Corporate Insolvency - Liquidation

Voluntary and Compulsory Winding Up

• What is Liquidation?
   

• Voluntary Winding Up
   

• Compulsory Winding Up
   

• Provisional Liquidation
   

• The Effects of Winding Up

 What is Liquidation?

Liquidation also known as the winding up process which prepares a company for deregistration. The process involves the assets of the company being collected and realised, the proceeds are then used to pay the debts and liabilities and anything that remains after this and after all of the costs of the process is to be distributed amongst the members in accordance with their rights and interests or in accordance with the company's constitution.

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Voluntary Winding Up

A company does not need to be insolvent in order to be wound up; they can apply for voluntary liquidation instead. The winding up can be initiated through either the members or the creditors.

Member's voluntary winding up

In this form of winding up the creditors are not involved because they will be repaid in full and because the decision to wind-up is internal and not subject to outside influence. This type of winding up is initiated by special resolution of the company at the members meeting. The majority of the directors may wish to make a declaration of solvency which basically means that they have made an inquiry into the company's affairs and have formed the opinion that the company will be able to pay its debts within 12 months of the commencement of the winding up. If however a special resolution is passed to wind up the company then this resolution must be lodged with ASIC within seven days and a notice of the resolution must be published in the Gazette within 21 days.

Creditor's Voluntary winding up

Regardless of its name this type of winding up cannot be initiated by creditors. It occurs by a special resolution of the members, it can occur in one of two ways:

1.     The directors determine that their company is insolvent and that it is to be wound up, or

2.     Through a members voluntary winding up being initiated because it was thought that the company was solvent but the liquidator then forms the opinion that it in fact insolvent. 

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Compulsory Winding Up

Compulsory Winding Up has to be ordered by a court, it can be initiated by any of the following: the company itself, the members, the liquidator, the creditor, ASIC and with regards to insurance the Australian Prudential Regulation Authority. The court can also order the winding up of a company if it is found that in an application for the liquidation that the company is insolvent. However it is usually the creditor who initiates the process as he or she are often the ones who are frustrated in their attempts to recover money which is owed to them by the company.

If a court decides to order the winding up of a company it will appoint an official liquidator and that person will conduct the winding up. In a compulsory winding up the liquidator must be an official liquidator as opposed to a registered one which is required for a voluntary winding up.

The functions of a liquidator for an insolvent company are:

• To wind up the affairs of the company;

• To collect protect and equally distribute the companies assets amongst its creditors;

• To investigate and report to creditors regarding the affairs of the company such as any uncommercial transactions which may be set aside and any claims that may be made against the company's officers;

• To inspect the circumstance which lead to the liquidation which may reveal any improper dispositions of property and criminal offences and

• To apply for deregistration of the company upon the completion of the liquidation. 

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Provisional Liquidation

The court has the power to appoint a provisional liquidator any time after the filing of the winding up application and before the making of a winding up order. The reason a provisional liquidator may be appointed is because the creditor may find that the assets and affairs of the company are in jeopardy while the winding up application is pending. The appointment of a provisional liquidator is not merely a formality and is therefore only granted on good grounds. If and once a provisional liquidator is appointed that persons powers are generally limited as they can only take possession of a companies assets in order to preserve them until the hearing of the application to wind up.

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The Effects of Winding Up

The effects of winding up for both compulsory and voluntary liquidation are that the company must cease to carry on business. In a winding up the company still retains ownership of its property and the liquidator serves as an agent of the company; however the company cannot deal with the property.

Some of the effects of winding up are:

• Directors loss of power as they are suspended;

• The court and the liquidator can require delivery of all of the company's property, books and records;

• Officers and former officers of the company are to co-operate with the liquidator;

• It removes the management's right to control the members;

• An automatic stay on the prosecution or the initiation of legal proceedings applies and

• The publication of the winding up order works as a notice of dismissal to all the employees of the company.

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Our dedicated team consists of Liquidator's who can assist you with all your liquidation needs. Complete and submit the Express Enquiry form on the top right hand side of this page and we will contact you to discuss your enquiry or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange an appointment.