- Liquidation is the process of winding up a company in an orderly manner. The end result is the distribution of any remaining assets to those owed by the company;
- Liquidators, the professionals that oversee a liquidation, are appointed by shareholders, creditors or the Court, but company directors have an important say in their appointment;
- Once appointed, there are two methods for replacing liquidators: creditor resolution or court replacement. Neither option is particularly useful for dissatisfied directors. The focus for directors should always be on the initial appointment of a liquidator and seeking professional advice before doing so.
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When do liquidators get appointed?
Liquidation occurs where a business is wound up in an orderly manner set out in legislation. The assets of the business are sold and distributed to creditors, with any surplus going to shareholders. A Liquidation can be voluntary or involuntary. And it can occur whether the business is solvent (able to pay its debts/bills as they fall due) or insolvent (unable to do so). In all forms of liquidation, the process is overseen by an independent professional known as a liquidator.
Liquidations are categorised according to who initiates the liquidation:
- A members’ voluntary liquidation (MVL), where the shareholders of the company (‘the members’) resolve to wind up a solvent company;
- A creditors’ voluntary liquidation (CVL) where the creditors vote at the end of voluntary administration or following a terminated ‘deed of company arrangement’ (DOCA) for the liquidation of an insolvent company. To find out more about these processes click here and here. As with an MVL, this process can also be initiated by a resolution of the shareholders.
- Court liquidation, where the court appoints a liquidator to wind up an insolvent company on an application from a broad range of parties.
To understand the liquidation process better read: What is a liquidation?
The liquidation process itself can be stopped via an application to the court for the process to be stayed or terminated. This is a step sometimes taken by directors where the creditors are satisfied with their payments to date (i.e. all debts are considered paid) and the company is no longer considered insolvent. A determination will be made entirely at the discretion of the court. This is likely to be an expensive process given all the creditors need to be paid in full as well as the liquidator’s fees. There is also a requirement that a court is satisfied that the newly restored company directors have appropriate “commercial morality”. Termination applications are usually only started by directors who mistakenly allow a company to be wound up by failing to receive a winding-up process (such as if the ASIC registered address is not updated).
The director’s role in the appointment of a liquidator
One might ask if it shareholders, creditors or the Court that initiate the liquidation, what say do directors have in the appointment of a liquidator?
Directors (at law) have an indirect say in the appointment of liquidators through the following mechanisms:
- In the case of a MVL, the Directors may initiate the meeting where shareholders vote on a liquidation;
- In the case of a CVL, the Directors may initiate a Voluntary Administration, and appoint a voluntary administrator, who subsequently becomes the liquidator;
- If a liquidation is otherwise required, the directors may apply for a court liquidation.
The reality, however, is that the directors usually select the liquidator because in most small-to-medium sized enterprises the directors and shareholders are the same persons.
The choice of liquidator can have a substantial impact on directors. This includes:
- the power of a liquidator to investigate directors and report impropriety to the authorities;
- the ability of liquidators to engage with the media about the behaviour of directors.
In all cases, it is at this crucial appointment stage where the directors can have a say on the appropriateness of a given liquidator. Once appointed the obligation of the liquidator is legally obliged to act only in the interests of creditors and shareholders. They do not act in the interest of, or at the behest of, directors. Directors often complain that insolvency practitioners are like a ‘Mr Jekyll and Mr Hyde’, friendly and gregarious upfront to obtain the appointment and then aggressive once appointed. This situation is not the fault of the insolvency practitioner, who is both running a business and fulfilling legal duties, but the fault of policy makers who have unrealistic expectation of privately appointed liquidators.
For more about the considerations that should go into selecting a liquidator see how do you choose the right liquidator?
Liquidator replacement via creditor resolution
Replacement of a liquidator might be sought where it is perceived that a liquidator is acting improperly or breaching their duty of independence. For more information on reviewing the conduct of liquidators, see How to review the conduct of a liquidator.
In many cases, it will be the creditors who are dissatisfied with the conduct of the liquidator. After all, the liquidators are obligated to the creditors, not to the directors of the company or the company itself. Creditors have the right, at any time, to propose the removal and replacement of the liquidator.
If a creditor wishes to replace a liquidator via this mechanism, they should first approach a registered liquidator and seek their written consent for appointment. The creditor seeking a replacement liquidator must request the existing liquidator to call a meeting. Note, however, that this is not a guaranteed method for replacing the liquidator. The existing liquidator is not required to comply with any request that is ‘not reasonable’.
Liquidator Replacement via Court Determination
Liquidator replacement via creditor resolution will not be available in many cases. It may be that creditors cannot agree on a replacement liquidator, or that a non-creditor, such as a director, seeks the replacement of a liquidator.
In that case, an individual’s only recourse is to apply to the court under section 447A of the Corporations Act 2001. This section provides the court with broad powers to make orders as it sees fit in relation to liquidation.
This application to the court allows creditors, others with a financial interest and directors apply to the court for an order:
- For a determination in relation to any matter related to the liquidation;
- An order that an individual be replaced as the liquidator;
- Remuneration orders.
It should be emphasised that directors will not be able to use this option if they merely disapprove of the liquidator’s actions. They will need to demonstrate that the liquidator is failing to perform their legal duties.
- The best opportunity for a director to have a say on who would be an appropriate liquidator, is before the initial appointment;
- The director can exert their influence on the appointment of a liquidator in a variety of ways. This may occur through calling a meeting of shareholders (in an MVL), through appointing the Voluntary Administrator (in a CVL) or via applying directly to the Court;
- Once appointed, the director will have little ability to replace the liquidator. The only option available will require application to court, a clear breach of duties, and will be very costly.