Liquidation can be by either court appointment or voluntary and is a process whereby a company has its assets realised and distributed to satisfy, as far as possible, its liabilities and to repay shareholders. It is a terminal process, followed by dissolution of the business, which can also occur when administrators are called in too late.
The key challenge for the liquidator is to act quickly and judiciously to realise as much of the value of the company as possible, so that potential shortfalls to creditors and shareholders are minimised. This is a difficult task. Move too hastily – without investigating the options – and it could mean the end of the business, which perhaps could have continued trading after all. Act too slowly and there may be no value left to realise.
There are four distinct types of liquidation:
- Members Voluntary Liquidation
- Creditors Voluntary Liquidation
- Provisional Liquidation
- Official Liquidation
In all instances, a liquidation is said to commence either on the passing of a resolution or on the date the Court makes an order.
Directors may decide they have no further use for a company, generally because it has ceased to trade. It is a criterion that the company is solvent. A members’ voluntary liquidation is instigated by a resolution of the shareholders or members of the company.
When a company is insolvent, the wishes of creditors and members need to be accounted for. This type of liquidation can be instigated in two ways. The first is initiated by a meeting of shareholders or members resolving that the company is insolvent, followed by a meeting of creditors of the company, who confirms the company needs to be wound up.
The second method occurs when creditors resolve in a Voluntary Administration that a company be wound up or a Deed of Company Arrangement fails. The company is then placed into voluntary liquidation.
This appointment is ordered by the Court. The role of a Provisional Liquidator is to firstly protect the assets of the company and investigate and report as to whether the company can continue to trade or is insolvent. The court may, after a period, order the company to be wound up.
This appointment is also made by the Court and may come as a result of the appointment of a Provisional Liquidator or a creditor of the company petitioning to the Court to have the company wound up.
Effects of Liquidation
Once a company is placed into liquidation, creditors may not continue any recovery action against the company. Their rights are restricted to proving their claims to the Liquidator and, ultimately, receiving a pro rata distribution of the company’s assets. An order of priority exists in the distribution of funds to creditors.
Upon Liquidation, the directors of the company lose all of their rights to manage the company. Their obligation is to assist the Liquidator by supplying information about the company’s financial position and the whereabouts of its assets.
A Liquidator has broad powers to allow them to realise and recover the company’s assets. It may also involve a recovery action for unfair preferences, uncommercial transactions and an action against the directors for incurring debts in circumstances where they knew or ought to have known that the company could not pay its debts as and when they fell due.
A Liquidator of a company may call a meeting of creditors at any time. Meetings are conducted subject to the Regulations of the Corporations Act 2001.
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