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Insolvency & Bankruptcy

CORPORATE INSOLVENCY – LIQUIDATION

Liquidation is the process of winding up a company’s financial affairs. The aim of this process is to provide for an orderly dismantling of the company structure, the undertaking of appropriate investigations and a fair distribution of the company’s assets to its creditors.

The liquidation of a company occurs because the company can’t pay all of its debts, meaning it is insolvent, or the company’s members want to bring an end to the company’s existence and have it ultimately struck off the company register with the Australia Securities Investments Commission.

HOW CAN AN INSOLVENT COMPANY BE WOUND UP?

An insolvent company can be wound up in one of two ways:

• By resolution of its members at an appropriate meeting; or
• By an Order of the Court, usually on the application of one or more creditors. Generally this occurs after the issuing of a Creditors Statutory Demand to the company.

For more information on Creditors Statutory Demand refer to the Bankruptcy Notices and Creditors Statutory Demand page of this website. 

A company is insolvent if it can’t pay all of its debts as and when they fall due, even though the company may have an asset surplus but no ability to liquidate those assets quickly. Most commonly a company will be deemed insolvent if it fails to satisfy a Statutory Demand issued by a creditor.

THE WINDING UP OF SOLVENT COMPANIES

Solvent company’s can be wound up by its members.

It is done when the members of a company no longer wish to retain the company structure.

This process is usually undertaken because a company has reached the end of its useful life. The effect of winding up on the company is that control of the company assets, conduct of any business and any other affairs transfers to the liquidator. The directors of the company cease to have any authority to act and all dealing must be done by the liquidator. The powers of the liquidator are very similar to that of a liquidator appointed to an insolvent company, but the scope of work that is necessary is very limited.

ADMINISTRATION OF LIQUIDATION

Liquidations are administered by liquidators, who are specialist accountants.

The Corporations Act 2001 sets out the powers of liquidators. These include all of the powers that are invested in the Directors of the Company, as outlined in the Corporations Act 2001 and the company’s constitution, plus the powers to:

• Investigate and examine the affairs of the company;
• Examine the Directors and others under oath;
• Realise the assets of the company;
• Identify transactions that are considered void;
• Conduct and sell any business of the company;
• Admit debts and pay dividends.

Generally the liquidator of a company will attend to the following:

• Find and protect the assets of a company;
• Realise those assets;
• Conduct investigations into the financial affairs of the company and any suspicious transactions;
• Make appropriate recoveries;
• Issue reports to  the Australian Securities Investments Commission and creditors;
• Make a distribution to creditors;
• Make a distribution to shareholders; and
• Apply to the Australian Securities Investments Commission to de-register the company.

The liquidators powers include holding public examinations, seizing books and records, gaining access to property, and detaining persons relevant to the liquidators investigations. Also, the liquidator must identify any offences committed by the Directors of the company and report these to the Australian Securities Investments Commission.

PROVISIONAL LIQUIDATION

A Court may appoint a liquidator provisionally to exercise interim control over the assets and affairs of a company, in the period between when a winding up Application has been filed and when the Application is heard by the Court. Such an appointment may be made when the Court believes that the assets of the company may be at risk and that it is in the interest of the company’s creditors that these assets be protected until the winding up Application is heard by the Court.

INSOVLENT TRADING

At Law there is a positive duty on the Directors of a company to ensure that their company does not continue to incur debts at a time when the company is insolvent. If any or all Directors of a company breach that duty, the liquidator of the company in question can bring an action against the Directors for recovery of the debts incurred during the period that the company was insolvent. Such a claim made by the liquidator is made against the Directors personally, and renders them personally liable to compensate the company for the amount claimed.

PREFERENCE OR PREFERENTIAL PAYMENTS

Preferential payments, or preferences, are payments or transfers of assets that give creditors of a company a preference or advantage over other creditors of the same company. Payments or transfer made to a creditor of a company prior to the liquidation of the said company may be recovered by the company’s liquidators in certain circumstances.

Before a Court will order the recovery of a preferential payment, it must be satisfied that:

• A transaction was entered into, i.e the payment of money;
• It was between the company that has been placed into liquidation and a creditor of that company;
• It occurred at a time when the company was insolvent;
• It occurred within a certain statutory period before the liquidation of the company in question commenced;
• The transaction gave the creditor and advantage over other creditors; and
• The creditor expected or should have suspected that the company was insolvent.

ENDING A LIQUIDATION

As outlined above a liquidation usually ends with the de-registration of the company being liquidated.

