What is a Court liquidation?
Liquidation is the process that prepares a company for deregistration. The main reason for liquidation is because the company is insolvent. A Court liquidation is a compulsory winding up of a company where the liquidator is appointed by order of the Court.
Various parties including creditors, shareholders and directors of a company may initiate the Court process.
The most common petitioner is a creditor that is owed money.
What are the objectives of liquidation?
Liquidation allows for the equitable and fair distribution of the company’s assets amongst its creditors. It allows an investigation of any improper conduct that may lead to the recovery of funds for creditors.
What happens during the Court liquidation?
The liquidation involves the cessation of the business operated by the company, collecting of assets, realising and converting the assets to cash, dealing with the claims of creditors by admitting or rejecting them and distributing the net proceeds, after providing for costs and expenses, to the persons entitled.
What are the advantages of liquidation?
Liquidation provides an orderly winding up of the company. The directors are not in control of the company as control rests with the liquidator.
What are the effects of liquidation?
- The company ceases to carry on business except to the extent that the liquidator believes that it will assist the beneficial realisation of assets
- The assets of the company remain with it, but the liquidator becomes an agent of the company
- All legal proceedings against the company are stayed. Proceedings cannot be commenced or continued without the leave of the Court
- The disposition of property by the company after the commencement of the winding up is void
- The powers of the director(s) cease upon appointment of the liquidator
- Only the liquidator can exercise a function as an officer of the company
- All director(s) must prepare and submit a Report on Company’s Activities and Property and deliver all the company’s books and records to the liquidator
- A secured creditor can enforce its valid registered security
What is the priority for repayment?
Proceeds realised from the sale of non-circulating assets must be paid to the secured creditor. If there is a surplus, then this is paid to the company’s unsecured creditors.
Proceeds realised from the sale of circulating assets are paid to meet the costs of the liquidation, employee entitlements, the secured creditor and then to unsecured creditors.
What are the roles and powers of the liquidator?
The liquidator has a duty to:
- Ascertain and take possession of the assets, preserve and realise the assets
- Ascertain the liabilities of the company
- Investigate and report to ASIC concerning the affairs of the company and if less than 50 cents in the dollar is paid to unsecured creditors, or if an officer may be guilty of an offence
- Act honestly, to avoid conflicts of interest and to act impartially
- Act with care and skill