Liquidation

Objective

Liquidation involves the collection of the company's assets, the realisation of those assets and the distribution of the proceeds of their sale to the company's creditors.

Process of appointing liquidator

A company can be wound up in insolvency by the court (court liquidation).¹   This is most commonly initiated by way of service on the company of a creditors' statutory demand and its failure to comply with that demand. Evidence of that process and its outcome is usually the basis upon which creditors prove the insolvency of a debtor company.²   Court liquidations can also be initiated by, among others, the company.³

Alternatively a company may be wound up voluntarily either by a resolution of both its members and its creditors (if it is insolvent) (creditors' voluntary liquidation) or by a resolution of its members only (if it is solvent) (members' voluntary liquidation).⁴

Appointment of interim or provisional liquidator

Where a creditor or some other third party, such as ASIC, is applying to the court for the liquidation of a company and has a concern that its assets may be at risk if they remain under the control of the company's directors, the court can be asked to appoint a liquidator on a provisional basis pending the hearing of the winding-up application.⁵

Appointment of liquidator

The liquidator will be appointed either by the court when making the winding-up order (the usual practice is for a nominated liquidator to consent to being appointed) or by the resolutions by which the creditors and members of the company determine that it should be wound up.⁶

Effect of liquidation

Once a court makes orders for the winding-up of the company, its unsecured creditors are barred from continuing or initiating proceedings against it.⁷   A similar moratorium also applies upon the passing of a resolution to place the company into creditors’ voluntary liquidation.⁸

Unlike other forms of insolvency administration, liquidation may be relied upon as a ground for terminating a contract made on or after 1 July 2018 under an "ipso facto" clause (see see Ipso Facto), provided the termination is permitted by the terms of the contract. However, if the company is placed into liquidation from voluntary administration (VA), the termination right should be carefully considered to ensure it is independently triggered by liquidation, as the original stay on rights arising from the VA will remain in place. Having said that, the exercise of contractual rights in liquidation is less of an issue when compared with VA given that the fate of the company has been sealed.

Secured creditors and lessors of property are not precluded from either enforcing their security or recovering possession of their property.

The essential task of a liquidator is to wind up the affairs of the company and pay any dividends to unsecured creditors. As for secured creditors or the owners or lessors of property, they usually sit outside of the process.

The unsecured creditors prove their debts via a formal proof of debt procedure which entails the liquidator calling for proofs (usually as part of the conclusion of the liquidation), the unsecured creditors providing completed forms including supporting documentation (if required), the liquidator adjudicating on the proofs and then ultimately paying dividends to unsecured creditors.

So far as employees of the company are concerned, compulsory liquidation terminates their contracts of employment. If liquidators wish to retain some employees to assist with the winding-up and realisation of assets, the liquidator will usually continue their employment under their existing contracts. In a voluntary winding-up, whether a winding-up resolution effects a termination of employment will depend on the circumstances of the liquidation; if the company goes into voluntary liquidation because of insolvency, it is likely that the winding-up resolution will have the effect of terminating the contracts of employment. With a voluntary liquidation of a solvent company, however, the better outcome is that contracts of employment are not terminated.

To prevent shareholders from avoiding liability on account of their shares, shareholders are prohibited from transferring their shares after liquidation has commenced.⁹

Effect of liquidation outside Australia

As with VAs, DoCAs and creditors’ schemes, a liquidation will not have extraterritorial effect and, accordingly, will not shield the company’s assets in jurisdictions outside Australia, unless court orders are obtained which have the effect of recognising the liquidation in those jurisdictions.

Powers of a liquidator

A liquidator has all the powers necessary to realise the company's assets and distribute the proceeds of sale to the company's creditors.¹⁰   As an officer of the court, the liquidator also has far-reaching powers to investigate the company and, if circumstances require, to bring any further proceedings.

However, as the purpose of liquidation is, in effect, to bring the life of the company to an end, liquidators have only a limited power to carry on the business of the company and they only do so to the extent necessary for the purposes of winding up its affairs.¹¹

Liquidators can also claw back the benefit of any transactions effected before the commencement of the winding-up that preferred particular creditors, were uncommercial, involved unfair loans, were unreasonable director-related transactions or that were undertaken to defeat or delay creditors.¹²

Against that, as already noted, a liquidator may appoint a voluntary administrator. Such an appointment is a ready means which is available to liquidators where they identify an opportunity for restructuring a company or its business.¹³