Day 152 Winding up

Winding up

When a company decides to end its business, the process of liquidation takes place. Generally, the purposes of winding up a company are: ensure all creditors (secured or unsecured) share the distribution of the remaining assets in the company equally and fairly; protect the wider business community’s interest by shut down desperately insolvent business; and find out the reason behind this insolvent. During the progress, the liquidator would sell the company’s existing property except those held as security. In addition, he/she would also try to obtain extra funds available such as the voidable transactions, void security interest and remedies from directors. Therefore, these funds will be allocated to all creditors, and among the members as well if there is any surplus asset left. 

There are four major categories of liquidation processes. To illustrate, these are voluntary liquidations by members or creditors, and compulsory winding up by the court under the condition of insolvent or others. It is relatively easy to distinguish these types of the liquidation process, since the procedures after the liquidator appointment are the same. Hence I would like to explain the initial steps and circumstances when these situations apply. Firstly, the member’s voluntary liquidation must prove that the company is solvent. The section 95A Corporations Act determined the term as ‘ able to pay off all debts on due in the next 12 months’. As a consequence, the initial step for this approach is the provision of solvency statement.(S.494) After that, the members need to pass a special resolution on the general meeting, in order to acknowledge the liquidation. It is important for the company remains solvent on that period, otherwise the liquidator should seek other methods such as: administration, creditors winding up or court’s order to liquidate the company. On the other hand, the creditors’ voluntary winding up applies to the insolvent business. It can be issued by members’ special resolution (s.491) or on creditors’ vote if the business is under administration/deed of company arrangement.(s.446) Besides these two voluntary methods, the liquidation can be enforced by the court. In the case of insolvency, the creditor would normally use the statutory demand to prove the company will not be able to pay its debts. So, it this SD is not responded or challenged by the company within 21 business days, the court will determine the business is at insolvency and make up liquidation order. Before this application is recognized, a provisional liquidator may be appointed as to safeguard the company’s assets. Moreover, there are other situations listed under S.461 where the court may also order a compulsory winding up. For instance, if the company is not commencing business for a year, has oppressive or unfair conduct or other circumstances where court considers is just and equitable. 

After the liquidator is appointed, he/she will carry on his/her duty. The company’s operation and directors’ power will cease except when the liquidator believes is it necessary to retain that power. In the end, the assets and other funds recovered will be distributed to creditors and then to members. Thereby the business can be deregistered.