Restructuring, Turnaround and Insolvency Specialists

How is a Creditors Voluntary Liquidation commenced?

The directors of an insolvent company meet and pass a resolution to convene a general meeting of shareholders for the purpose of passing a special resolution that the company be wound up.

The liquidation commences immediately upon the shareholders of a company passing a resolution that the company be wound up and a liquidator be appointed. Within 18 days of being appointed by the shareholders, the liquidator must convene a meeting of creditors. At this meeting, creditors may decide to replace the shareholder appointed liquidator with another of their choice.

How are creditors impacted?

Once the liquidation has commenced:

  • unsecured creditors can’t begin, continue or enforce their claims against the company without the consent of the court’s
  • owners of property used or occupied by the company, or people who lease such property to the company can recover their property
  • secured creditors can enforce their charge over company property
  • a creditor holding a personal guarantee from the company’s director or other person is able to enforce the guarantee

What happens to the employees?

Employees are automatically terminated upon the commencement of the liquidation and the liquidator is not personally liable for any employee entitlements that arise during the liquidation.

However, if the liquidator continues to trade the business of the company for a short period whilst he/she winds up its affairs, they must pay ongoing wages for services provided and other employee entitlements that arise after the date of their appointment. These payments are treated as an expense of the liquidation.

Employees have the right to be paid their outstanding entitlements in priority to other unsecured creditors. Priority employee entitlements are grouped into classes and paid in the following order:

  1. outstanding wages and superannuation
  2. outstanding leave of absence (including annual leave and sick leave, where applicable, and longservice leave)
  3. retrenchment pay.

Unfortunately there may not always be sufficient assets able to be realised by the liquidator to enable employees full payment of their entitlements. Each entitlement class is paid in full before the next class is paid. If there are insufficient funds to pay a class in full, the available funds are paid on a pro-rata basis (and the next class or classes will be paid nothing).

Payments are generally only made to employees once the liquidator has sold all of the assets of the company and completed their investigations which can take several months.

Directors, their spouses and relatives are limited to rank equally with employees to maximum of $2,000 for outstanding wages and superannuation and $1,500 for outstanding leave entitlements. The balance of their claims will rank alongside general unsecured creditors

Employees may also be able to make a claim against the Fair Entitlement Guarantee (FEG) operated by the Federal Government. Information regarding FEG can be found HERE [insert link]

The timing and quantum of payments to employees in respect of their pre-appointment entitlements depends on the option passed at the creditors’ meeting (i.e. company returned to directors, a deed of company arrangement, or liquidation).

What powers does the Liquidator have?

Once the liquidation has commenced, the liquidator takes control of the company’s assets and affairs and is the only one with the power to bind the company. In general, the liquidator will:

  • Identify, secure and realise the company’s assets
  • Investigate the failure of the company
  • Identify any transactions that may be void
  • Report to creditors and hold meetings
  • Report to the Australian Securities and Investments Commission (ASIC) on any offences committed by company officers
  • Distribute any company assets to creditors
  • Apply to ASIC to deregister the company

What information is provided to Creditors?

During the course of the liquidation, the administrator is required to issue the following reports and hold the following meetings:

Information Timing
First Report Within 11 business days after appointment
First Meeting 7 business days after First Report issued
Annual Report* Within 3 months of the anniversary of the appointment
Final Report / Final Meeting** At completion of the winding up

*A liquidator may lodge a report with ASIC in lieu of calling an annual meeting of creditors.

** A liquidator is not required to call a final meeting of creditors if there are insufficient funds in the liquidation to convene the meeting.

How does the liquidator get paid?

A liquidator’s fees receive a priority under the Corporations Act from funds received from realising company assets. A liquidator cannot draw fees without the prior approval of creditors or the court

 

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