Member Article

What is the Role and Purpose of Liquidation?

What is Liquidation?

Liquidation is the systematic “winding up” of a company’s activities. It includes ceasing all sales and/or operations and allocating proceeds and surpluses among creditors and shareholders. The assets are discharged and the company is deregistered or closed.

The purpose of a liquidation is to make sure that a company is wound-up equitably and fairly and its debts paid when due. If it can do that, it’s solvent. If it can’t, it’s insolvent.

There are three types of liquidations:

• Members’ Voluntary • Creditors’ Voluntary • Court

Creditors’ Voluntary

When a company’s directors or members decide to wind-up an insolvent company or one that is likely to become insolvent, they name their favored Liquidator to commence a meeting of the creditors to consider whether another liquidator should be named or to allow the Liquidator to continue with the winding-up.

The Liquidator is then accountable for dissolving the company’s affairs and allocating its funds in accordance with the Corporations Act.

Court

When a creditor files for liquidation, it’s mostly because it has not been paid even after the conclusion of a legislative timeline for payment. The court can also select a liquidator on ‘just and equitable grounds’ if it believes a director, shareholders, or key stakeholders has a sincere concern that the company is insolvent or is expected to be insolvent and is being run in a manner that may be disadvantageous to the Insolvency Expert Balmain company, the shareholders, and other key stakeholders.

Liquidator For an Insolvent Company

The Liquidator owes a duty to the company’s creditors. Liquidators also:

• protect, collect, and release the company’s assets • examine the company’s activities and report to the creditors • note any unfair preferences • look into why the company failed • investigate whether anyone committed any offences • find out if any funds may be recoverable to the creditors • identify and void non-money making transactions • investigate potential claims against company’s officers • attempt to identify unavoidable financial troubles

Under the Corporations Act, except for lodging of reports and documents, unless there is enough money to pay their costs, a Liquidator is not required to do any work.

The law endeavors to keep Voluntary Receivership Services equal and asset distribution uniform as per each claim. It does, though, give priority to those creditors who charged over some the company’s property as security or secured creditors. Plus, some rules keep some creditors from acquiring an unfair advantage.

The Liquidator first pays the costs of the liquidation. Subject to any secured creditors’ rights, proceeds are then distributed first to priority creditors (including employees), then to unsecured creditors. Then, with the liquidation complete, the Liquidator applies for deregistration of the company.

For a Solvent Company

Members usually voluntarily “wind up” or end a company. All debts are usually paid.

This was posted in Bdaily's Members' News section by Thomas Dawson .