Insolvency – no matter the circumstance – is a stressful time for business owners. When a company finds itself in the situation where they are facing court liquidation due to exhausted negotiations, from an application by a creditor or to settle a dispute, there are key process milestones to consider.
What is a court liquidation?
A court liquidation is initiated when a judge orders that a liquidator be appointed to wind up a company. A broad range of parties can apply to the court for a wind-up order, but a creditor typically initiates the process because a company is insolvent due to non-payment under a statutory demand.
Once an order is made by the court, control of the company and its assets are placed in the hands of the liquidator, with a view to making an equitable distribution to creditors.
Court liquidation process
The court liquidation process can be a useful tool in circumstances where a creditor is seeking recovery of an outstanding amount and:
- all other informal avenues of negotiation have been exhausted. Where there are assets in the company that can be used to satisfy the debt, the liquidator will realise these assets and make a distribution to creditors; and/or
- the creditor suspects that some wrongdoing has been conducted by the directors. A court-appointed liquidator has an obligation to investigate and report such wrongdoing to ASIC, which may result in director banning and/or civil or criminal liability. In addition, if assets have been transferred out of the company, a liquidator has the ability to investigate and recover these assets for the benefit of creditors.
In addition, the court liquidation process can also be used where there is a dispute between directors and/or members and a resolution cannot be reached.
For example, the court may order the winding up of a company if the directors have considered only their own interests rather than the interests of the shareholders. The appointment of a liquidator by the court means that decisions regarding the operation (and potential dissolution) of the company are made by an experienced, independent third party.
Where an applicant is concerned about asset dissipation while waiting for the outcome of a winding-up application, a further application can be made for the appointment of a Provisional Liquidator. This type of appointment gives interim control to a liquidator and can be used where there is a perception that the assets and affairs of the company are in jeopardy.