A liquidation is the orderly winding up of a company’s affairs. The three types of liquidation are:
- Court ordered
- creditors’ voluntary
- members’ voluntary (see below)
Court ordered liquidation starts as a result of a Court order, made after an application to the Court, usually by a creditor of the company. A Court may order a company to be wound up and appoint an Official Liquidator to act. Such orders may be made:
- where the company is proved to be insolvent
- if the directors have acted in their own interests, rather than in the interests of the shareholders of the company
- where the Court is of the opinion that the interests of the public, shareholders or creditors are best served by that course of action, or
- where the Court is of the opinion that it is just and equitable that the company be wound up.
Any one of the following can apply to the Court for the appointment of a Liquidator:
- the company
- a creditor
- a shareholder
- a director, or
- the Australian Securities and Investments Commission
The Liquidator’s main role is to realise the company’s assets and distribute the proceeds of realisation among its creditors. Where the assets are more than sufficient to meet the claims of creditors, the surplus funds are distributed to the members in accordance with the company’s constitution.
The Liquidator has extensive powers to displace the directors and assumes full control of the company’s affairs. The Liquidator may continue the business of the company to enable the beneficial disposal or winding up of that business.
In addition to realising the company’s assets the Liquidator may:
- institute proceedings against the directors for insolvent trading
- have certain transactions entered into by the company prior to the appointment of the Liquidator declared void
- publicly examine officers of the company
- seek to recover from creditors amounts which were paid to them at a time when the company was insolvent within the relation back period prior to the commencement of the liquidation
A creditors’ voluntary liquidation is a liquidation initiated by the company. A creditors’ voluntary liquidation may occur either:
- through the members (shareholders) of an insolvent company resolving to appoint a liquidator to the company, or
- following a voluntary administration of a company
There are often benefits to those associated with a company in arranging for it to be placed in liquidation, including:
- it is a way in which a director may avoid personal liability under a Director Penalty Notice issued by the ATO
- it may limit or reduce the company’s directors’ liability for insolvent trading
- it may limit or reduce the company’s directors’ liability for certain offences under the Corporations Act 2001
- it results in an independent person being appointed to the company, who will conduct an orderly winding up of the company’s affairs
- it avoids the company being placed in liquidation by the ATO or another creditor
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