Is a Court Liquidation the End of a Company?

On several occasions we have been appointed by the Court as Liquidators to companies only to find that they are still trading businesses. In some circumstances, the underlying business is profitable and viable, but had experienced a “black swan” event which the company struggled to overcome.

Whilst the Directors of these companies would have been better off seeking advice on their options and appointing Voluntary Administrators some time earlier, the appointment of Liquidators by the Court does not preclude this from occurring.

Under section 436B of the Corporations Act 2001 (Act), a Liquidator can appoint a Voluntary Administrator for the purposes of allowing the Directors to propose a Deed of Company Arrangement.

The Act provides that, with leave of the Court or by a resolution of creditors, the Liquidators can appoint themselves as the Voluntary Administrators. An application to Court is more often the approach taken as orders can be sought:

  • Staying the liquidation whilst the voluntary administration process is undertaken;
  • Dispensing with the need to convene a first meeting of creditors.

Liquidators will only consider appointing a Voluntary Administrator once they have made some preliminary assessments of the company to which they are appointed. In particular, they would seek to collate the following information which a Court would consider in such applications. Some of these factors include:

  • Causes of insolvency
  • Any misfeasance by Directors/recovery actions
  • Profitability and financial position
  • The terms of the proposed Deed of Company Arrangement
  • Better outcome for creditors/stakeholders

As such, by the time this information is gathered and reviewed, the Liquidators are familiar with the company’s affairs, and it is beneficial to creditors to have the Liquidators act as Voluntary Administrators. Arguably, as they were appointed by the Court, the Liquidators are also independent and do not have any alliance with the company’s Directors or the petitioning creditor.

In two recent matters, we were successful in our applications to Court on each occasion and creditors subsequently accepted the proposed Deed of Company Arrangement in each case, with control of the companies returned to their Directors. A further Court application is required to terminate the winding up of the company upon the acceptance of the Deed of Company Arrangement.

Whilst each of these circumstances meant that Court Liquidation was not the end for these companies, there were significantly greater costs incurred in making such applications once the winding up order had been made.

Such costs could have been avoided, with the same outcome but a greater return to creditors, if the respective Directors had sought earlier advice and appointed Voluntary Administrators themselves well prior to court liquidation hearings.

If you have clients with viable businesses that are under pressure from creditors resulting from a “black swan” event (such as COVID), please encourage them to reach out to their local SV Partners’ office for early and appropriate advice.

Article written by Stuart Starr (Associate Director) – Adelaide

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