Court Liquidation

IMG

Why commence a court liquidation?

A court liquidation, as the name implies, is when a company is placed into liquidation upon the order of the court.

The most common form of a court liquidation stems from a creditor seeking to place the company into liquidation following a company’s failure to pay the money that is owing to the creditor.

How is the company placed into a court liquidation?

A number of different parties can apply to the court to place a company into liquidation. The most common approach is by a creditor whose debt remains unsatisfied by a company.

A creditor will need to bring an application to the court to have the company placed into liquidation. Independent legal advice should be sought by creditors seeking to place a company into liquidation.

If the application to the court is successful, the appointment will be referred to as a court liquidation. A court liquidation was previously referred to as an official liquidation.

After a company is placed into a court liquidation, much of the same processes and principles apply (with some differences) that are consistent with a creditors voluntary liquidation.

Can creditors continue with their actions against the company?

Following the company being placed into a court liquidation, unsecured creditors are not able to continue with, or commence new civil proceedings for recoveries, without seeking leave of the court. This does not apply to creditors who have a valid security interest, who are able to seek to recover assets subject to their security post the appointment of a liquidator.

Creditors should lodge the details of their claim with the liquidator. If sufficient funds are available to allow for a dividend, those funds are returned to creditors proportionally to the amount of their claim, compared to the total body of the claims of creditors eligible to receive a dividend.

What happens to any personal guarantees?

Placing a company into liquidation does not protect parties from any personal guarantees they may have provided. Independent legal advice should be sought in relation to any personal guarantees that may have been provided.

Who has control of the company after it is placed into liquidation?

Once the company is placed into liquidation, the powers of the directors cease, and the assets and affairs of the company come under the control of the liquidator.

The liquidator will seek to gather in and realise the assets of the company. Those funds will then be distributed in accordance with priorities afforded by the Corporations Act.

Does the company in liquidation continue to trade?

The liquidator can choose to trade on the business.

Whilst not common to most appointments, the continuation of trade may be done to complete existing sales or work in process, to recover debtors, or alternatively to seek to sell the business as a going concern.

Once the above has been completed, the company will cease to trade.

What happens to the employee claims?

Whilst a liquidator can continue to trade a business that is in liquidation, the trading period will eventually come to an end. In most cases, the company has ceased to trade on, or prior to the appointment of the liquidator. The most common outcome is that ongoing employment will not be available to the company’s employees.

Employees who are owed funds at the time of liquidation may be eligible to lodge a claim under the Fair Entitlement Guarantee (“FEG”). There are certain restrictions as to who may be able to lodge a claim, or what limits may apply to any claim lodged with under the FEG.

FEG is a Federal Government Scheme to assist in meeting the obligations of employees when a company is placed into liquidation, and there are insufficient funds to pay the funds owing to them. FEG payments do not extend to any amounts which may be owing for superannuation.

Employees whose claims are paid under the FEG, will have their claim in the liquidation subrogated to FEG.

What are the obligations of a director of a company once it is placed into liquidation?

The main obligations of directors (including former directors), upon the company being placed into liquidation are:

  • The requirement to provide a Report on Company Affairs and Property (ROCAP);
  • To provide the company’s books and records; and
  • To attend on the liquidator’s reasonable requests and provide assistance and information.

Where a court liquidation differs from a creditors voluntary liquidation is that the liquidator will have already had discussions with the directors of the company and will have information at hand regarding the company’s activities, affairs, and company records etc in a creditors voluntary liquidation.

In a court liquidation, the liquidator will not have had previous contact with the directors and is unlikely to have any detailed knowledge of the company’s operations, activities, and records.

A great challenge encountered by a liquidator in a court liquidationis seeking information from directors and others at the commencement of a court liquidation. In circumstances where a director or others may seek to frustrate the liquidator, and fail to provide the assistance required, inclusive of attending to their obligations as noted above, their conduct may be referred to the Australian Securities and Investments Commission (ASIC) for prosecution.

What role does the liquidator play?

The primary difficulty in a court liquidation is getting information from the directors and others regarding the company’s affairs following their appointment.

As noted above, where information and assistance is not provided, the conduct of the offending parties may be referred to ASIC for prosecution.

After the information is recovered, either from directors themselves, or from other third parties, the liquidator will then seek to commence gathering in, securing, and realising the assets of the company.

Investigations into the company’s affairs will be conducted to identify what may have happened to the company’s assets, what possible causes of action may be available for further recovery, the reasons for the failure of the company, and in most cases, lodge a report with the Australian Securities and Investments Commission (ASIC).

Subject to the timing of the information being available, the findings of the investigations are also reported to creditors.

The liquidator is required to distribute the funds in accordance with the Corporations Act, and where funds are available, declare and distribute dividends to creditors.

After the investigations are finalised, all assets that are commercial to deal with are realised, and all funds have been distributed, the liquidator will then notify ASIC of the completion of the liquidation. The company will then be deregistered within approximately 3 months after ASIC is notified of the completion of the liquidation.

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