A common misconception among directors is that once a liquidator is appointed, their responsibilities end.
While directors lose control of the company's affairs upon the commencement of liquidation, they do not simply walk away from the process. In fact, directors continue to have a range of important statutory obligations and can face significant consequences if they fail to cooperate with the liquidator.
Understanding what duties remain after liquidation begins is critical. A failure to comply can result in penalties, court orders, adverse reports to ASIC, and in some cases personal liability.
Does a director still have duties after liquidation?
The appointment of a liquidator transfers control of the company from the directors to the liquidator. Directors can no longer manage the company's affairs, deal with company assets, or make decisions on behalf of the company.
However, directors retain several important obligations designed to assist the liquidator in administering the winding up and investigating the company's affairs.
Many directors are surprised to learn that their obligations often increase immediately after appointment rather than disappear.
The duty to assist the liquidator
One of the most important obligations of a director following liquidation is the duty to assist the liquidator.
Liquidators are required to investigate the company's affairs, identify and realise assets, examine transactions, review books and records, and report potential misconduct to ASIC.
A liquidator will commonly request information regarding:
The company's assets.
Banking arrangements.
Employee records.
Tax affairs.
Related-party dealings.
Loans and guarantees.
Unpaid creditors.
Significant transactions before liquidation.
Providing prompt and accurate information can significantly reduce the cost and duration of a liquidation. Conversely, incomplete or delayed responses often increase investigation costs and can raise concerns regarding the company's record-keeping and governance practices.
Handing over books and records
A liquidator cannot properly administer a liquidation without access to the company's books and records.
Directors are required to deliver company records in their possession and assist the liquidator in locating records held by accountants, bookkeepers, advisers or third parties. These records may include:
Financial statements.
Accounting software files.
Bank statements.
Tax records and BAS.
Customer and supplier records.
Employment records.
Company registers and minutes.
Poor books and records are one of the most common issues encountered in external administrations.
Where records are missing or incomplete, the liquidator may need to conduct more extensive investigations to determine what occurred prior to liquidation.
Completing the Report on Company Activities and Property (ROCAP)
Following appointment, directors are usually required to complete a Report on Company Activities and Property (ROCAP).
This report provides the liquidator with information about:
Assets and liabilities.
Banking arrangements.
Trading history.
Related-party transactions.
Causes of failure.
Employee entitlements.
The information contained in the ROCAP often forms the starting point for the liquidator's investigations.
Providing inaccurate or misleading information can create significant issues later if the information is found to be inconsistent with the company's records or other evidence.
Can a director be examined after liquidation begins?
Yes. If further information is required, a liquidator can conduct interviews, request documents, or seek court orders requiring a person to attend for examination.
Formal examinations can be an important tool where significant transactions require further investigation or where information has not been voluntarily provided.
Directors who cooperate with the liquidator and respond to requests promptly can often avoid the need for more formal processes.
What happens if a director does not cooperate?
While many directors actively assist a liquidator, some mistakenly believe they can simply disengage once the company enters liquidation.
That approach can create significant problems, and a liquidator may report non-cooperation to ASIC and may seek court orders compelling compliance.
Examples of non-cooperation can include:
Failing to provide books and records.
Ignoring requests for information.
Refusing to complete the ROCAP.
Concealing company assets.
Providing misleading information.
The costs associated with enforcement action may ultimately increase the overall costs of the liquidation.
Does liquidation protect directors from past conduct?
No. One of a liquidator's key roles is to investigate the circumstances leading up to the company's failure.
Depending on the facts, investigations may consider:
Insolvent trading.
Unreasonable director-related transactions.
Unfair preference payments.
Uncommercial transactions.
Breaches of directors' duties.
Phoenix activity.
Inadequate books and records.
The commencement of liquidation does not remove liability for conduct that occurred before appointment.
In some circumstances, liquidation may simply be the point at which those issues come under closer scrutiny.
A cooperative approach benefits everyone
Most directors have never experienced a liquidation before and may be uncertain about what is expected of them.
The best approach is usually a cooperative one.
Responding promptly to requests, providing complete information, and assisting the liquidator in understanding the company's affairs can reduce costs, improve outcomes for creditors, and help the liquidation progress efficiently.
Importantly, cooperation also allows directors to address issues early and ensure the liquidator has an accurate understanding of the circumstances surrounding the company's failure.
The key takeaway
Liquidation may bring a director's management role to an end, but it does not bring an end to their obligations.
Directors remain responsible for assisting the liquidator, providing books and records, completing required reports, and answering reasonable enquiries regarding the company's affairs.
Understanding these obligations and engaging constructively with the liquidator can make a significant difference to the efficiency of the administration and the outcome for all stakeholders.
At Worrells, we regularly work with directors, advisors and creditors to navigate the liquidation process and understand the obligations that arise following an external administration. If you or your client has questions regarding a liquidation or director responsibilities, contact your local Worrells Principal for a confidential discussion.
