When a company, trust, or partnership can no longer pay its debts, it becomes insolvent. Warnings that insolvency is imminent include: a history of rolled-forward (and accumulating) losses, a low level of liquid assets relative to the size of the liabilities, overdue government fees and taxes, an inability to raise capital or loans, and being placed on ‘cash-on-demand’ terms by suppliers.
The Corporations Act 2001 governs the process by which a company is liquidated, so that proceedings are fair, orderly, prompt, efficient and transparent. Liquidators will also have professional codes of conduct and accounting standards to adhere to.
A court will then appoint a liquidator to conduct the winding up process. The liquidator is required to be a member of Chartered Accountants Australia and New Zealand or CPA Australia. The liquidator will initially be advised by the directors about the state of the company and be provided with all relevant financial records.
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The liquidator’s role combines elements of fiduciary trustee, agent, officer of the corporation, and in some cases, an officer of the Court. The liquidator owes fiduciary duties to the company, its creditors and members. The liquidator is required to act honestly, fairly and impartially at all times, and must avoid any conflicts of interest.
Liquidators should exercise their powers, and discharge their duties, with the degree of care and diligence that a reasonable person would exercise if they were a director or officer of the company.
When the liquidator is appointed, all of the powers of the directors are suspended and the company must cease to carry on business except to the extent that the liquidator believes it will assist the beneficial disposal of the assets. The liquidator will take over operation of the company and can deal with the property of the company.
The primary functions of the liquidator are to:
- Wind up the company
- Ascertain and recover the company’s property
- Distribute the company’s assets equitably among its creditors
- Examine what caused the liquidation and whether any improper dealings took place
In relation to the administration of the liquidation, the statutory duties of the liquidator include:
- To ascertain and take possession of all assets of the company. The liquidator is empowered to take into custody all property which the company is or appears to be entitled to.
- To preserve the assets of the company by taking an inventory, insuring the assets, investing funds wisely and defending any claims initiated against the company to recover assets or claims for damages.
- A duty to liquidate and realise the value of the assets for the benefit of the company.
- A duty to report and investigate on the affairs of the company, including ascertaining the liabilities of the company.
- Administrative duties which require certain documents to be lodged with governmental bodies, and the keeping of accurate accounts and records of all matters relating to the liquidation.
For more information, see the ASIC website.
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