Company Liquidation

When a company is in liquidation its financial affairs are being wound up.

Liquidation doesn’t always occur as a result of insolvency.  A solvent company can be wound up and this process is called a Members’ Voluntary Liquidation.

The more common processes in terms of the winding up by a liquidator of an insolvent company are Creditors’ Voluntary Liquidation and Court Liquidation.  The liquidation of an insolvent company allows an independent registered liquidator to assume control of a company so its affairs can be wound up in an orderly and equitable way to benefit creditors.

What is the liquidator’s role when winding up an insolvent company?

A liquidator has a duty to a company and its creditors.  Their role is to:

  • Preserve, protect, and realise (where it is commercial to do so) company assets;
  • Investigate and report to creditors about a company’s affairs including any potential recovery actions or existence of transactions which have resulted in property being dealt with in an improper manner i.e. illegal phoenix activity and any rights of action against officers of the company;
  • Inquire into the failure of the company and report offences to the ASIC;
  • Following the distribution of monies in the accordance with the priorities of the Corporations Act, finalising the winding up.

Creditors’ Voluntary Liquidation

Generally, a Creditors’ Voluntary Liquidation (CVL) is initiated by members (shareholders) who have resolved that a company is insolvent and company to be wound up.  As the name suggests, the process involves the voluntary appointment of a liquidator.

The key advantages of a CVL include:

  • The stakeholders are in control of the timing and appointment a liquidator;
  • Control is transferred to the liquidator.  The appointment of an independent person from outside of the company generally provides creditors with a sense of closure and some comfort that a company’s affairs are being dealt with in an orderly and equitable way;
  • Minimises the likelihood of risk in terms of the personal liability that attracts to directors in relation to insolvent trading;
  • Once appointed, the liquidator and his or her office deal with creditors.  This can relieve the pressure on stakeholders and staff of a company from having to take phone calls from creditors and respond to emails and letters;
  • Following the appointment of a liquidator to a company, unsecured creditors cannot commence or continue legal proceedings without leave of the Court.
  • Providing they are eligible, former employees should be able to make a claim to the Fair Entitlements Guarantee (FEG) scheme in respect of unpaid entitlements owed to them.

A CVL may also come about if creditors of a company in Voluntary Administration resolve at the second meeting of creditors that a company be wound up or following the termination of a deed of company arrangement.

Simplified Liquidation

A Simplified Liquidation is a type of creditors’ voluntary liquidation (CVL) which can be adopted after a company has been placed into a CVL. To be eligible for the Simplified Liquidation process certain criteria must be met including that a company must not have liabilities in excess of $1 million (excluding contingent liabilities) and it must up to date with its tax lodgements. The simplified process is intended to be more cost effective due to reduced investigation, reporting and distribution requirements however much of the process remains the same.

Court Liquidation

A Court Liquidation is a process that involves a party applying to Court for a company to be wound up.If it can be established that a company is insolvent, The Court will make an order that a company be wound up in insolvency.The most common ground for establishing insolvency is the non-compliance with a statutory demand (a demand for payment) served by a creditor.If the Court makes a winding up order, it will appoint a liquidator to administer the winding up.

Provisional Liquidation is a type of liquidation used by courts to preserve the assets of the company when a liquidation is pending.

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