There are two other ways however that a liquidation may end. These are:

• The liquidator of the company appoints a voluntary administrator to the company which leads to a Deed of Company Arrangement; or
• The Court Orders the stay or termination of the liquidation of the Company.

There are a number of reasons why a Court may Order that a liquidation be terminated, including:

• The Winding Up Application and other material was not served upon the Company in the correct manner, or in a way that did not allow the company to properly defend it;
• The company is solvent and should not have been wound up;
• The liquidator has appointed a voluntary administrator and this has resulted in the company entering into a Deed of Company Arrangement; and
• It is just and equitable to do so for any other reason that the Court so deems.

BANKRUPTCY

Bankruptcy is a legal process where a trustee is appointed to administer a person’s affairs in order to provide a air distribution of that person’s assets to their creditors.

An individual may be declared bankrupt in one of two ways:

• They may make themselves bankrupt; or
• One of their creditors may bankrupt them through the Court system.

Bankruptcy is a legitimate and just way for an individual to solve their debt problems, it is also the correct method for creditors to take action against someone for unpaid debts.

For further information on the process involved with bankrupting someone due to them owing you money, please refer to the Bankruptcy and Creditors Statutory Demand page of this website. 

THE EFFECT OF BANKRUPTCY

A person is an undischarged bankrupt from the time a person is bankrupted until they are discharged. During this period the individual:

• Can’t act as a company officer;
• Can’t trade under a registered business name without advising people that they are bankrupt;
• Must make all of the divisible assets available to the trustee that has been appointed to administer their assets;
• Can’t incur credit over an indexed amount without advising the lender that they are bankrupt;
• Must surrender their passport and will have limitation on overseas travels; and
• Must make all books and records and financial statements available, including those or associated entities such as companies and trusts.

A bankrupt may continue to earn income and is encouraged to do so by the trustee in bankruptcy.

All of the bankrupts’ divisible property is controlled by the trustee in bankruptcy. Property includes all property of the bankrupt at the commencement of the bankruptcy and all property received after the date of bankruptcy.

It is important to note that all property owned by a bankrupt individual is not divisible by the trustee in bankruptcy. Divisible property (i.e. the property that can be divided amongst creditors) generally does not include the following:

• Necessary clothing and household items;
• Tools of trade to a certain value;
• A motor vehicle to a certain value;
• Life insurance or endowment policies;
• Certain damages and compensation payments;
• Sentimental property; and
• Superannuation payments.

JOINTLY OWNED PROPERTY IN BANKRUPTCY

The trustee of a bankruptcy estate is entitled to be entered in the place of the bankrupt individual as the owner of any property in the proportion that the bankrupt individual was the owner of the property prior to becoming bankrupt.

The trustee in bankruptcy will generally invite the co-owner of the property to either buy the bankrupts’ interest from the trustee or join the trustee in selling the property.

If the co-owner will not cooperate with the trustee or they cannot agree on a satisfactory arrangement, the trustee in bankruptcy can force the sale of joint property by applying for the appointment of a Statutory Trustee.

CHOOSING THE TRUSTEE IN BANKRUPTCY

If an individual who wants to declare themselves bankrupt and presents a debtors’ petition obtains the consent from a trustee to act as a trustee of the estate, then this individual will become the trustee of the bankrupts estate.

Similarly, if a creditor filing a creditors petition can obtain a consent from a trustee to become trustee of the estate then this individual will become the trustee of the bankrupts estate.

If no consent is obtained the official receiver, the Insolvency and Trustee Service Australia will be appointed as the trustee of the bankrupts estate.

ROLE OF THE TRUSTEE

The trustee has the power to sell any divisible asset of the bankrupt, investigate the affairs of the bankrupt and examine the bankrupt and others under oath, conduct and sell any business of the bankrupt, admit debts and distribute dividends.

The trustee is empowered to exercise all of the rights and powers that the bankrupt would have had if they had not become bankrupt, plus has recovery powers that the bankrupt would not have.

A good summary of what a trustee in bankruptcy attends to is as follows:

• The finding and protection of the assets of the bankrupt;
• Realisation of those assets;
• Conducting investigations into the financial affairs of the bankrupt and any suspicious transactions;
• Make appropriate recoveries;
• Report to creditors;
• Report offences to the Insolvency and Trustee Service Australia; and
• Distribute surplus funds to creditors.

For further queries regarding Insolvency/Liquidation and Bankruptcy, please contact Byron Cannon, Director byron@fclawyers.com.au  or Samuel Barber, Solicitor sam@fclawyers.com.au or (07) 5443 6600.