If you are in the sticky situation where you need to recover debt from a company in liquidation, you will inevitably have a lot of questions. Can I even pursue the company? Will I receive any money back? What can I do? This article will explore how the liquidation process works, what process you need to follow to recover your debt, and what you need to prove to make a successful claim.

How Does Liquidation Work?

When a company is in liquidation, the liquidator takes control of the company to ensure that they wind it up equitably and efficiently. Ideally, all creditors of the company will have their debts paid out when the liquidator winds the company up and realises its assets. However, this is often not the case.

When winding up the company, the liquidator will inspect its books and records to determine whether the directors have managed the company following the requirements of the Corporations Act 2001 (Cth) (‘the Act’). If the liquidator finds that the directors have breached their duties to the company, or other aspects of the Act, then it may commence court proceedings against them. The liquidator may also bring claims that the company may have against third parties.

Common situations in which liquidators will commence proceedings against directors include where the company has engaged in insolvent trading or where the directors have effected transactions for their benefit (and not the company’s). The liquidator may also commence proceedings against third parties who had knowingly taken the benefit of any such transactions or who had received payments from the company at a time when it was insolvent.

The purpose of any such proceedings is to maximise the assets available for distribution amongst the company’s creditors. They do this by recovering any money that the directors or third parties ought to repay to the company.

However, if there is not enough money to satisfy the debts of all unsecured creditors after the liquidator has realised the company’s assets and claims, the liquidator will pay the creditors an amount which corresponds to the value of their debt as a percentage of the total unsecured debts.

What if the Liquidator Does Not Pursue the Directors of the Company in Liquidation?

A liquidator may elect not to proceed with an action against the directors of a company in liquidation for several reasons including lack of funds to do so or doubts as to the prospects of success.

If this remains the case six months after the court orders the company into liquidation, the Act provides a mechanism for unsecured creditors to pursue the directors themselves. However, they can only pursue the directors for failing to prevent the company from incurring debt at a time when the company was insolvent or became insolvent by incurring that debt. The directors also needed to be aware of the insolvent trading.

What is the Process I Need to Follow?

To commence such a proceeding against the directors, the creditor must first give the liquidator a written notice of their intention to begin the proceedings. They must also receive from the liquidator, within three months of providing the notice, a written statement which:

  • gives consent to the proposed proceeding or states the reasons why the liquidator thinks the creditor should not commence proceedings; and
  • in the latter case, permission from the court for the creditor to commence the proceedings.

If the liquidator either doesn’t respond or refuses to provide consent, then the creditor will need to apply to the court for permission to commence a proceeding against the directors. The court will need to consider any reasons the liquidator gives in its refusal to provide consent.

What Do I Need to Prove to Succeed in a Claim Against the Directors?

To succeed in the claim, the creditor will need to prove:

  1. the directors have contravened relevant insolvent trading provisions contained within the Act;
  2. that they have suffered loss or damage because of the company’s debt;
  3. the debt was wholly or partly unsecured when the creditor suffered the loss or damage; and
  4. the company is in the process of being wound up.

If the creditor is successful, it will obtain an order for the directors to repay the debt that the company incurred plus its costs of bringing the action.

To prove the first point above, the creditor will need to follow similar steps to a liquidator. It may require expert evidence from a suitably qualified accountant or financial controller who is given access to the books and records of the company.

Further, creditors must bring proceedings against a director for insolvent trading within six years from the commencement of liquidation of the debtor company.