What is a Court Ordered Liquidation?

In Short

• Court-ordered liquidation occurs when a court orders a company to be wound up, typically due to insolvency.
• The process involves appointing a liquidator to sell assets and pay creditors.
• Affected businesses should act quickly to manage their interests and understand their obligations.

Tips for Businesses

If your company is facing insolvency, it is important to understand the court-ordered liquidation process. Seek legal advice early, as this may help protect your personal liability and minimise financial damage. Also, ensure that you cooperate with the liquidator to avoid legal complications.

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Table of Contents

• The Liquidator’s Role
• What Happens at a Creditor’s Meeting?
• Can a Creditor Vote at a Creditors’ Meeting?
• The Priority of Distribution
• Key Takeaways
• Frequently Asked Questions

As a third party creditor, you might find yourself in a situation where a company owes at least $4,000. Likewise, that amount is due and payable. Under the Corporations Act 2001 (Cth) (the Act), you can issue a demand for payment of the debt, known as a statutory demand. This must comply with the requirements of the Act regarding its form and content.  If the debtor company does not respond to the validly issued statutory demand within 21 days, it will be presumed insolvent. Once that occurs, you can apply to the court to wind up the debtor company. This is a court ordered liquidation. If your application is successful, a court will appoint a liquidator responsible for winding up the debtor company’s affairs.

This article will provide creditors with an overview of various aspects of the liquidation process, including the role of the liquidator.

The Liquidator’s Role

The liquidator’s overall duty is to the debtor company’s creditors. Their powers and responsibilities are extensive and include: 

• collecting and realising the company’s assets, including protecting company assets where necessary;
• investigating the debtor company’s affairs and reporting to the creditors;
• reviewing the causes of the debtor company’s failure;
• distributing funds in order of priority of creditors (after the payment of the liquidator’s costs); and
• applying to ASIC to deregister the debtor company (once the liquidation is complete).

What Happens at a Creditor’s Meeting?

A liquidator can call a creditors’ meeting at various stages throughout the liquidation process. At the meeting, a liquidator will inform the creditors of their progress and seek approval of their fees. Indeed, where the court has appointed the liquidator, they only need to call a creditors’ meeting in circumstances where:

• they need creditor approval for an action;
• creditors pass a resolution requiring a meeting; or
• they are requested to do so by creditors representing one-tenth of the value of the amount owing by the debtor company. 

Additionally, a creditors’ meeting is also a good opportunity for creditors to provide the liquidator with any relevant information about the debtor company. The meeting’s chairperson (typically the liquidator) must lodge the minutes from the meeting with ASIC. Creditors can obtain a copy of these minutes through ASIC after paying any requisite fee.

Can a Creditor Vote at a Creditors’ Meeting?

Before a creditor can vote at a creditor’s meeting, they must first lodge a ‘proof of debt’ form with the liquidator (discussed below). A creditor can then either attend the meeting and vote themselves or appoint a proxy who can attend the meeting and vote on their behalf. If appointing a proxy, the creditor may specify how that proxy is to vote or, the creditor may allow the proxy to decide how they vote.

Proof of Debt

A ‘proof of debt’ is a form that a creditor lodges with a liquidator. It must contain sufficient information about the debt to ‘prove’ to the liquidator that the debt is owing. Creditors should attach copies of any tax invoices or other supporting documents to the proof of debt form.  

Once a creditor lodges a proof of debt form, the liquidator has seven days to notify them of the admission or rejection of their claim. Therefore, if the liquidator has rejected your claim and you cannot resolve the matter with them, it is crucial that you immediately seek legal advice.  A liquidator can only distribute funds to creditors who have lodged proof of debt forms which the liquidator has ultimately admitted.  

The Priority of Distribution

A liquidator will pay the distribution of any funds in the following order of priority:

1. the costs and expenses of the liquidation, including the liquidator’s fees;
2. outstanding employee wages and superannuation, if any;
3. outstanding employee leave entitlements, if any;
4. employee retrenchment pay, if any; and 
5. any unsecured creditors.  

Each category is paid in full before the next category receives any funds. Indeed, if there are insufficient funds to pay the whole of a category in full, the liquidator will pay the balance of the funds pro-rata. If this occurs, any remaining categories will receive nothing.  

Key Takeaways

If a company owes you at least $4,000, you can take steps to recover the debt or have the debtor company wound up by the court.  If court ordered liquidation commences and a court appoints a liquidator, the liquidator has extensive powers to recover and distribute the debtor company’s assets. The process to participate in the liquidation of a debtor company is as follows. Generally, you:

• must validly issue a statutory demand;
• must prove your debt to the liquidator (with supporting documents and evidence);
• may attend and vote at any creditors meetings. Alternatively, your proxy can attend; and
• should assist the liquidator’s investigations as much as possible.

Once liquidation occurs, the liquidator will distribute the funds in order of priority. 

Whether you are a creditor who is owed money and wish to pursue the recovery of that debt or your debtor has already been placed into liquidation, it is sensible to obtain legal advice.

If you have any questions about recovering a debt, our experienced disputes and litigation lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions