In this article we will look at corporate insolvency, otherwise known as liquidation. Liquidation involves the winding up of a company by distributing any available assets to the creditors. This can come about by one of two ways. The first of these is known as voluntary liquidation and involves a resolution of the company’s members (shareholders) to wind up the company. This resolution is usually based on the directors’ advice that the company is insolvent. The second way involves a Court ordered liquidation as a result of a creditor proving to a Court that the company is insolvent.
A company is considered insolvent when it can’t pay all of its debts as and when they fall due. This might be the case even if the company has significant assets. The assets must be quickly realised to save the company, otherwise it will still be considered insolvent by the Courts. Once it has been decided to wind up the company, a liquidator is then appointed. The liquidator is usually a specialist accountant who becomes the controller of the company. The liquidator can sell assets, void certain transactions, enter into contract and generally do all the things a director can do. The liquidator must also report to ASIC and creditors.
During the corporate insolvency process, the liquidator may decide to keep the company trading if it is profitable to do so. While the liquidator’s duties are to wind up the company as quickly as possible, they must do so in a practical way. During the liquidation any secured creditors (such as mortgagees) will not be affected. In other words, if a bank has a mortgage over company owned property, it may step in and sell that property and it will receive all that it is owed. For unsecured creditors, the story is quite different. These creditors must wait in line with all other unsecured creditors until the liquidator can distribute what is left at the end of the company’s winding up. Essentially, unsecured creditors will be the last creditors to be paid once the liquidator’s expenses and any employee entitlements are paid out. This is why it is often the case that unsecured creditors will only receive a few cents of every dollar owed to them. In some cases they get nothing.
Corporate insolvency can be a complex area of law and often there are many strategies at play as the various creditors jostle for payment. If you become a creditor of a company which you think is insolvent, you should contact us for advice immediately. In these situations, time is very much of the essence.