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Liquidation

Company is now in liquidation, so what does it mean for you the directors and creditors of the company?

This article focuses on court liquidation and creditor voluntary liquidation.

Effect on Directors

Directors of companies in liquidation lose control of the company. The appointed liquidator takes control of the company and its assets. It is the liquidator’s role to collect, and deal with, the company’s assets, and, where possible, to make a distribution to the creditors and if there is any surplus thereafter, a distribution will be made to the members of the company. The liquidator also conducts investigations into the failure of the company, the conduct of its directors and the conduct of third parties, like creditors.

Directors are required to complete a Statement of Affairs form which provides details of all company‘s assets and liabilities, cause of the company’s failure and a brief description of the company’s history. Directors are also required to assist the liquidator with their investigations of the company’s affairs, locating the company’s assets and business records.

Directors have a duty to prevent the company trading if it is insolvent. A company is insolvent if it is unable to pay all its debts when they are due. If the liquidator’s investigations indicate that the director was trading the company whilst it was insolvent, the liquidator may pursue the director for insolvent trading via an application to the court. Insolvent trading can have serious consequences for directors. There are various penalties associated with insolvent trading, including civil penalties, compensation proceedings and criminal charges. If you receive an insolvent trading claim, it’s best to seek legal advice.

Effect on Creditors

Secured creditors

If your debt is secured, you can rely on the security to get your money back. If there is any surplus after the secured assets have been valued or sold, it will be paid to the liquidator. Any shortfall can be claimed for as an unsecured creditor.

Unsecured creditors

An unsecured creditor must complete a proof of debt form and provide supporting evidence of the debt owed. The proof of debt lets the liquidator know how much the company owes the unsecured creditor and why.

The company may not have enough money available to make any payments at all to unsecured creditors. If the liquidator recovers money the Corporations Act sets out the priority of payments. Unsecured creditors rank at the bottom but before the members of the company. If there is money available to pay unsecured creditors, these creditors may be entitled to payment (dividend payment), assuming that their proof of debt is accepted by the liquidator.

A liquidator investigates transactions involving unsecured creditors. These transactions are known as unfair preferences.

An unfair preference is a payment made to a creditor in the six months before the liquidation started (or the date that the winding-up application was filed in the case of court liquidation). The payment must have been received while the company was insolvent or it causes the company to become insolvent, and the creditor must have received more than it would have received in the liquidation in circumstances where they knew, or ought to have known, that the company was insolvent.

A liquidator has the power to claw back the unfair preference and may do this via an application to the court. If you receive a preference claim, it’s best to seek legal advice.

Clewett Lawyers has the expertise in house to work with you through this process and advise you how best approach these claims. Please contact our team on 07 3210 6500.

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