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Business & Company: Insolvency & Liquidation

Home >> Legal Information Centre >> Legal Topics >> Business & Company >> Insolvency & Liquidation

Frequently Asked Questions

You need to check the relevant legislation in your State and Territory, as the rules are different in each jurisdiction.

What should you do if you think your company is experiencing financial difficulty?
- If you believe your company is in financial difficulty you should seek accounting and legal advice as soon as possible.
- Obtaining prompt professional advice not only increases the likelihood of your company surviving but also reduces the risk of penalties for breaches of duty.
- An insolvency practitioner can investigate your company’s affairs and advise you of its financial situation including its solvency.
- An insolvency practitioner can also explain the formal options available to you to should your company be in severe financial distress. These options include:
- voluntary administration;
- liquidation; and
- receivership.
- Typically only administration and liquidation are options for directors. A receiver is usually appointed by a secured creditor though may be appointed by a director who is also a secured creditor.
- You can use our Phone a Lawyer service for a preliminary legal consultation if you think you may need legal advice.
>> Read more & related FAQ's
What should you do if you believe your company may be insolvent or approaching insolvency?
- If your company may be insolvent or approaching insolvency you should ensure your company does not incur further debt.
- You should discuss your company’s financial position with your financial advisor. If your company is not in a position to restructure or refinance you may need to appoint a voluntary administrator or liquidator.
- An insolvency practitioner can explain to you the procedure involved and your obligations throughout the process.
>> Read more & related FAQ's
What are your duties as the director of a company that may be insolvent or approaching insolvency?
- The law defines director broadly so that a director includes:
- a person who has been formally appointed to the position of director; as well as
- a person who has not been validly appointed to the position of director but whose instructions and wishes are typically acted upon by the company’s directors. This is termed a ‘shadow director’.
- In addition to your obligation to ensure your company complies with general and specific laws applying to its operations as a director you are subject to a number of other duties both at common law and under legislation including a duty:
- not to place yourself in a conflict of interest with the company;
- to act in good faith and for a proper purpose;
- to act with care and diligence;
- not to make improper use of information;
- not to make improper use of your position; and
- to prevent insolvent trading.
- Your primary duty is to the shareholders. However if your company is insolvent or faces a real risk of insolvency your duties extend to creditors. This includes company employees with outstanding employee entitlements.
- Breaches of your duties may result in serious sanctions such as disqualification from management or payment of compensation.
- The court distinguishes between breaches of duty that are offences and those that are not.
- Generally an offence requires a breach involving reckless or intentional dishonesty.
- Certain offences such as insolvent trading are punishable by imprisonment.
>> Read more & related FAQ's
What can you do if your company receives a statutory demand?
- A statutory demand is a demand made under legislation. Failure to respond to a statutory demand can have serious consequences. Therefore if you receive one you should not ignore it.
- For a statutory demand to be valid it must:
- be in the required form;
- state the debt and amount claimed;
- be signed on behalf of the creditor or the creditor's solicitor;
- provide an address for service; and
- be accompanied by an affidavit from the creditor or in the case of a court judgment a copy of that judgment.
- The statutory demand procedure can only be used for certain types of debts. The debt in question must be:
- owed by the debtor company;
- for an amount of $2,000 or more; and
- for a liquidated sum of money that is due and payable at the date of the statutory demand.
- If your company is served with a statutory demand within 21 days you must either:
- repay the debt;
- enter into a satisfactory arrangement with the creditor;
- persuade the creditor to withdraw the statutory demand in writing;
- apply to the Supreme Court or Federal Court to have the statutory demand set aside on certain grounds; or
- apply to the court seeking an extension of the time for making the application to set aside the demand.
- The court may set aside a statutory demand in a number of circumstances including where:
- there is a genuine dispute as to the debt’s existence;
- there is an off-setting claim; or
- the demand contains a defect that is likely to cause substantial injustice unless the demand is set aside.
- If served with a statutory demand you should contact your lawyer immediately to determine whether there may be grounds for having it set aside. Failure to respond promptly to the statutory demand could have serious consequences.
- You can use our LegalPlan™ member service to call for tenders from experienced lawyers who may be able to assist you with this.
>> Read more & related FAQ's
What rights do creditors have in a liquidation?
- You have a number of rights including the right to:
- attend meetings;
- participate in dividends;
- receive creditors’ reports;
- inspect certain books of the liquidator; and
- make a complaint to the court or ASIC regarding the liquidator’s conduct.
- A lawyer will be able to explain your rights at the various stages of the insolvency process.
>> Read more & related FAQ's
What rights do employees have in a liquidation?
- Typically the liquidation of a company will terminate your employment.
- If funds remain after payment of the fees and expenses of the liquidator you have the right to payment of your outstanding entitlements in priority to other unsecured creditors. Classes of priority employee entitlements exist and are paid in the following order:
- outstanding wages and superannuation;
- outstanding leave of absence including where applicable annual leave and sick leave and long service leave; and
- retrenchment pay.
