creditor can participate in the meeting.

Exceptions to meetings

Creditors’ meetings are vital for a number of liquidation matters to be resolved. However there are some elements that do not apply. For example, creditors cannot vote in respect of:

  • An unliquidated debt or claim;
  • A contingent debt or claim; and
  • A debt where the value of it has not been established unless a just estimate of its value has been made.

If you are facing company liquidation, do not hesitate to contact us for more information or support.