The 101 basics.
Liquidation is a process that allows a company's financial affairs to be wound up and its structure dismantled. This can happen when a company is unable to pay its debts, or when its members decide to end its existence. The two main types of liquidation are:
court liquidation
voluntary liquidation/creditors’ voluntary liquidation.
In court liquidation, a creditor applies to the court to demonstrate that the company is insolvent. The court then appoints a liquidator to dismantle the company's structure and protect the interests of creditors, directors, and members.
In voluntary liquidation, the company voluntarily appoints a liquidator through a creditors' voluntary liquidation appointment or as a subsequent appointment to a voluntary administration appointment, which can be used as a pathway for voluntary administrators to investigate the company's financial affairs and determine the available options for creditors regarding the company's future.
The liquidator has the power to:
investigate the company's financial affairs
realise its assets
investigate any suspicious transactions including insolvent trading
issue reports to the Australian Securities and Investments Commission (ASIC) and creditors
make distributions to creditors and shareholders (if applicable)
apply to ASIC to deregister the company.
When a company is being liquidated, its structure remains active during the liquidator’s appointment. Control of assets, conducting business, and other financial affairs are transferred to the liquidator. The directors cease to have any authority.
Unsecured creditors lose their right to recover money from the company but gain a right to prove for dividends in the liquidation. Creditors also have a range of powers, including the right to request information, meetings, and directions to the liquidator.
The liquidator must pay dividends in the order of priorities set out in section 556 of the Corporations Act 2001. The priority of payment is generally:
The applicant creditor’s costs (if the company was wound up by the court).
The liquidation’s costs and expenses.
Employee entitlements.
Other unsecured creditors.
Secured creditors with perfected security interests are entitled to recover assets subject to their charge. If their debt exceeds the recoverable assets, they can prove for the balance as an unsecured creditor.
There is no set time limit for a liquidation. The liquidation lasts for as long as necessary to complete all the liquidation’s required tasks. The liquidation ends when the company is either:
dissolved by a court order on the liquidator’s application
struck off ASIC’s register of companies (at the request of the liquidator)
the winding up is set aside or stayed by the court.
Liquidation is a complex process that requires the expertise of specialist accountants who are registered liquidators with ASIC. It is important for directors to cooperate with the liquidator throughout the liquidation process to ensure a fair distribution of the company's assets to its creditors.
For more information about liquidation download our Guide to Corporate Insolvency.
Related articles:
How do directors/shareholders commence a corporate insolvency appointment