Official Liquidation

What is Official Liquidation?
An official liquidation (OL) occurs when a creditor (or group of creditors) make an application to court to wind-up a company due to non-payment of a debt. It allows for an orderly realisation of the company’s assets, investigations into the company’s failure and distribution of the company’s assets amongst creditors.
Why choose an Official Liquidation?
The OL process allows for a systematic approach to winding up a company and bringing its affairs to an end. A creditor can resort to this process if they have exhausted all other avenues to obtain payment for outstanding debts.
How is an Official Liquidation commenced?

The process to wind up a company is as follows:

  • Creditor issues a company a Creditor’s Statutory Demand for payment of an undisputed debt
  • Within 21 days of serving the Creditor’s Statutory Demand the company must either pay the debt or apply to court to set aside the demand
  • If neither of the above occurs, a presumption of insolvency exists which is the basis for a creditor’s application to court to wind up the company
  • The court will set a date for hearing the application and the creditor must serve a copy of the Winding up Application on the company
  • At the hearing, the court will determine whether the company should be wound up
What is the impact of an Official Liquidation on key stakeholders?
Below is an overview of how an OL may impact various key stakeholders:

Secured creditors

An OL does not usually affect a secured creditor’s right to enforce its security. Often, a secured creditor will allow a liquidator to sell charged assets during the course of the liquidation provided the rights of the secured creditor are maintained.

Employees

Employee entitlements (including wages, superannuation, leave and termination pays, etc.) are afforded as a priority under the Corporations Act ahead of ordinary unsecured creditor claims in the event of a distribution in a liquidation.

The federal government has a scheme to protect employee entitlements in the event of a company being placed into liquidation – the Fair Entitlements Guarantee Scheme (FEGS) or previously known as the General Employee Entitlements and Redundancy Scheme (GEERS). This scheme provides a fund to satisfy outstanding wages, leave entitlements and termination pays however does not cover unpaid superannuation. Please refer to the FEGS website at https://extranet.deewr.gov.au/feg for further information.

Unsecured Creditors

The appointment of a liquidator suspends an unsecured creditor’s rights to pursue a company further for unpaid debts. An unsecured creditor is able to lodge a claim in the liquidation for the amount of its debt and will rank equally with all other unsecured creditors for any distribution.

An unsecured creditor that holds a personal guarantee in respect of company debts can proceed to enforce its rights against the guarantor under the guarantee once the liquidation commences.

Shareholders

Shareholdings generally have no value once an OL is commenced, as the company is insolvent and has insufficient assets to satisfy its liabilities. Accordingly, shareholders will most likely not receive a distribution in an OL.

Directors

The powers of a director are suspended on the appointment of a liquidator and only the liquidator is able to bind the company in any transaction. A director is required to assist the liquidator in undertaking the winding up and has an obligation to comply with any requests made by the liquidators. Directors are also required to provide the liquidator with a Report as to Affairs outlining the asset and liability position of the company within 14 days of the date of the winding up.

Directors also often provide personal guarantees to creditors for debts incurred by the company and as such, may become liable for some company debts once the liquidation commences.

Role & powers of the Liquidator
Once the liquidation has commenced, the liquidator takes control of the company’s assets and affairs and is the only one with the power to bind the company. In general, the liquidator will:
  • Identify, secure and realise the company’s assets
  • Investigate the failure of the company
  • Identify any transactions that may be void
  • Report to creditors and hold meetings
  • Report to the Australian Securities and Investments Commission (ASIC) on any offences committed by company officers
  • Distribute any company assets to creditors
  • Apply to ASIC to deregister the company
Reports & Meetings
There is no requirement for a liquidator in an OL to hold meetings of creditors. A liquidator may convene a meeting of creditors if funds are recovered and requiring approval of his/her remuneration or to give creditors an update on the status of the liquidation.
How does the Liquidator get paid?
A liquidator’s fees receive a priority under the Corporations Act from funds received from realising company assets. A liquidator cannot draw fees without the prior approval of creditors or the court.
What is the outcome of the process?

Once all assets have been realised, investigations are completed and distributions to creditors are made, the liquidator will apply to ASIC for the company to be deregistered. Creditors will no longer have any claim against the company and the company will no longer exist.

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If you would like more information about how SV Partners can assist your business through a court liquidation process, please contact one of our expert advisors.

 

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