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Liquidation

Liquidation: a guide for creditors

Amos Insolvency

If a company is in financial difficulty, its shareholders, creditors or the court can put the company into liquidation.

This information sheet provides general information for unsecured creditors of companies in liquidation.

Who is a creditor?

You are a creditor of a company if the company owes you money. Usually, a creditor is owed money because they have provided goods or services, or made loans to the company. Employee owed money for unpaid wages and other entitlement is also a creditor. A person who may be owed money by the company if a certain event occurs (e.g. if they succeed in a legal claim against the company) is also a creditor, and is sometimes referred to as a 'contingent' creditor.

There are generally two categories of creditor: secured and unsecured.

A secured creditor is someone who has a 'charge', such as a mortgage, over some or all of the company’s assets, to secure a debt owed by the company. Lenders usually require a charge over company assets when they provide a loan.

An unsecured creditor is a creditor who does not have a charge over the company’s assets.

Employees are a special class of unsecured creditors. In liquidation, some of their outstanding entitlements are paid in priority to the claims of other unsecured creditors. If you are an employee, see ASIC's information sheet ‘Liquidation: a guide for employees'.

The purpose of liquidation

The purpose of liquidation of an insolvent company is to have an independent and suitably qualified person (the liquidator) take control of the company so that its affairs can be wound up in an orderly and fair way for the benefit of all creditors.

There are two types of insolvent liquidation: creditors’ voluntary and court. The most common type is a creditors' voluntary liquidation, which usually begins in one of two ways:

  1. when creditors vote for liquidation following a voluntary administration or a terminated deed of company arrangement, or
  2. when an insolvent company's shareholders resolve to liquidate the company and appoint a liquidator. Within 11 days of being appointed by shareholders, the liquidator must hold a meeting of creditors who may confirm the liquidator's appointment or appoint another liquidator of the creditors' choice.

In court liquidation, a liquidator is appointed by the court to wind up a company, following an application, usually by a creditor. Others, including a director, a shareholder and ASIC, can also make a winding-up application.

After a company goes into liquidation, unsecured creditors can no longer commence or continue legal action against the company, unless the court permits. It is possible for a company in liquidation to also be in receivership.

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:

  • collect, protect and realise the company’s assets;
  • 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;
  • enquire into the failure of the company and possible offences by people involved with the company and report to ASIC;
  • after payment of the costs of the liquidation, and subject to the rights of any unsecured creditor, distribute the proceeds of realisation-first to priority creditors, including employees, and then to unsecured creditors, and
  • apply for deregistration of the company on completion of the liquidation.

Except for lodging documents and reports required under the Corporations Act 2001 (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 offences and the liquidator reports this to ASIC, the liquidator may also be able to apply to ASIC for funding to carry out a further investigation into the allegations.

Sourced from www.asic.gov.au Information Sheet 46