Liquidators and Liquidations
This is the eighth in our series of articles at informing directors of their duties and options for small to medium enterprises (SME) if faced with insolvency. This particular article will deal with liquidations and the role of a liquidator.
A liquidator can be appointed by either a creditor or shareholder (through a Court application) or voluntarily by members of the company. A liquidation can be either solvent (i.e. all liabilities are paid and there is a surplus for shareholders) or insolvent (i.e. when there are insufficient assets to pay all liabilities).
The process to appoint a liquidator voluntarily, whether the company is solvent or insolvent, is very similar. That process is briefly outlined below:
Directors hold a meeting to confirm intention to voluntarily wind up the company and authorise general meeting to be convened.
General meeting of members is convened.
General meeting of members is held, resolving to wind up the company and appoint liquidator(s).
A court ordered liquidation is driven by a creditor, who applies to court for a company to be wound up as a result of it being insolvent. The most common path for a creditor to wind up a company is to issue a creditor’s statutory demand and then once expired (after 21 days), file the requisite material, affidavits and application with the appropriate Court. The creditor’s statutory demand process provides a shortcut to proving a company is insolvent. The law states a company is presumed to be insolvent if the demand is not answered. Once the presumption of insolvency has arisen, a creditor can file a winding-up application.
Sometimes a creditor (or more commonly a shareholder) may apply to Court for the appointment of a provisional liquidator. A provisional liquidation is usually sought as urgent and interim appointment with the main purpose of protecting and preserving the company’s assets until a winding up application can be heard (which may be on just and equitable grounds or insolvency).
Once a registered liquidator is appointed, they will act in a fiduciary capacity and have total management control of the affairs of a company. This means they are under a legal duty to be independent, impartial, and honest. The duties of liquidators, once appointed, are principally focused on complying with the Corporations Act and, more specifically, acting in the interests of creditors.
The general purpose of an insolvent liquidation is to close a company’s business because it has no realistic chance of resolving its financial difficulties. The role of the liquidator in an insolvent liquidation is to act as caretaker, to collect and deal with the company’s assets and, where available, distribute the recoveries to the creditors of the company in liquidation. The liquidator must also investigate the company's financial affairs, with the primary goal of determining when and what caused the company to become insolvent and to pursue certain transactions for the benefit of all creditors. Finally, this concludes with the end of the Company’s journey, deregistration.
In a solvent winding up, creditors are paid (either before or after the liquidation commences) and remaining funds are then returned to shareholders. The process of paying creditors is required to occur within 12 months of the date of the declaration by directors or the liquidation reverts to an insolvent liquidation.
When a company enters liquidation, the liquidator is obliged to sell assets for the best price reasonably obtainable at the time of sale and insofar as necessary for the company's beneficial winding up. The sale process in a liquidation is usually one of imposed haste, which may explain why transactions are frequently conducted prior to the appointment of a liquidator (for more information on pre-pack transactions, see the sixth article in the series; " Elephant in the Room- Pre-Packs").
A liquidator has the following general functions:
Take control of and, where appropriate, realise the company’s assets for the best price reasonably obtainable at the time of sale and insofar as necessary for the company’s beneficial winding up.
Review the company’s pre-liquidation transactions to determine if any may be voidable by the liquidator (think preference payments, uncommercial transactions, unreasonable director related transactions).
Investigate if there may be any courses of action against directors, for example, insolvent trading (Refer to our article about insolvent trading) or other breaches of duty.
Make recoveries.
Report findings to the creditors and ASIC.
Evaluate claims against the company by creditors (proof of debt forms and company records).
Distribute funds available towards the payment of the liquidators’ costs, and to creditors’ claims (including priority employees).
Apply for deregistration of the company at the finalisation of the liquidation process.
As explained in our previous pre-pack article, any transactions, including the sale/transfer of assets or payments, will be reviewed by a liquidator. If directors are considering an asset transfer before liquidation, it is essential they consider liquidator clawback actions before undertaking the transaction (in particular the more recent 2020 creditor-defeating disposition provisions). To mitigate any concerns in this regard, seeking appropriate advice from a qualified advisor is always essential.
We will issue a further article in due course, outlining the various and wide-ranging sections dealing with the transactions a liquidator may seek to unwind or recover.
The WCT Advisory team consists of an experienced registered liquidator, registered trustee and full members of ARTA and AIIP. We very clearly understand how a liquidator will review transactions, the role a liquidator will play and likely steps they will take when undertaking an appointment. This makes the firm well placed to assist any directors contemplating the liquidation of a company or require help when already in liquidation, and also to undertake the appointment as liquidator if required.