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What Happens When a Company Goes into Liquidation in Australia


When a Company goes into liquidation, a Liquidator is appointed to wind down the Company’s affairs and recover as many assets as possible to repay its debts. The Director’s powers to manage the company are suspended. Winding up a company can therefore have a major impact on its stakeholders.

In most cases, a company is liquidated if it’s experiencing serious financial difficulties. This often leads to situations where creditors, employees and other stakeholders only receive a fraction, or none of the money they are owed.

In this article, we discuss what happens when a company goes into liquidation in Australia, and how it affects the company’s core stakeholders

1. Impact on the Business and Trade Partners

In most cases, the appointment of a Liquidator will result in the closure of the business however in some circumstances, a Liquidator does continue to trade the business for a limited period.

The impact of liquidation on a company’s trading partners depends on how the liquidation is being managed:

  • If the Liquidator continues to trade the company while conducting their investigations, the company may still buy and sell goods and services during the appointment.
  • If the Liquidator does not continue to trade the company, customers won’t receive unfulfilled orders for products and/or services, and no further orders will be placed.

Suppliers must seek direction from the Liquidator of the company as to whether their supply is still required. The Director is not able to give instructions on behalf of the company once a Liquidator is appointed.

2. Impact on Company Stakeholders

Directors

Liquidation impacts directors in a number of ways. Some key examples are:

  • Director’s powers are suspended. Once a Liquidator is appointed, the Director can no longer use their powers and act on behalf of the Company.
  • Directors have a duty to support the Liquidator’s efforts. For example, the Liquidator will investigate the company’s affairs and may need the Director’s help to understand certain business decisions.
  • Directors must provide books and records of the Company. This includes completion of a Report on Company Affairs and Property (ROCAP), and providing all company records they have in their possession to the Liquidator.
  • Directors may be subject to legal action by a Liquidator. For example, a Liquidator may pursue a Director for any debts they incurred whilst the company was trading insolvent.

Despite the liquidation, directors may be made personally liable for debts owing to the Australian Taxation Office (ATO) if they have been issued with a Director Penalty Notice (DPN), or for debts owing to certain trade creditors if they have signed personal guarantees.

Employees

An unfortunate reality of the liquidation process is that employees usually lose their jobs when a company is liquidated.

Employees are considered “priority creditors” for the purposes of liquidation. The employees of liquidated companies may be entitled to unpaid wages, superannuation, leave entitlements, pay in lieu of notice (PILN), and redundancy.

If the Liquidator does not recover enough money to pay all outstanding employee debts, employees may be able to claim the Fair Entitlements Guarantee (FEG). The FEG allows employees of liquidated companies to claim unpaid wages, leave, payment in lieu of notice, and redundancy pay up to a certain limit, and will advance these amounts to employees regardless of the assets recovered in the liquidation. In most cases, the ATO will claim for unpaid superannuation in place of employees, but these amounts will only be paid if sufficient assets are recovered by the Liquidator.

Shareholders

Company shareholders are treated as investors who have knowingly taken a risk by purchasing shares. Shareholders receive the lowest priority in the order of payments, so it’s uncommon for shareholders to receive a dividend when a company is liquidated.

3. Impact on Creditors

Creditors are people or entities that are owed money by a company. For example, customers are considered a company’s creditor if they:

  • Have paid for a product or service that they have not received
  • Have paid a deposit for a product or service
  • Have a gift card, voucher or credit note from the company

Suppliers are considered creditors if:

  • They have provided goods or services to a company, but have not been paid for them
  • Amounts owed pursuant to a contract are unpaid

Secured vs Unsecured Creditors

Secured and unsecured creditors have different entitlements:

  • Secured creditors retain their normal right to repossess secured assets if the company is in breach of the relevant agreement.

Secured creditors can also ask the Liquidator to deal with the security, or surrender the security to the Liquidator and lodge a proof of debt as an unsecured creditor.

  • Unsecured creditors do not hold a security interest, and must lodge their debt with the Liquidator to receive a dividend.

What to Do if You Are Owed Money

Creditors have the option of lodging the debt and potentially receiving a dividend as an unsecured creditor.

Lodging the Details of Your Debt

If you want to receive a dividend as a creditor, you must lodge the details of your debt or claim with the Liquidator, including supporting documentation to prove the debt owed.

Voting at Creditors’ Meetings

Lodging your debt with the Liquidator allows you to vote at creditors’ meetings, or on proposals put forward by the Liquidator.

During the liquidation process, the Liquidator may call creditors’ meetings or issue proposals to inform creditors about their progress and/or ask the creditors to vote on certain matters.

If you have lodged your debt with the Liquidator, you can:

  • Attend creditors’ meetings
  • Vote on matters
  • Ask the Liquidator questions
  • Share information about the company

This allows you to have your say in the liquidation and vote on matters that may affect your outcomes.

Alternative Options

As an alternative, customers may be able to ask their bank to reverse the transaction. Some financial institutions offer payment protection that can help you get your money back. Time limits apply, so contact your bank or financial institution as soon as possible.

Article written by Ben Prebble (Supervisor) – Brisbane

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