A common question I am often asked as a Registered Liquidator is:
“If a company is in liquidation, how do you, as the liquidator, get paid?”
It is a good question. Generally, the costs of any liquidation are met from the available assets of the company, with proceeds distributed in accordance with the statutory priority regime under Section 556 of the Corporations Act 2001 (‘the Act”).
However, many companies that are wound up have little or no assets available to fund the liquidator’s investigations or recovery action.
During the course of a liquidation, a liquidator may also receive funding from other external sources including:
Director Contributions
ASIC Assetless Administration Fund
Creditor funding
Fair Entitlements Guarantee funding
Litigation funding
As such, a Liquidator may ask creditors for funding towards more detailed investigations or recovery actions to be undertaken. Creditors will regularly ask:
“If the company is in liquidation, why is the liquidator asking us for money?”
Pursuant to Section 545 of the Act:
Expenses of winding up where property insufficient
(1) Subject to this section, a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property.
(2) The Court or ASIC may, on the application of a creditor or a contributory, direct a liquidator to incur a particular expense on condition that the creditor or contributory indemnifies the liquidator in respect of the recovery of the amount expended and, if the Court or ASIC so directs, gives such security to secure the amount of the indemnity as the Court or ASIC thinks reasonable.
(3) Nothing in this section is taken to relieve a liquidator of any obligation to lodge a document (including a report) with ASIC under any provision of this Act by reason only that he or she would be required to incur expense in order to perform that obligation.
In effect, this means a liquidator is not expected to fund the liquidation personally.
Many companies that are in liquidation have limited or no recoverable assets, poor or limited books and records, and potential claims (voidable transactions or insolvent trading) that require investigation.
While those claims may ultimately generate recoveries, they often require upfront work and costs such as legal fees, investigations, and court proceedings.
If the liquidator is unfunded, then the potential claims may never be investigated fully or pursued.
If a liquidator obtains creditor or third-party funding, it enables a liquidator to:
Investigate potential recoveries
Pursue claims
Properly examine the company’s books and records.
Commence litigation
Maximise the potential return to creditors.
From a creditor’s perspective, providing funding is usually a commercial decision, not a legal obligation. Creditors who provide funding are not guaranteed that it will produce a recovery. The investigations may reveal that a claim has limited prospects of success or insufficient assets are available to satisfy any judgment.
In some cases, creditors may choose to fund investigations even where a significant financial recovery is uncertain. They may consider it important that potential misconduct is investigated and reported, and that directors or other parties are held to account.
Importantly, funding arrangements are usually structured to provide the funding creditor with:
A right of reimbursement from any recoveries; and
In some cases, a premium or priority return
This reflects the risk taken by the funding creditor.
Section 545 provides an important balance. It protects the liquidator from being personally exposed to the costs of a liquidation and allows creditors to participate in the commercial decision as to whether further investigations or recovery actions are worthwhile.
If a liquidator is unable to obtain funding in a liquidation, then:
Investigations may be limited.
Claims may not be pursued.
Minimal work is carried out beyond statutory obligations.
Section 545 acknowledges that liquidators often have limited funds in a liquidation. However, Section 545 does not excuse a liquidator from complying with their statutory reporting and other obligations.
Funding is therefore an essential part of a liquidation, enabling liquidators to investigate potential misconduct, pursue recovery claims, and maximise returns to creditors without being personally exposed to the costs and risks.
For more information contact a Worrells Principal.
