Corporate Insolvency

What is liquidation?

Corporate Insolvency liquidationsLiquidation or ‘winding up’ refers to the process by which a company is brought to an end.  It involves collecting and redistributing the assets and property of the company to its creditors.    Liquidation usually occurs when the company has become insolvent, meaning it can no longer pay its debts as and when they fall due. An independent person known as a ‘liquidator’ will be appointed to oversee this process to ensure that the interests of the creditors, directors and members are treated fairly. Liquidation can be either voluntary or compulsory.  Liquidation ends when the company is dissolved by court order on the application of the liquidator or the company is struck off the register of companies by ASIC.

What is voluntary liquidation?

Voluntary liquidation occurs when the company, through a resolution of its directors and sometimes its members, chooses to enter into liquidation. This may be because it has become insolvent and the members of the company wish to bring the company to an end. In a voluntary liquidation, a liquidator is usually chosen by the company; however, the creditors have the right to change the liquidator. Voluntary liquidation can occur in one of two ways, being either through a creditors’ voluntary winding up or a voluntary administration.

A voluntary winding up occurs where the directors and members decide to place the company in liquidation and a liquidator oversees the process of redistributing the assets and property of the company in order to bring it to an end.

A voluntary administration occurs where the directors resolve to appoint a voluntary administrator to the company. The voluntary administrator will take control of the company and conduct investigations into the company’s affairs. They will then provide options for the company’s future.  These options may include:

  1. Entering a deed of company arrangement;
  2. Placing the company in liquidation;
  3. Ending the administration and handing the company back to the directors.

A deed of company arrangement is an agreement between the company and its creditors to satisfy the company’s debts.

Voluntary administration allows the company time to consider its future and options for moving forward with an aim to continue trading successfully whereas voluntary liquidation is purely aimed at bringing the company to an end.

What is a compulsory liquidation or court appointed liquidation?

Australian liquidationHave you asked yourself What Does Liquidation Mean?  Compulsory liquidation or court appointed liquidation occurs when the court in exercising its discretion orders that the company be wound up.  In this instance, one or more of the company’s creditors applies to the court for the company to be wound up. This is because prima facie, the company has been shown to the court to be insolvent.  In this instance, the court usually appoints the liquidator nominated by the creditor/s.

What is insolvency?

Pursuant to section 95A of the Corporations Act 2001 “A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.”

When a person is not solvent, they are insolvent. Insolvency occurs when a company cannot pay all of its debts as and when they fall due. 

Despite this strict definition, over the years judicial interpretation has found that when a company is not able to pay its debt when they fall due, they may not in fact be insolvent but could merely be suffering from a temporary lack of liquidity. 

Case law has determined that insolvency is established from a thorough consideration of the debtor’s financial position in its entirety and ought not to be drawn simply from evidence of a temporary lack of liquidity.  Insolvency is indicated through the debtor’s inability to meet its debts as and when they fall due when they have utilised the cash resources it can command through the use of its assets (Sandell v Porter (1966)).  It is also evident that an endemic shortage of working capital must be distinguished from a temporary lack of liquidity.  It may also be the case that a company will be considered insolvent even if they have an asset surplus (an ‘asset rich, cash poor’ scenario), if they are unable to quickly liquidate those assets.

The fourteen indicators of insolvency listed by Mandie J in the case of Australian Securities and Investment Commission v Plymin (2003) include;

  • The company is experiencing continuing losses;
  • The company’s liquidity ratio is below 1;
  • The company is subject to overdue Commonwealth and State taxes;
  • The company has evidence of poor relationship with its Bank, including the inability to borrow further funds from it;
  • The company does not have access to alternative finance;
  • The company has an inability to be able to raise further equity capital;
  • The company’s suppliers place the company on cancellation of debt or otherwise demanding special payments before resuming supply;
  • The company’s creditors are unpaid outside of the trading terms;
  • Issuing of post-dated cheques by the company;
  • Issuing of dishonored cheques by the company’
  • The company is required to enter into special arrangements with selected creditors;
  • The company becomes the recipient of solicitors’ letters, summons, judgments or warrants issued against it;
  • Payments to creditors of rounded sums which are not reconcilable to specific invoices; and
  • The company has an inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts.

A company will be deemed to be insolvent when it fails to comply with certain requirements set down in legislation, the most common of these being the failure to comply with a statutory demand from a creditor which creates a presumption of insolvency. A statutory demand is a demand in the appropriate form (Form 509H) served by a creditor on a debtor company requiring the company to satisfy the debt within 21 days.

