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Liquidation procedures

Eligibility

What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?

A liquidation may be compulsory (ie, court ordered) or voluntary (ie, initiated by the company’s shareholders or creditors).

In the case of compulsory liquidation on the ground of insolvency, the following parties may apply to the court for a winding-up order:

  • the company;
  • a creditor;
  • a contributory;
  • a director;
  • a liquidator of the company;
  • the Australian Securities and Investments Commission (ASIC); or
  • a prescribed agency. 

The Corporations Act 2001 (Cth) also sets out other grounds for a compulsory liquidation and the persons or entities eligible to apply.

Shareholders may initiate a voluntary liquidation as:

  • a members’ voluntary liquidation (where the company is solvent); or
  • a creditor’s voluntary liquidation (where the company is insolvent).

A creditors’ voluntary liquidation may also occur at the end of a voluntary administration if the creditors vote for the company to be liquidated.

Procedures

What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?

An insolvent company may be wound up by a court or voluntarily:

  • A (compulsory) court liquidation begins with an application to the court, which appoints the liquidator and ultimately orders the company’s winding up.
  • A voluntary liquidation of an insolvent company is ordinarily initiated by its shareholders, but the process is thereafter conducted by the liquidator under the control of the creditors. If the company is already under administration at that point, the creditors may initiate the voluntary liquidation.

In general, the winding-up provisions in the Corporations Act apply to both court and voluntary liquidations, although there are some special provisions that apply to each type. For example, in the case of a court liquidation:

  • the court retains the discretion to decide whether to order the company’s winding up; and
  • the proceedings leading up to the court’s appointment of the liquidator are judicial.

How are liquidation procedures formally approved?

For a court liquidation:

  • the court orders that the company be wound up in insolvency; and
  • the liquidator requests that the ASIC deregister the company. 

For a creditors’ voluntary liquidation, the liquidator must submit a report to ASIC and hold a final joint meeting of the creditors and members to explain how:

  • the liquidation proceeded; and
  • the company’s assets were realised and distributed. 

The company is then automatically deregistered by ASIC three months after the notice of the meeting of creditors and members is lodged with ASIC.

What effects do liquidation procedures have on existing contracts?

The effect of liquidation on existing contracts will depend on the precise circumstances. The newly adopted ipso facto regime does not apply when companies proceed directly to liquidation. Accordingly, the entry into liquidation by a counterparty to a contract will often give rise to termination rights under the contract. Separately, a liquidator can carry on the company’s business to a limited extent – namely, for the beneficial disposal and winding up of that business. It is therefore possible that the performance of an existing contract may not be affected. However, it is more common that on liquidation, the contract will cease to be performed. Separately, the liquidator may disclaim certain contracts (particularly where the contract is unprofitable or contains onerous terms).

What is the typical timeframe for completion of liquidation procedures?

There is no set period for liquidation. It will depend on the complexity of the company’s structure and affairs and the extent to which the liquidator’s investigations into the company’s affairs discloses matters requiring action (eg, whether the liquidator will seek to undo dealings entered into before liquidation or take action against the directors for breach of their duties).

Role of liquidator

How is the liquidator appointed and what is the extent of his or her powers and responsibilities?

In a court liquidation, the liquidator is appointed by a court following a winding-up application. In a voluntary liquidation, the liquidator is appointed by a resolution of the company’s shareholders. 

A liquidator’s functions, powers and responsibilities are governed by:

  • the Corporations Act;
  • the Insolvency Practice Rules (Corporations) 2016 (Cth); and
  • general law. 

A liquidator’s powers and duties are generally the same or similar regardless of whether they are appointed by the court or creditors.

A liquidator’s powers include:

  • carrying on the company’s business;
  • paying the company’s creditors;
  • making compromises and arrangements with creditors or claimants;
  • bringing legal proceedings on the company’s behalf;
  • selling or otherwise disposing of the company’s property; and
  • entering into agreements on the company’s behalf (subject in some cases to court approval).

 A liquidator’s duties include:

  • impartially investigating the company’s affairs;
  • collecting the company’s property and applying it to discharge the company’s liabilities;
  • reporting to ASIC, including where it appears to the liquidator that officers, employees or members may have been guilty of criminal offences in relation to the company;
  • keeping proper books; and
  • lodging returns to ASIC annually and at the end of administration.

Court involvement

What is the extent of the court’s involvement in liquidation procedures?

Where a company is wound up by the court, the court appoints a liquidator and has general superintendence over the winding-up process. General powers include:

  • staying or terminating the winding up;
  • ordering the delivery of money, property or books to the liquidator;
  • appointing a special manager;
  • making various orders regarding debts or claims; and
  • preventing persons from absconding.

Voluntary liquidation is mostly a non-judicial process. However, a court may inquire into, and make orders in relation to, the external administration of the company on:

  • its own initiative where proceedings are before the court; or
  • application of certain persons (eg, a person with a financial interest in the company, an officer of the company or ASIC).

Creditor involvement

What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?

A liquidator may call a creditors’ meeting at any time. In certain circumstances, the liquidator may be required to do so, including where the creditors pass a resolution requiring a meeting or where there is a matter which requires creditor approval.

Creditors may:

  • request information from the liquidator;
  • inspect the liquidator’s books;
  • inform the liquidator of their knowledge of matters relevant to the company’s affairs; and
  • remove or replace a liquidator. 

Creditors may also appoint a committee of inspection to undertake these functions and monitor the liquidator’s conduct.

In general, where a company is in liquidation, a creditor cannot:

  • pursue individual proceedings against the company or in relation to its property; or
  • proceed with any enforcement process in relation to that property. 

However, secured creditors retain their right to realise or otherwise deal with their security interests.

Director and shareholder involvement

What is the extent of directors’ and shareholders’ involvement in liquidation procedures?

Compared with creditors, directors and shareholders have a fairly confined role in liquidation procedures.

Directors

In general, directors must do whatever the liquidator reasonably requires, including:

  • attending to the liquidator;
  • providing information to the liquidator; and
  • attending meetings of the company’s creditors or members. 

Directors must also deliver up all books in their possession that relate to the company.

Shareholders

In an insolvency, shareholders rank behind the creditors and their involvement in liquidation procedures is limited.