Many people confuse the roles of liquidators and administrators when a company enters financial difficulty or is wound up. Below, we provide a general overview of a liquidator’s role and purpose.
What is the Purpose of a Liquidator?
A liquidator’s primary function is to collect a company’s property and apply the assets in paying the company’s creditors, and distribute any surplus among the company’s members. A further purpose of liquidators is to investigate the cause of the company’s collapse and business’ conduct to report to the Australian Securities and Investment Commission (ASIC).
There are two types of liquidators:
- Registered liquidators; and
- Official liquidators (who are also registered liquidators).
Liquidators in a voluntary winding up are registered liquidators, registered by ASIC as a person qualified as a liquidator. Liquidators in a compulsory winding up must be official court-appointed liquidators. Official liquidators have further experience as determined by ASIC.
What is the Liquidator’s Role?
The role of a liquidator differs from that of an administrator. The role of a liquidator is as follows:
- Wind up the affairs of the company;
- Distribute the company’s assets among its creditors equitably; and
- Examine the circumstances before the liquidation and the causes of the company’s failure and consider whether further inquiry is necessary.
Liquidators have a duty to act honestly, avoid any conflict of interest and to act impartially. They have a high standard to exercise a reasonable duty of care and skill in performing their role.
A liquidator may need to commence court proceedings to enforce a company’s entitlement to assets. For example, if there has been an uncommercial transaction where the company’s property has been transferred.
How are Administrators Different?
Administrators are appointed so that companies in financial distress, insolvent or likely to become insolvent, have the opportunity to develop and implement a restructuring plan with creditors called a deed of company arrangement, or otherwise plan for a sale of assets by the appointment of a liquidator. Administration can be a precursor to liquidation.
Who Can Be a Liquidator?
Liquidators are practicing accountants who have studied both accounting and law. A person is determined a registered liquidator or official liquidator on application to ASIC.
A person cannot be appointed as a company’s liquidator without leave of the court if they have a connection with the company, including:
- Debtors or Creditors of the company (over $5,000); or
- Auditors, officers or company employees of the company.
The courts are particularly concerned with the appearance of independence. Notwithstanding the restriction of appointment, certain connections do not disqualify a liquidator’s appointment to a voluntary winding up if the creditors resolve that a liquidator shouldn’t be disqualified.
Questions? Get in touch.