When the Directors of a company determine that it is unable to pay its debts as and when they fall due, meaning the company is insolvent, they may resolve to seek a resolution of shareholders to place the company into liquidation.
The company may have already ceased to trade, the company may wish to cease trading to protect the public, or to ensure that its officers do not incur penalties for breaches of the Act, such as insolvent trading.
Members and directors are excluded from the winding up process. Creditors play a more active role in this liquidation process.
In order for a Liquidator to be appointed, a meeting of Directors must be held. They must complete a Summary of Affairs in the prescribed form. At least 21 days-notice of the meeting must be given as the resolution for winding up is a special resolution.
95% of the shareholders can consent to shorten the 21 day period. Subject to obtaining this consent, the meeting of members can then be held immediately after the meeting of directors, where members can resolve to wind up the company and appoint a liquidator.
The Liquidator is required to convene a meeting of creditors which must be held 11 days after the day of the general meeting.
The Liquidator will take control of all the affairs of the company. The directors of the company must assist the liquidators in any reasonable manner. The most important part of this assistance will be to provide the liquidators with all necessary company accounts and information. They may also supervise the general process, but all authority and responsibility will now rest with the liquidators.
When a company is being liquidated because it is insolvent, the liquidator has a duty to all the company’s creditors. The liquidator’s role is to:
- collect, protect and realize the company’s assets;
- investigate and report to creditors about the company’s affairs, including any unfair preferences which may be recoverable, any un-commercial transactions which may be set aside, and any possible claims against the company’s officers;
- enquire into the failure of the company and possible offences by people involved with the company and report to ASIC;
- take action against directors for insolvent trading;
- publicly examine any person who has been associated with the company;
- after payment of the costs of the liquidation, and subject to the rights of any secured creditor, distribute the proceeds of realisation firstly to priority creditors, including employees, and then to unsecured creditors; and
- apply for deregistration of the company on completion of the liquidation.