The Corporations Act 2001 distinguishes between two types of liquidation:
Liquidation is the process whereby the assets of a corporation are realised in an orderly manner and the proceeds distributed among creditors of the company in satisfaction of their claims against the company. Any surplus funds are returned to members. On finalisation of the liquidation process, the company is deregistered and consequently ceases to exist.
The Court may order that a company be wound up in insolvency or on certain other grounds.
A winding up in insolvency is generally sought by a creditor following failure by the company to comply with a statutory demand for repayment of debt. Historically, the failure to pay a debt has been the most common ground for application to the Court for a winding-up order, although other classes of person also have standing to apply for a winding up in insolvency.
Amendments to the Supreme Court Rules effective March 2000 require an applicant for a winding-up order to obtain the consent of an Official Liquidator prior to the hearing of the application. In the absence of any conflict of interest, the Court will usually appoint the applicant's nominee to be Official Liquidator should a winding-up order be made.
The liquidator's powers are codified in the Corporations Act 2001. The liquidator is charged with the realisation or disposition of the assets of the company for the benefit of creditors generally. S/he owes no special duty to the creditor or party who made the winding-up application. S/he is further required to investigate the affairs of the company to determine whether the company or its officers had committed any fraud, negligence, misfeasance, breach of duty or trust or any other offence in relation to the management of the company. If so, the liquidator is required to report to the Australian Securities and Investments Commission (ASIC).
The liquidator's investigation may also disclose certain actions which may be available to the liquidator - such as the recovery of insolvent transactions or potential litigation e.g. for negligence by the directors.
When the liquidator has realised all available assets and pursued all potential areas of recovery, the funds in his/her possession are to be applied to discharge the liabilities of the company and if any surplus exists, to be returned to the members. The priority in which debts are to be repaid is specified in the Corporations Act 2001.
On finalisation of the liquidation and distribution of all funds, the company will be deregistered and cease to exist.
A voluntary liquidation, as the term implies, is instigated by the actions of the directors. There are two types of voluntary liquidation:
Members voluntary liquidation
Creditors voluntary liquidation
Whether or not a voluntary liquidation will be a members or creditors voluntary liquidation is dependent upon the capacity of the company to pay its creditors.
Where a company will be capable of paying its creditors in full within 12 months, the winding up will be a member’s voluntary liquidation.
However, where a company will not be able to pay all of its creditors in full, the winding up will be a creditors voluntary liquidation.
The voluntary winding-up process commences with a special resolution of members that the company be wound up. The resolution is passed at a general meeting convened by the company's directors. A liquidator is nominated and appointed at this general meeting.
For a creditors voluntary winding up, the company also convenes a meeting of creditors, generally held immediately after the general meeting, at which the creditors can resolve to appoint a different liquidator to the person appointed by the members.
Where a voluntary administration results in a creditors' resolution to wind up a company, the liquidation which ensues is considered to be a creditors voluntary liquidation.
The powers, duties and responsibilities of a liquidator in a voluntary winding up are effectively the same as for a Court liquidation. The liquidator realises all of the company's assets, pursues all other recoveries, investigates the affairs of the company and, where necessary, reports to the A.S.I.C. Dividends, if any, are paid to creditors in the priority specified by the Corporations Act 2001. Any surplus funds are returned to members.
As with a Court liquidation, on finalisation of the liquidation, the company is deregistered and ceases to exist.