Court Liquidation

Click here for a brief summary of Court Liquidations.

Contact us to discuss the specific details of your individual situation.

All section references relate to the Corporations Act, 2001.

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WHY APPOINT A LIQUIDATOR?

 

Liquidation is governed by the Corporations Act and is used to wind up and finalise the company's affairs. Purposes of liquidation include:

  • to realise assets of the company for payment amongst its creditors, or if they are paid in full, to pay any surplus amongst its shareholders;
  • to investigate the affairs of an insolvent company to ascertain the reason for its failure and to ensure all recoverable property is retrieved - such as through the recovery of preference payments or funds personally from the directors for insolvent trading.

There are a number of different types of liquidation:

  • creditors' voluntary liquidation;
  • members' voluntary liquidation; and
  • Court liquidation.

Most of the discussion below refers to a court liquidation; however many of the principles apply to all liquidations.

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HOW DOES A LIQUIDATION BEGIN?

The method of liquidation can vary and depends on the type of liquidation utilised:

Court Liquidation

The company itself or a creditor can initiate a Court liquidation by making an application to the Court showing that the company is insolvent. While the Court (either the Federal or Supreme Court) appoints the liquidator, the company or creditor can nominate the liquidator to be appointed. Invariably the nominee will be appointed by the Court. The nominee must, in these circumstances, be an Official Liquidator.

To show that the company is insolvent, the creditor must show that the company cannot pay its debts as and when they are due. Serving a statutory demand on the company is the most common way to achieve this. Once the time period on the statutory demand expires, the company is deemed to be insolvent.

Members' Voluntary

The company shareholders appoint the liquidator. In these circumstances, the company must be solvent and the directors are required to file a statement with ASIC to this effect. The purpose of a members voluntary liquidation is to finalise the company's affairs, realise the assets and distribute the proceeds to shareholders.

Creditors Voluntary

From 1 January 2008, the appointment occurs at a meeting of members. The liquidator must cause a meeting of creditors to be held within 11 days after the date of the members meeting. At the meeting of creditors, the creditors may, by resolution, appoint someone else as liquidator of the company if they so desire.

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WHO CAN ACT AS LIQUIDATOR?

A Court appointed liquidator must be an official liquidator, registered through the Supreme Court of Queensland.

A liquidator appointed in a members' voluntary or creditors' voluntary liquidation must be a registered liquidator, registered by the ASIC.

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WHAT HAPPENS ON THE APPOINTMENT OF A LIQUIDATOR?

The liquidator has the responsibility of bringing the company's affairs to an end, and in this process is accountable to:

  • the Court;
  • creditors; and
  • the shareholders.

Creditors include employees, secured and unsecured creditors.

The duties of a liquidator include the following:

  • to investigate the affairs of a company from its foundation onwards;
  • to act impartially;
  • to act with skill and diligence;
  • to avoid placing himself in a position where his interest conflicts or is likely to conflict, with his duties.

A liquidator should get in all assets, and discharge all the liabilities, so far as the assets allow. He should be alert to ascertain any misfeasance by officers, former officers or promoters and, so far as the assets allow, proceed to recover any preferences or any damages for which any such persons may be liable.

Where the history of the company shows a likelihood of some misfeasance, he should investigate, so far as the assets allow, to see whether officers or former officers have infringed the requirements of the law.

If the assets available (pending any recovery for misfeasance etc) do not allow full compliance with the relevant duties, the liquidator should report the circumstances, with his opinion of the likelihood, and the reasons for his opinions, to the interested creditors and to the Australian Securities and Investments Commission.

The statutory requirements of the liquidator are:

  • s478 requires a Court liquidator to: "Cause the company's property to be collected and applied in discharging the company's liabilities".
  • s501 requires a liquidator in a voluntary liquidation to ensure that "The property of the company shall … be applied in satisfaction of its liabilities".

The directors' powers cease upon the appointment of a liquidator. The directors are required to assist the liquidator in all matters arising in the liquidation and are to deliver to the liquidator all assets and records of the company.

The directors are also required to lodge a Report as to Affairs with the liquidator within 14 days of the liquidator's appointment in a Court liquidation - s475, or within 7 days in a creditors voluntary winding up - s497. A Report as to Affairs is a document which details the assets and liabilities of the company at the date of the liquidator's appointment.

