Winding up or liquidating a company

A corporation goes through liquidation when its operations are terminated and its assets are liquidated to pay off debts. Liquidation is a legal process that can be started by the company's directors, shareholders, or creditors and is governed by the Corporations Act 2001. The liquidator plays a crucial role in the liquidation process, investigating the company's affairs and distributing the proceeds of the liquidation to creditors and shareholders. Liquidation has significant consequences for the company's directors, shareholders, and creditors, and should be carefully considered before it is initiated.

Types of liquidation

Liquidation of a company can be either voluntary or mandated by the court.

Voluntary liquidation is initiated by the company's directors and requires the approval of the company's shareholders. There are two types of voluntary liquidation: members' voluntary liquidation and creditors' voluntary liquidation.

Members' Voluntary Liquidation

To qualify for members' voluntary liquidation, the company must be solvent and have unanimous consent from both the board of directors and the shareholders. In a members' voluntary liquidation, the company's assets are liquidated and the proceeds are divided amongst the company's creditors and its owners.

Creditors' Voluntary Liquidation

When a corporation is unable to meet its current debt obligations, it may seek protection under creditors' voluntary liquidation. In a creditors' voluntary liquidation, all of a company's assets are liquidated and the proceeds are used to pay its creditors in order of priority. If there are any remaining funds after all creditors have been paid, these are distributed to the shareholders in accordance with their respective entitlements.

Compulsory or Court Ordered Liquidation 

Court-ordered liquidation, also known as compulsory liquidation, is initiated by a court order. This occurs when a creditor makes an application to the court to wind up the company due to the company's inability to pay its debts. Once the court order is made, a liquidator is appointed to wind up the company's affairs.

CONTACT OUR 
LITIGATION LAWYERS

RETAINING A LAWYER

If you're thinking about liquidating your company, you should consult with a law firm with expertise in this field. When selecting a law firm to assist with your company's liquidation, keep the following points in mind:
Experience
Experience counts when it comes to liquidation. Choose a law firm with a track record of effectively helping businesses through the liquidation process. A firm with experience in your industry may also be advantageous because they will be familiar with the unique issues that your company may face.
Knowledge
The laws and regulations governing liquidation can be complicated and difficult to understand. Look for a law firm that is well-versed in the Corporations Act of 2001 and its ramifications for the company you run. A firm with experience in litigation can also be beneficial, as this area frequently intersects with liquidation.
Communication
You will need to engage closely with your law firm during the liquidation process to ensure that everything is handled correctly. Look for a firm that communicates effectively, as well as one that is ready to answer your questions and provide direction throughout the process.
Cost
Because liquidation can be costly, it is critical to select a legal firm that offers fair pricing and can provide a realistic assessment of the costs involved.
Pera Lawyers has the experience, knowledge and expertise to advise you about the liquidation process. Our commercial lawyers can help you understand your legal rights and obligations, guide you through the liquidation process, and help you minimize your risk of personal liability.

FREQUENTLY ASKED QUESTIONS

Common questions from clients that our litigation lawyers answer include: 

The liquidator has a number of powers and duties under the Corporations Act 2001, including:


  • Investigating the company's affairs and determining the cause of its insolvency
  • Recovering any voidable transactions, such as preferential payments made to creditors before the company became insolvent
  • Reporting to creditors on the company's affairs and the progress of the liquidation
  • Distributing the proceeds of the liquidation to creditors and shareholders in accordance with their respective entitlements

Liquidation has significant consequences for the company's directors, shareholders, and creditors.


If a director violates their responsibilities under the Corporations Act 2001 by, for example, failing to keep adequate financial records or engaging in business when the company is insolvent, the director may be held personally liable for the debts of the company. In the future, directors may also be barred from serving in executive roles at corporations.


If there is no money left after paying off the company's debts, the shareholders could lose their investment.


Depending on how much money can be raised through the sale of the company's assets, creditors may only receive a portion of the sum owing to them by the company.

When a corporation is liquidated, its directors may be held personally liable for any obligations that the company is unable to repay. This is referred to as directors' liability in liquidation.


The Corporations Act of 2001 imposes a duty on directors to prevent insolvent trading. Insolvent trading happens when a corporation incurs obligations that it cannot repay and the directors should have known that the company was insolvent or was about to become insolvent. A director may be held personally accountable for the company's obligations if he or she fails to prevent insolvent trading.


Aside from preventing insolvent trading, directors must work in the best interests of the company and its shareholders. If a director breaches this obligation and the firm suffers losses, the director may be held accountable for such losses.


Directors may also be held accountable for any violations of the Corporations Act 2001 or other laws that happened during the company's operation. For example, if a director fails to comply with tax regulations, they may be held personally accountable for any outstanding tax liabilities.


It should be noted that not all directors will be held accountable in the event of a liquidation. Liability will be determined by the facts of the case, including the activities of the director and the financial state of the company.


If you are a director of a company that is about to be liquidated, you should get legal advice to understand your potential liability and take steps to mitigate your risk. A company liquidation lawyer can help you negotiate the complicated legal problems involved and safeguard your interests as a director.

Client Testimonials

PERA LAWYERS

Copyright © 2020 Pera Lawyers Pty ltd (ACN 646 048 419) as trustee for the Pera Trust trading as Pera Lawyers (ABN 454 994 910 21) - All Rights Reserved.


LIABILITY LIMITED BY A SCHEME APPROVED UNDER PROFESSIONAL STANDARDS LEGISLATION