What is liquidation?

A members' voluntary liquidation (MVL) is for a solvent company, one able to pay its debts within 12 months: the directors swear a declaration of solvency and the purpose is an orderly closure with a distribution to shareholders. A creditors' voluntary liquidation (CVL) is for an insolvent company and starts with a special resolution of the members, usually on the directors' recommendation, or with a creditors' resolution at the end of a voluntary administration. A court-ordered liquidation follows a winding-up order on the petition of a creditor, member, liquidator or regulator.

On commencement a liquidator, an insolvency practitioner, becomes the company's officer and takes control of its property and business. Directors' powers cease, only the liquidator can bring or defend claims for the company, unsecured creditors are in practice stopped from enforcing, and ASIC is notified.

The liquidator takes control of the company's property and records, investigates its affairs including director conduct and voidable transactions, realises the assets by selling property and recovering debts, and distributes the proceeds in statutory order. They report to ASIC, the ATO and creditors and can litigate where there is something to recover.

Under the Corporations Act the liquidator can sue related parties, set aside unfair preferences, uncommercial transactions and unreasonable director-related transactions, and pursue directors for insolvent trading under section 588G. Directors who kept poor or false records face civil and criminal exposure, and can be disqualified or made personally liable. Liquidators also administer employee entitlements and work with the Fair Entitlements Guarantee scheme where it applies.

Secured creditors generally rely on their own security: a registered PPSR interest usually has priority over the liquidator's claims. But a security interest over circulating assets, the old floating charge, ranks behind employee entitlements under section 561, while a security interest over non-circulating assets is not affected. The remaining funds go first to the costs of the winding up, then employee wages and superannuation, then injury compensation, then leave entitlements, then retrenchment pay, subject to statutory caps for excluded employees such as directors, then unsecured trade creditors pro rata, with shareholders last.

The ATO proves as an ordinary unsecured creditor for most tax debts. What matters more for directors is the director penalty regime, which can make them personally liable for PAYG withholding, GST and superannuation guarantee amounts. In most insolvent liquidations unsecured creditors receive little or nothing, so when a customer goes into liquidation, confirm the appointment, preserve invoices and delivery evidence, check your security on the PPSR and lodge a proof of debt promptly.