What is a liquidation?

A liquidation is the orderly winding up of a company’s affairs. It involves realising the company’s assets, cessation or sale of its operations, distributing the proceeds of realisation among its creditors and distributing any surplus among its shareholders. The three types of liquidation are:

1. court
2. creditors’ voluntary, and
3. members’ voluntary

A creditors’ voluntary liquidation is a liquidation initiated by the company. A court liquidation starts as a result of a court order, made after an application to the court, usually by a creditor of the company.

What is the liquidator’s role?

When a company is being liquidated because it is insolvent, the liquidator has a duty to all the company’s creditors. The liquidator’s role is to:

1. collect, protect and realise the company’s assets
2. investigate and report to creditors about the company’s affairs, including any unfair preferences which may be recoverable, any uncommercial transactions which may be set aside, and any possible claims against the company’s officers
3. enquire into the failure of the company and possible offenses by people involved with the company and report to ASIC
4. after payment of the costs of the liquidation, and subject to the rights of any secured creditor, distribute the proceeds of realization – first to priority creditors, including employees, and then to unsecured creditors, and
5. apply for deregistration of the company on completion of the liquidation.

Except for lodging documents and reports required under the Corporations Act, a liquidator is not required to do any work unless there are enough assets to pay their costs.
If the company is without sufficient assets, one or more creditors may agree to reimburse a liquidator’s costs and expenses of taking action to recover further assets for the benefit of creditors.
In this case, if additional assets are recovered, the liquidator or particular creditor can apply to the court for the creditor to be compensated for the risk involved in funding the liquidator’s recovery action.
If a liquidator suspects that people involved with the company may have committed offenses and the liquidator reports this to ASIC, the liquidator may also be able to apply to ASIC for funding under the Assetless Administration Fund to carry out a further investigation into the allegations.

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