A creditor who is owed over $4,000 by a company can apply to Court to have the company placed in liquidation.
The Court may also appoint a liquidator to a company as a result of an application made by a director or member (shareholder) of the company, the company itself, a provisional or voluntary liquidator, or the Australian Securities & Investments Commission.
How Does a Creditor Appoint a Liquidator
Statutory demands can be issued by creditors who are owed a debt of at least $4,000 by a company. A statutory demand must be in a form prescribed by the Corporations Act 2001 (Cth) and accompanies by an affidavit stating that the debt is due and payable. The statutory demand must be served on the company, being commonly on its registered office.
If a company fails to pay a creditor who has served it with a statutory demand or have the demand set aside by a Court within 21 days of service the company is deemed to be insolvent. The creditor owed the debt can then make an application to Court to place the company in liquidation and appoint a Liquidator of their choice. The Court will usually hear this application within about one month of the proceedings being filed and determine if the company should be placed in liquidation or not.
If the Court determines the company should be placed in liquidation it will issue a Court Order and appoint a Liquidator which is nominated by the applicant creditor.
Purpose of Appointing a Liquidator via the Court
The purpose of appointing a liquidator to an insolvent company is to have an independent and suitably qualified person take control of the company, investigate its affairs, determine whether any assets or funds may be available or recoverable to pay creditors and wind up the company in an orderly and fair way for the benefit of all creditors.
A creditor who is owed a debt by a company may wish to have a Liquidator appointed, often as a last resort, to have the company’s affairs wound up and hopefully receive a return in respect of the debt they are owed. However, very commonly in Court appointed liquidations there is no return to ordinary unsecured creditors.
Role of the Liquidator
The liquidator of the company will determine the assets of the company (if any) and their value and take steps to realise any assets which are identified, if it is commercial to do so. This will commonly mean that a Liquidator will immediately contact a company’s director after their appointment and take steps to take possession of assets. In a vast majority of cases this will mean a Liquidator will shut down a company’s business and terminate its staff.
In accordance with their duties, a liquidator will also conduct a review of the records and financial history of the company in order to investigate such things as:
- The financial performance of the company;
- Whether any preference payments have been made to creditors, or uncommercial transactions entered into by the company, or other matters which may give rise to potential recovery actions by a Liquidator;
- Whether the company has traded whilst insolvent and the extent of any insolvent trading claim against the company’s director(s); and
- Any offences which ought to be reported to the Australian Securities & Investments Commission.
The liquidator will distribute the funds received from the realisation of a company’s assets, after payment of the liquidator’s costs, in accordance with the priorities set out in the Corporations Act 2001 (Cth), being generally:
- Firstly (subject to some exceptions) payment to creditors who hold security over a company’s assets;
- Secondly in payment (either in full or in part) of unpaid employee entitlements; and
- Thirdly in payment of debts owed to ordinary unsecured creditors, with creditors being paid on a pro-rata basis based on the amount of their debts.
Director’s Duties and Obligations
A company’s director has the same duties and obligations during the period of a liquidation as the director had prior to the liquidator’s appointment. In addition, a company’s director must:
- Notify the liquidator of the whereabouts of the company’s assets and assist them collect and realise them;
- Provide the liquidator with a Report on Company Activities and Property for the company;
- Provide all of the company’s books and records to the liquidator; and
- Reasonably assist the liquidator in carrying out his or her role.
How to Voluntarily Place Your Company in Liquidation
You can voluntarily place a company in liquidation by passing a resolution of shareholders. Voluntarily liquidating your company can be a viable option and can assist you manage the timing of a liquidation appointment. However, you realistically cannot place a company in voluntary liquidation once
What Other Options are Available to Avoid Liquidation
The most common insolvency appointment to avoid liquidation is small business restructuring which is means of settling a company’s debts by appointing a restructuring practitioner who puts an “offer” to creditors on behalf of the directors. Small business restructuring is an insolvency appointment though and there are certain restrictions on using the appointment including that a company must have unsecured debts of less than $1 million, owe no overdue employee entitlements and have no material overdue taxation lodgements.
Directors and companies can also consider Business Turnaround which we specialise in and which can be used as an alternative to an insolvency appointment.
Information and Advice Regarding Court Liquidation
If you would like to obtain further general information regarding liquidation you may wish to access our Liquidation FAQ.
If you are seeking advice regarding liquidation, please contact our Brisbane or Gold Coast office and our experienced staff will be able to assist you.
