In light of Covid-19, the federal and state government’s response to shutter commerce considered ‘non-essential’, and the paradigm shift in the way business is done, the external administration of companies is expected to balloon in 2021.

When is a company insolvent?

If a company is unable to pay all of its debts when they are due, a company can be deemed insolvent. This can happen even if there is an asset surplus but there is no way to liquidate the assets quickly. In the most common case, companies are deemed insolvent if they are unable to satisfy the statutory demand of a creditor. 

What is liquidation?

Liquidation is a formal process of insolvency, in which the life cycle of a company is brought to an end. Liquidation is colloquially known as the ‘winding-up’ of a company. Practically, the process results in an independent third party known as a liquidator being appointed to take control of the company and its assets. The liquidator’s appointment is designed to protect the interests of creditors, directors, and shareholders as the company structure is dismantled. The liquidators typically sell company assets and use the proceeds to repay debts to creditors.

How does a liquidation come about?

The process of liquidation may come about either by court order, ordinarily due to an application by one or more of the company’s creditors, or voluntarily by resolution of the company directors and potentially the company shareholders, if necessary.

Court Ordered Liquidation

The applicant, who has applied for the company to be wound up must demonstrate to the court that the company in question is insolvent or that it can be deemed to be insolvent. If this application is successful, the court will appoint a liquidator, usually one proposed by the applicant to investigate the companies affairs and administer the liquidation process. There is a host of factors that may potentially substantiate an application to wind up a company, including:

• A failure to pay debts to creditors;
• Recovery actions by the ATO and Directors Penalty Notices;
• On-going losses and a consistent failure to improve the trading performance of the company;
• Insolvent trading;
• Certain company dispute’s; and;
• Unlawful removal of assets from the company.

Voluntary Liquidation

Voluntary liquidation occurs when the company self-appoints a liquidator to wind up the company. Creditors maintain the power to change the liquidator at any time. A voluntary liquidation may occur through a creditors’ voluntary winding up or through voluntary administration.

Member’s Voluntary Winding Up

In cases where a company wishes to be wound up, yet is presently solvent, a members voluntary winding is appropriate. Members voluntary winding up processes usually see all outstanding creditors paid in full with surplus assets distributed to members. 

Creditors’ Voluntary Winding Up

A creditors’ voluntary winding up can happen if the directors of the company conclude that the company is insolvent and they decide to put the company in liquidation, thereby appointing a liquidator. A creditors meeting is held within the timespan of 18 days of the resolution to wind-up the company. In this meeting, creditors can determine whether to keep the current liquidator or to choose another liquidator. Creditors’ voluntary winding up commonly occurs when a company is insolvent and a Deed of Company Arrangement (DOCA) is not applicable, and so the company needs to be liquidated. If a court orders the company to be wound up, however, a creditors’ voluntary winding-up is not possible. 

Voluntary Administration

A company can also choose to wind up through the voluntary administration process, whereby the directors appoint administrators to the company. As voluntary administrators, their role is to determine the value of remaining assets and verify any asset securities, monitor and manage the trading activities of the company, and to create a forecast in which the future trading prospects are assessed, and to see if the company is able to be restructured so that it would be profitable again. 

What occurs following a liquidation?

Once the liquidator has completed the administration of the liquidation, realised the extent of the company’s assets and distributed them to creditors, finalised their investigations, and made any necessary disclosures to ASIC, they will then apply to have the company deregistered. Once this occurs, all claims against the company by unsecured creditors will be extinguished, however, secured creditors may still be able to exercise their rights. Potentially, if the company has been insolvent trading, action may be taken against individual directors for recovery of funds for the benefit of creditors.

What are my options?

Whilst not common, in some cases, it may be possible for the liquidator, a creditor, or a member of the company to apply to a relevant Court for an order to set aside a liquidation. Such an order would cause control of the company to be reverted back to the directors.

To make such an order, the Court must be satisfied that the conditions that caused the company to be liquidated no longer exist. In instances where companies enter liquidation due to insolvency, the company must demonstrate that they are no longer insolvent, ordinarily by paying out all creditors and the costs of the liquidator. Further, the Court will only make such orders if they are satisfied that the company will remain solvent and the directors are the appropriate parties to whom the company’s affairs may be entrusted.

Applications to terminate a liquidation, whether it be by court order or voluntarily, are made under the discretion of the relevant court hearing the application. In determining this, the court may give regard to the following factors:

1. The position of current and future creditors;
2. The interests of the liquidator, primarily being financial interests;
3. Any shareholder interests;
4. The public’s interest (including any commercial misconduct engaged in by the directors); and,

5. Any other issues are relevant to the situation’s context.

It is important to note that the court is unlikely to take into consideration any factor that could have been and was not put before the court in the initial defence of a winding-up application.

If you are facing insolvency or liquidation, please contact MC Lawyers and Advisers for a free consultation to discuss how we can assist you in securing the best possible outcome for your circumstances.