Commercial Lawyer Brisbane
Corporate Insolvency
Liquidation
Liquidation occurs when a company is unable to pay all of its debts, because it is insolvent, or members of the company want to end its existence, by having it struck off the Australian Securities and Investments Commission (ASIC) register. Liquidation is the process of winding up a company’s financial affairs to disassemble the company’s structure. This is achieved through conducting appropriate investigations and enabling a fair distribution of company’s assets to it creditors.
Liquidation is the only way to fully wind up the affairs of a company, by putting an end to its corporate existence. An independent party undertakes the process, to protect the interests of creditors, directors and members, while dismantling the company’s structure. An insolvent company can be wound up by the court, usually by an application to the court, of one or multiple creditors. It can also occur voluntarily by a resolution of the company’s directors and, in some instances, company members at a relevant meeting.
Court Liquidation
For a court liquidation to be successful, the applicant must demonstrate to the court, that the company is insolvent, or can be otherwise deemed insolvent. Once that has been determined, the court will then appoint a liquidator (usually, the liquidator is nominated by the application as a creditor of the company). At its discrepancy, the court also can wind up a company when there are irreconcilable disputes between shareholders or directors, or for a limited number of other reasons.
Voluntary Liquidation
Liquidation can also occur voluntarily, whereby the company, by its own will, appoints a liquidator. Creditors have a right to change the appointed liquidator at any time. A voluntary liquidation often occurs by a creditors’ voluntary winding up or through a voluntary administration.
Members’ Voluntary Winding Up
A members’ voluntary winding up is the process which is undertaken by members, who wish to disassemble the company structure. It is often the case that the company is solvent, however, the members have determined that the company has no valuable future.
Creditors’ Voluntary Winding Up
A creditors’ voluntary winding up, is a process in which the directors ascertain that the company is insolvent and agree to place the company into liquidation, by appointing a liquidator.
Following the resolution to wind up the company, a meeting of creditors is held within 18 days, being an 11-day convening period, and a 7-day notice period. The meeting provides creditors with an opportunity to change the appointed liquidator.
A creditors’ voluntary winding up is com commonly used in situations where, a company is insolvent and a Deed of Company Arrangement (DOCA) is not feasible, so the company must simply be wound up. It is important to be aware that if a winding-up application has been filed with the court, or if the court has ordered that the company be wound up, it is not possible to proceed with a creditors’ voluntary winding up.
Proving Insolvency
Directors have a duty to ensure that their company does not continue to incur debts when it is insolvent. If the director breaches that duty, the liquidator can bring an action against them for recovery of the amount of the debts incurred during the period that the company was insolvent. The insolvent trading claim is made against the directors personally, making them personally liable to compensate the company for the unpaid debts.
In establishing whether a company is insolvent, it is relevant to consider whether it can pay all of its debt as, and when they fall due. Even if the company has an asset surplus, but not way to quickly liquidate those assets, the company could in fact be deemed insolvent. Commonly, a company is deemed insolvent if it fails to satisfy a creditor’s statutory demand.
Provisional Liquidation
A provisional liquidator may be appointed by the court to exercise interim control over the assets and affairs of a company. This is usually for the period between filing the winding up application, and the court hearing. A provisional liquidator appointment is made when the court believes that assets may be at risk and should be protected in the interest of creditors until the winding up hearing. It is a ‘provisional’ appointment as the company may not be wound up at the application hearing, at which time control may pass back to its directors.