What is insolvent trading?

Insolvent trading occurs when a director allows the company to incur debts when the company is insolvent. Directors have a duty to prevent insolvent trading and therefore can be held personally liable in certain circumstances for debts that were incurred from the date of insolvency to the date of liquidation of the company. 

How does a liquidation end?

A liquidation can end by:

  1. The company being de-registered;
  2. The liquidator appointing an administrator who then arranges a Deed of Company Arrangement;
  3. The Court ordering the stay or termination of the winding up.

An administrator might be appointed in circumstances where the liquidator believes that creditors may be given a greater return. This means that the company may be able to continue trading where the liquidator believes the company has prospects of carrying on its business successfully.

What powers do liquidators have?

The liquidator’s powers include:

  1. Investigating the affairs of the company;
  2. Identifying transactions that are considered void;
  3. Examine the directors and others under oath in a public examination;
  4. Realizing the assets of the company;
  5. Conducting and selling any business of the company;
  6. Admitting debts and paying dividends.

What are my rights and options as a creditor?

insolvency and liquidation in AustraliaCreditors are able to apply to the court for an order in relation to a court appointed liquidation in the event that the company is insolvent.

In all types of voluntary liquidation, creditors are able to appoint alternative liquidators or administrators. The creditors are able to vote to appoint an alternative at the first creditor’s meeting which is held within 8 business days of the appointment of the voluntary administrator. If a creditor is seeking to appoint an alternative liquidator, they should secure the alternative liquidator’s consent prior to the meeting. The resolution will be passed if a majority of creditor present at the meeting vote in favour of the resolution.

Where the company’s assets are realized and they are insufficient to pay creditors, creditors will be paid a dividend or percentage of the amount due and owing. Debts of the company are generally paid in order of priority as follows:

  1. The costs and expenses of the liquidation (including the liquidators’ fees);
  2. The costs of the petitioning creditor;
  3. Outstanding employee entitlements;
  4. Unsecured creditors; and
  5. Members.

Each ‘class’ of creditors must be paid in full before the next class can receive a payment or dividend.

What rights do I have if I am a secured creditor?

A secured creditor’s rights include:

  1. appointing a receiver to realize some or all of the secured assets (even after liquidation commences);
  2. requesting that the liquidator deal with the secured assets and account for the proceeds;
  3. voting at creditors’ meetings for the amount of the debt which exceeds the value of their secured assets;
  4. receiving dividends for the amount of the debt which exceeds the value of their secured assets.

A secured creditor will generally need to submit a proof of debt form to the liquidator for the amount of the debt which exceeds the value of their secured assets. This will allow them to receive dividends in a similar way to unsecured creditors.

What rights do I have if I am an unsecured creditor?

An unsecured creditor’s rights include:

  1. receiving dividends;
  2. attending creditors’ meetings
  3. receiving written reports from the liquidator;
  4. inspecting certain books of the liquidator;
  5. informing the liquidator of matters about the company within the unsecured creditor’s knowledge; and
  6. complaining to ASIC or the court about the liquidator’s conduct.

An unsecured creditor must submit a proof of debt form to the liquidator proving their debt in order to be paid a dividend. The proof of debt form should be accompanied by supporting documentation such as invoices. The proof of debt will either be admitted by the liquidator or it will be rejected and the unsecured creditor notified within a period of 7 days. If you cannot reach a resolution with the liquidator in relation to your proof of debt, you may be able to appeal to the court. You should seek legal advice as soon as possible as an unsecured creditor will only have 14 days to appeal to the court. 

What are my options as a director?

If a director has reason to believe that the company could be trading insolvent, they should immediately arrange for the company to enter voluntary liquidation or voluntary administration.  This is due to the fact that directors can be held personally liable for company debts including where there was insolvent trading, unreasonable director related transactions and personal guarantees.

Once winding up has started, directors are not able to exercise power over the company as their powers cease upon the liquidator taking control.   

What are my rights and options as a member?

Members have a right to receive any surplus after the company’s assets have been realized once the creditors and expenses of liquidation have been paid.

How will this affect me as an employee?

Where a compulsory winding up is entered into, publication of the winding up order serves as a notice of dismissal to the employees of the company.  A liquidator has the option to waive this notice of dismissal and may keep some employees on during the process of winding up the company.

Don’t put it off any longer, let Professional Insolvency Services assist you with corporate insolvency today.  Call 1300 30 66 49 to arrange a free consultation.