Company Liquidation Process

The lingering COVID-19 pandemic, rising interest rates and rocketing inflation are all contributing to a significant rise in company failures in Australia. It seems like every day a high-profile company is in the news for the wrong reasons, particularly in construction. It’s one thing to see it on the news, it’s another to be confronted by it in your day-to-day business dealings – whether that’s as a creditor of a company that goes into liquidation, or worse in your business directly.

Liquidation itself is a formal way to wind up a registered company and generally takes the form of either a:

1. Members’ voluntary liquidation – for winding up a solvent company only (not considered here)

2. Creditors’ voluntary liquidation – the most common type of insolvent liquidation which begins when either an insolvent company’s shareholders resolve to appoint a liquidator, or creditors vote for liquidation following a voluntary administration1 or a terminated deed of company arrangement. There is also the option of a simplified liquidation process, which streamlines the process for all involved where eligibility criteria are met including having liabilities less than $1 million.

3. Court liquidation – a liquidator is appointed by the court to wind up a company following an application (usually a creditor, but can also be a director, shareholder or ASIC).

Roles – directors, creditors, liquidators

However, let’s assume the company is weathering the current economic turbulence but one of its customers, or suppliers, is not. You are a creditor if you are owed money where you:

• have supplied goods or services to a customer
• have paid for goods or services in advance to a supplier
• made a loan to another company, or
• in the case of employees, you are still owed unpaid wages or entitlements.

As a creditor, it’s important that you take an active interest when a company enters liquidation.

A liquidator has a duty to ALL company creditors. A liquidator also has a duty to:
 

• protect, collect and sell the company’s assets
• investigate and report to creditors about the company’s affairs (including matters such as unfair preferences that may be recoverable and possible claims against the company’s officers)
• inquire into the failure of the company and report the findings to ASIC, and
• distribute the proceeds from the sale of assets.

Proceed Distribution

Often the main issue for a liquidator is determining how the proceeds will be distributed to creditors, particularly where there is going to be a shortfall in those proceeds. The order of payment is:

• the liquidator’s fees and costs
• secured creditors – a secured creditor will hold a security interest in some, or all, of the company’s assets, to secure their debt2. This may be a mortgage over land, or a registered interest over other assets on the Personal Property Securities Register (PPSR) but note the next point on employees. The PPSR can be searched by anyone
• priority unsecured creditors – employees are a special type of unsecured creditor. Outstanding employee entitlements, subject to some limits around related parties, are paid out before other unsecured creditors. This includes wages and superannuation contributions, leave entitlements, redundancy, and personal injury compensation. Importantly, employees enjoy priority over the floating assets of the company in preference to creditors with a circulating security interest3. Employees can also be eligible for assistance under the Fair Entitlements Guarantee (a legislative safety-net scheme of last resort)
• unsecured creditors – effectively the remainder of creditors, where no security interest is held. This will often include most customers, contractors and suppliers to the company and entities like the ATO (but remember, the ATO can chase unpaid PAYGW, GST and superannuation guarantee charge directly from directors in the form of director penalty notices).

If funds remain at this point, then shareholders will receive a distribution.

Each of these stakeholders must be paid in full before moving to the next one. If there is a shortfall in funds, then available funds are paid pro-rata to the stakeholder and other remaining stakeholders will not receive anything. As an unsecured creditor, once liquidation commences, you cannot commence legal action against the company. It is also too late to seek to become a secured creditor.

What happens next?

This initial information should also advise you about your right to request information and reports, direct that a meeting of creditors be held, give directions to the liquidator, appoint a reviewing liquidator, and remove and replace the liquidator. The liquidator will also give a summary of the company’s affairs, estimated listing of creditors and an initial remuneration notice if they will seek fee approval.

The next step in the process requires the liquidator to send a report to you including:

• a summary on what has happened to the company and its business
• a statement of estimated assets and liabilities, and the chances of creditors receiving repayment of their debt
• the liquidator’s anticipated next steps, including further inquiry or possible recovery action.

Depending on the liquidator’s findings, they may convene meetings with the creditors or seek to streamline the process and vote on issues without a meeting.

A liquidator may also seek to recover certain payments made by the company to specific creditors prior to the liquidation, known as “unfair preferences”. This can involve the liquidator looking back over the prior six months to the liquidation (or three months and where more than $30,000 is paid in a simplified liquidation) and reviewing payments where:
 

• the company was insolvent when the payment was made or became insolvent due to making the payment
• the amount received by the creditor was more than they would have received by way of distribution from the liquidation if the payment was set aside and they had to prove their debt instead.

If a liquidator seeks to make a claim against you

Firstly, you should seek details from the liquidator on the payments they are claiming as an unfair preference and their reasoning and evidence to support their claim.

The most common defence to an unfair preference claim is the “good faith defence” – you became a party to the transaction in good faith, you had no reasonable grounds for suspecting that the company was insolvent, and you provided valuable consideration for the transaction. The Corporations Act provides other defences, such as how to deal with a running account in a continuous business relationship and the right to set off mutual dealings.

Where the issue is unresolved, you should seek legal advice prior to making payment to the liquidator.

Creditors’ meeting

Where a meeting is called, the liquidator will usually update creditors on progress, gauge opinion on certain matters or seek fee approvals. ASIC may also attend these meetings, which may be more likely if there is evidence of some wrongdoing.

If a creditor wishes to vote at a creditors’ meeting, they will need to lodge a ‘proof of debt’ form with the liquidator. This is a prescribed form that sets out the details of the claim against the company including how the debt arose and the amount being claimed. Documentary evidence should also be provided to substantiate the debt claimed.

This last point is important as the chairperson of the meeting can accept or reject a claim for voting purposes. They may decide a creditor does not have a valid claim and prevent them from voting. While this does not prevent a creditor from later receiving payment on a genuine debt, lack of documentary evidence may also hinder the claim.

In the situation where the liquidator does not call a meeting, proposals to creditors can instead be put in writing and voted on this way. This will be the method used in a simplified liquidation.

Unsecured creditors

If for some reason the liquidator rejects your claim, they must notify you within seven days and give you the reasons for doing so. You will have an opportunity to appeal the decision, following the required steps, or seek legal advice. Failure to do so by the deadline will mean the liquidator’s decision is final.

Your rights extend beyond just questioning the liquidator about the calculation of your claim or timing of payment. You also have the right to:
 

• request the liquidator to provide information
• inspect certain books and records
• update the liquidator with information you have that is relevant to the liquidation
• potentially appoint a reviewing liquidator, or remove and replace the liquidator, and
• lodge a complaint with ASIC or the court about the liquidator’s conduct.

Directors no longer have power once a liquidator is appointed, and instead must assist the liquidator in performing their duties. Where a director is suspected of wrongdoing, the liquidator can apply to the court to publicly examine a director under oath.

The liquidation is finalised once all company assets have been realised and distributed, and the final report is lodged with ASIC. In a court liquidation, a liquidator can also seek an order for release by the court. ASIC will generally deregister the company three months after the end of the administration.