- Each class is paid in full before the next class is paid. If there are insufficient funds to pay a class in full the funds are paid on a pro rata basis.
- If you are a director or a director’s spouse or relative any priority claim you have for the period you are a director, spouse or relative is limited to a maximum of $2,000 for outstanding wages and superannuation and $1,500 for outstanding leave entitlements.
- You may also be entitled to make a claim against the FEG which is a payment scheme established to assist employees whose employment is terminated due to the liquidation or bankruptcy of their employer and who are owed certain employee entitlements.
- If you are a director or a director’s spouse or relative limits and restrictions apply.
- A lawyer can explain the consequences of insolvency on employees to you in detail.
>> Read more & related FAQ's
What rights do directors have in a liquidation?
- Upon appointment of the liquidator you lose control of your company and your powers are severely curtailed.
- You are required to assist the liquidator and must:
- inform the liquidator of company property and its location;
- provide the company’s books and records which are in your possession to the liquidator;
- advise the liquidator of the location of the company’s other books and records;
- within a certain timeframe after the liquidator’s appointment provide a written report about the company’s:
- business;
- property; and
- financial circumstances;
- meet with the liquidator and help them with their investigation; and
- not obstruct the liquidator in carrying out their duties.
- You should contact a lawyer for detailed information regarding your responsibilities during the liquidation process.
>> Read more & related FAQ's
In a liquidation how are distributions to creditors made?
- Generally the order in which funds are distributed are as follows:
- the costs and expenses of the liquidation including the fees of the liquidator; then
- employee wages and superannuation entitlements; then
- other amounts owed to employees for example in relation to:
- annual leave;
- sick leave; and
- long service leave; then
- unsecured creditors.
- Dividends are only paid in relation to debts or claims that have been proved.
- If there are likely to be funds available for distribution the liquidator will ask creditors to lodge formal proof of debt forms.
- The liquidator will also publish a notice in a daily newspaper in those states where the company carried out its business.
- Creditors must lodge their completed proof of debt forms with any relevant invoices or other supporting documents by the specified deadline.
- The liquidator may request additional evidence from a creditor.
- If a creditor provides insufficient evidence of the debt the creditor’s claim may be rejected by the liquidator.
- Within 7 days the liquidator must notify each creditor if their claim is rejected.
- A creditor dissatisfied with the liquidator’s decision should contact the liquidator promptly to seek to resolve the matter.
- If the matter cannot be resolved with the liquidator the creditor can appeal the liquidator’s decision and has 14 days after receiving the notice within which to do so. The court can extend the timeframe to appeal.
- If an appeal is not made within the allowed time the decision made by the liquidator is final.
- Claims which are accepted by the liquidator form a pool of creditor claims to which payments are made from the company’s assets on a pro rata basis.
- While the basic principle of liquidation is that all creditors are to share equally in the assets of the company by way of pro rata payments certain groups are given a priority.
- After all priority payments have been made any remaining funds are distributed to creditors by way of dividends.
>> Read more & related FAQ's
What is the function of a liquidator?
- In carrying out their role a liquidator must:
- collect, protect and sell the assets of the company;
- investigate and report to creditors about the company’s affairs including any transactions involving the company that may be set aside and any possible claims against company officers;
- investigate the failure of the company and any possible offences by persons involved with the company;
- convene creditors’ meetings to keep creditors informed of the liquidation’s progress to seek their views on matters and to obtain approval of fees;
- after payment of the costs of the liquidation distribute remaining funds in accordance with the law, regulations and rules; and
- apply for the deregistration of the company upon completion of the liquidation.
>> Read more & related FAQ's
How long will a liquidation last?
- There is no set time period. A liquidation lasts until the liquidator has carried out his or her functions however the liquidator typically tries to conclude the liquidation as soon as practicable.
>> Read more & related FAQ's
What is the difference between liquidation and voluntary administration?
- The primary difference between the two is that an administration typically aims to help the company repay its debts in order to avoid insolvency and continue trading if possible where a liquidation involves winding up the company’s affairs and dissolving the company.
- Often a liquidation follows an administration. However the administration process gives the company the chance to reorganise its affairs so that it may continue to operate and become profitable.
- You can use our free and anonymous Ask a Lawyer service if you have a particular issue you want to know more about.
>> Read more & related FAQ's
What is the effect of a liquidation on unsecured creditors?
- Creditors lose their right to recover money from the company but acquire a right to prove or claim for dividends in the liquidation.
>> Read more & related FAQ's

View more Information on Insolvency & Liquidation

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Create a Legal Document

Click, Customise, Print.

Find a Lawyer

Find the right lawyer for you, in your region and the area of law you need.

Ask a Lawyer

Don’t guess! Your question is answered fast by lawyers in your region.

Phone a Lawyer

Book a preliminary phone consultation up to 30 minutes with an experienced lawyer in your region

LegalPlans

Free Legal Information Centre

Practical legal information written by lawyers to help you make informed choices.

Legal Guides

FAQs

Q&A by Lawyers

Glossaries

Articles

Business & Company: Insolvency & Liquidation

Frequently Asked Questions

View more Information on Insolvency & Liquidation

Connect with a Lawyer