Creditors Voluntary Liquidation

IMG

Why liquidate a company?

When a company is unable to continue to pay its debts, (i.e., it is insolvent) and there is no prospect of utilising an alternative appointment for the restructuring of the company’s affairs, the company can be placed into liquidation voluntarily, without the need of making an application to the court.

Whilst the appointment is referred to as a creditors voluntary liquidation, in most cases, it is the shareholders (also referred to as members) of the company who control placing the company in to liquidation.

A company may also be placed into liquidation by way of a resolution of creditors for a company that was previously in a voluntary administration or a deed of company arrangement.

By placing the company into liquidation, the liquidator will become responsible for dealing with the company’s affairs. The liquidator will also be responsible for communicating with the creditors of the company.

The appointment of a creditors voluntary liquidation may also help limit the exposure a director may have to a director penalty notice.

How is the company placed into liquidation?

The process is commenced by the directors, who after having concluded that the company is insolvent, will convene a meeting of the members to place the company into liquidation.

The company is placed into liquidation immediately after the special resolution of the members is passed to put the company into liquidation. Members will also appoint a liquidator (who must be a registered liquidator) to conduct the liquidation.

No application to the court is required.

Can creditors continue with their actions against the company?

Following the company being placed into 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 communicate with creditors, notifying them of the liquidation, and seek that further correspondence regarding the company be directed to the liquidator’s office.

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 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.

What role does the liquidator play?

The liquidator is responsible for gathering in, securing, and realising the assets of the company.

The liquidator will also conduct investigations into the company’s affairs 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, distribute the dividends to the 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.

Please contact us for further information or an obligation-free consultation regarding how a creditors voluntary liquidation may be appropriate to deal with your company.

Having Insolvency Concerns?

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