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WHO MUST THE LIQUIDATOR REPORT TO?

The liquidator must report to the creditors and shareholders and to the Australian Securities and Investments Commission.

 

1. Creditors and Shareholders

 

In a Court liquidation it is invariably the rights of creditors that are paramount (ie not shareholders) as it is the creditors who have lost money.

The liquidator is therefore obligated to report to creditors and as a consequence there are rights which are available to creditors.

The first point of call is often through the Committee of Inspection.

1.1 The Committee

The function of the Committee is to advise and assist the liquidators and/or to supervise the conduct of the liquidation.

The Committee's views must be taken into account by the liquidator but he does have the right to make the final decision - s479(1) and s479(4).

The Committee has the following powers:

  • General Control. s479
  • Convene a Committee Meeting. s549
  • Right to replace a member. s550
  • To approve or reject liquidator's remuneration. s473
  • Authorise the liquidator to enter into long term arrangements over 3 months. s477(1)(a)(2B)
  • Compromise a debt due to the company greater than $100,000. s477(2A)
  • Right to direct investment of surplus funds. s543

The liquidator must have regard to the Committee's directions.

The Committee would generally be elected at the first meeting of creditors. While there is no limit on the number of committee members it would generally be for 3, 4 or 5 persons.

Formal meeting procedures as for creditors meetings apply, however the usual 14 days notice is not required when calling the meeting.

The liquidator will become the chairperson, and must keep minutes of the meeting. These must record who is present and be filed with the Australian Securities and Investments Commission within one month of the meeting.

To be eligible to be a Committee member, creditors must be represented:

  • personally;
  • by an attorney; or
  • by a person authorised in writing by the creditor.

Committee members are not able to obtain personal gain by virtue of the position they hold. If they do, then a creditor may apply to have the transaction set aside. The Court has the power to approve transactions before they are entered into; which if approved can go ahead.

1.2 Reports to Creditors

Creditors will almost invariably receive a written report, or a number of reports, from the liquidator.

Contents of reports:

  • Initial Report - This is likely to be no more than a brief introduction and advice of the liquidator's appointment.
  • Subsequent Reports - This should be in more detail commenting on:
    • strategy of realisation of assets;
    • success in realisation of assets;
    • summary of Report as to Affairs;
    • statement of Receipts and Payments;
    • details of the basis of the liquidator's charges; and
    • results of investigations.
  • Verbal reports- Will be given to creditors when:
    • they contact the liquidator's office direct;
    • at a meeting of creditors.

1.3 Meeting of Creditors

If required to do so by not less than 10% in value of creditors, then a liquidator must convene a meeting of creditors. The costs will be borne by the party requiring the meeting, unless either the Court or the Committee of Inspection approved the cost being an expense of the liquidation.

If the liquidator decides to call a meeting then the cost will be an expense of the liquidation.

Other than the 10% requirement above, there is no compulsory obligation on a liquidator to call a meeting.

HOWEVER, the liquidator is likely to call a meeting to:

  • report on matters of substance;
  • seek creditors' agreement to a course that the liquidator proposes to undertake;
  • obtain funding;
  • obtain approval of remuneration (if there is no Committee);
  • seek information;
  • obtain authority to enter into long term agreements - s477(2B); and
  • compromise a debt due to the company exceeding $100,000 - s477(2A).

1.3.1 Calling of the Meeting

Creditors must be given 14 days notice of the meeting which can be sent by:

  • personal delivery;
  • prepaid post;
  • fax; or
  • DX - document exchange.

From 1 January 2008, creditors may also receive notices by electronic means if they so request - s600G.

Within 7 days before the meeting, the notice of meeting must be advertised in a daily newspaper circulating in a state where business was conducted by the company at any time during the two years immediately before the meeting.

1.3.2 The Meeting
Other than to

  • elect a chairperson;
  • accept proofs of debt; and
  • adjourn the meeting,

a quorum must be present before a meeting can start. If the number of persons entitled to vote is 2 or more, then a quorum is at least 2 of those persons (personally or by proxy). If only one person is entitled to vote, then a quorum consists of that person.

The meeting must start within 30 minutes of the time nominated in the notice of meeting otherwise it is adjourned to:

  • the same day, time and place the next week or
  • the day the Chairperson nominates being not less than 7 days and not more than 21 days after the day of the adjourned meeting.

