Liquidation

Shareholders face no direct repercussions from the liquidation beyond the loss of their investment. The value of their shares becomes null, representing their primary loss as the company ceases operations and dissolves. 

Employees are significantly affected as they lose their jobs. Nonetheless, this situation could lead to a silver lining if the company was unable to fulfil its financial obligations to its staff. In such cases, the government may intervene through the Fair Entitlements Guarantee scheme, assisting employees to recover: 

• Up to 13 weeks of unpaid wages 
• Unpaid annual and long service leave 
• Up to five weeks of payment in lieu of notice 
• Redundancy payments, with a maximum of four weeks per year of service 

Employees also become priority creditors for any other outstanding entitlements in the liquidation process. 

Creditors, including individuals or entities owed money by the liquidating company, are directly affected. They receive communication from the liquidator at the commencement of the process, along with periodic reports detailing the proceedings and the prospects of recovering their owed funds. Unfortunately, in most liquidation scenarios, creditors recover a fraction of what is owed, often ranging between 0 to 10 percent of the total debt. 

Where a creditors’ 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.

Where funds are available for distribution to unsecured creditors, they need to prove their debts. The liquidator must give at least 14 days’ notice of the deadline for proving a debt.

The liquidator acknowledge receipt of a claim, and whether any further information is required.

If for some reason the liquidator rejects a claim, they must notify the claimant within seven days and give you the reasons for doing so. The claimant has 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.

A creditor’s rights extend beyond just questioning the liquidator about the calculation of a claim or timing of payment. An creditor also has 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.

Upon appointment, the liquidator essentially steps into the company’s shoes, taking over its operations. This role includes bearing personal liability for any new debts incurred during the liquidation process. Consequently, it is rare for companies to continue trading once liquidation has begun, due to this added responsibility on the liquidator. 

Each stakeholder faces distinct outcomes from a company’s liquidation, ranging from moderate impact on directors’ credit ratings, to the complete loss of investment for shareholders, employment for workers, and potential financial recovery for creditors. The liquidator plays a central role, orchestrating the process while assuming certain liabilities to conclude the company’s affairs. 

The liquidator is required to provide creditors with notice of their appointment within 10 business days in a creditors’ voluntary liquidation, or 20 business days in a court liquidation.

This initial information should also advise about creditors 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 creditors 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.