What are some frequently asked questions about corporate insolvency
Knowledge of the legal framework can give you back a sense of control
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When the members or directors of a company wish to bring their company to an end by consensus, and the company is solvent, they can do so by way of a members voluntary liquidation. A liquidation will be appointed and will undertake the standard tasks expected of the liquidator.
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Sometimes, when a company is insolvent, or the directors of the company have determined that the company is likely to become insolvent, they may decide to appoint a liquidator in insolvency, rather than alternatives such as appointing a voluntary administrator or small business restructuring practitioner. You should always get advice on whether a creditors’ voluntary liquidation is suitable in the circumstances.
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Unfortunately, this is an area that can cause directors, and the company, quite the headache if a transfer of money or assets from the company is done inappropriately.
A liquidator, once appointed, has a legal obligation to investigate any transactions occurring prior to appointment and during a period of insolvency. These transactions might include preferential payments to some creditors over others, un-commercial loans or undervalued sales or transfers of property out of the company to related parties or others, among other things.
These types of transactions are called voidable transactions and a liquidator can commence legal action against the recipients of transfers of money or assets out of the company, and against the directors for compensation. In some instances, certain transactions might attract the attention of ASIC.
Always get advice, especially when you know or suspect your business is insolvent before making any transfers of assets or further transactions such as payments.
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Secured creditors will usually retain their rights over any secured property in the company, and can take steps in relation to their security interests. If there are any shortfall amounts owing to a secured creditor, that creditor needs to lodge a proof of debt with the liquidator for that amount.
An unsecured creditor usually loses their rights of enforcement once a company enters liquidation. This means they cannot sue to recover payment or for breaches of contract. Instead, they can lodge proof of debt with the liquidator and share in any dividends available to creditors out of the sale of assets by the liquidator.
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Once appointed, the liquidator effectively represents and acts in the interests of the company creditors.
The liquidator does not act for the directors. Directors need to get their own separate legal advice.
The directors have legal obligations to hand over the books and records of the company, provide a report on the assets and liabilities of the company and assist the liquidator with any reasonable requests.
A failure to cooperate with the liquidator can be detrimental. Always get advice.
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Generally, a liquidation does not extinguish a personal guarantee.
Usually, a personal guarantee relates to a personal obligation to guarantee and/or indemnify the company’s creditor should the company fail to make payments or breach a contract.
Directors need to get personal advice to understand the enforcement and impact of any guarantees on their personal assets.
Generally, a liquidation does not extinguish a personal guarantee.
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We help you understand the essentials.
Liquidation
When a company is placed into liquidation, this is generally occurs because the company is insolvent and because the company has no realistic chance of resolving its financial distress and becomes necessary to avoid additional financial and legal risks. This is usually because the financial situation of the business is dire and there is no prospect of restructuring or salvaging the business. A liquidation should be a last resort, and there are opportunities to avoid such a consequence. Sometimes, your creditors will have the power to liquidate your company.
Insolvent Trading
if your company incurs a new debt at a time where the company is insolvent, or where it reasonable to suspect that your company is insolvent or could become insolvent because, you and other directors could be engaged in insolvent trading. Learn about what this means and how to avoid this.
Voluntary Administration
Sometimes, risks of insolvency and liquidation might be avoided early via a corporate restructure or voluntary administration. A corporate restructure can involve making changes to the legal and operational set up of your company. For example, this might include changes to ownership, management, leadership, shareholders, operations & policy, employee structures & roles, among other things. Voluntary administration involves the appointment of a voluntary administrator with the view to formally restructuring of or the sale of the business. Learn more.
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