Creditors may force an adjournment of a meeting to another day and place.

1.3.3 Voting
Resolutions will be decided on voices unless a poll is called for before the declaration of the result of the voices by:

  • the Chairperson;
  • 2 persons participating in the meeting; or
  • by a person holding not less than 10% of total voting rights of all people entitled to vote at the meeting

If a Poll is conducted a resolution is carried if the resolution is carried by a majority in number and value. The Chairperson has a casting vote.

1.3.4 Proxies
A liquidator must send to the creditor with the notice of meeting a form of Proxy.

Creditors can appoint any natural person over 18 years of age to act as the proxy. If the proxyholder is the liquidator, or an employee or his/her partner, the proxy cannot be used for the approval of the liquidator's remuneration if it is to be paid out of the assets of the company.

A company can only participate in a meeting by appointing a proxy.

The lodgement of a proxy by facsimile is in order, so long as the original is also lodged within 72 hours after lodging the faxed copy.

The convenor of the meeting can require proxies to be lodged prior to the commencement of the meeting, but not more than 48 hours before its commencement.

1.3.5 Who May Vote?

Creditors must have lodged with the Chairperson details of their debt before they can vote. The liquidator may require a formal proof of debt.

In addition, the Chairperson must admit the debt for voting purposes, before the creditor can participate in the meeting.

Creditors cannot vote in respect of:

  • an unliquidated debt or claim;
  • a contingent debt or claim; and
  • a debt where the value of it has not been established unless a just estimate of its value has been made

1.3.6 Secured Creditors
Secured creditors can only vote for the difference between the value of their security and the amount actually owed.

If a secured creditor votes in respect of his or her debt or claim the creditor will be taken to have surrendered its security.

1.4 So you are not happy with the result?

If, as a creditor, you feel that a resolution (or the failure to pass a resolution) is

  • contrary to the interests of creditors; and/or
  • has prejudiced (unreasonably) creditors who voted against a resolution,

then you may apply to the Court for a review of the resolution.

Other Rights Available to Creditors

Right

Apply to Court for special consideration in view of costs indemnification of the liquidator.

 

To inspect liquidators records in respect of the estate and carrying on of business.

 

Proofs of Debt:
- to inspect all proofs of debt;
- to be advised of rejection within 7 days;
- to appeal against wrong admission.

 

Appeal to Court if aggrieved by act, omission or decision of liquidator.

Section

564

 

531
reg 5.6.01 & 5.6.02

 

531
Reg 5.6.54(1)
1321

 

1321

 

1.5 General Supervision

The liquidator is always accountable to the Court. Creditors have the right to make a complaint to the Court (or for that matter to the Australian Securities & Investments Commission) with respect to the conduct of a liquidator in respect of his performance of duties. The Court can take whatever action it thinks fit after making proper enquiries - including an examination of the liquidator or any other person.

2 To the Australian Securities & Investments Commission

When the report as to affairs is received the Court liquidator must lodge a report with the Australian Securities & Investments Commission (s476) providing details of:

  • share capital;
  • assets and liabilities;
  • cause of failure; and
  • whether or not further enquiry is desirable.

If it appears to the liquidator that:

  • an offence has been committed;
  • a misfeasance or misapplication has been committed by a person taking part in the formation, promotion, administration, management or winding up of the company; and
  • unsecured creditors will get paid less than 50 cents in the dollar

then the liquidator must report to the Australian Securities & Investments Commission and state whether or not he intends to make an application for examination.

The liquidator may lodge further reports specifying any other matter that he thinks appropriate to the Commission.

The liquidator's statements are protected by a limited privilege in proceedings for defamation.

2.1 Liquidator's Accounts

Half yearly, the liquidator is required to lodge with the Australian Securities & Investments Commission a statement of receipts and payments. Creditors are entitled to obtain a copy of that statement.

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ENDING A LIQUIDATION

Once the liquidator has recovered and realised all assets, completed his investigations and disbursed all available funds to creditors, the liquidation can be finalised. This can be done by:

  • Applying to the ASIC for de-registration of the company, or
  • Applying to the Court for a release from the liquidation and dissolution of the company.

Contact us to discuss the specific details of your individual situation.

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