10. Liquidations

Question 1

What does insolvency mean?

Answer 1

(1) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.
(2) A person who is not solvent is insolvent.

Question 2

What does insolvency occur?

Answer 2

When a company is unable to pay its debts when they fall due and payable.

Question 3

Does the administrator have to submit anything regularly?

Answer 3

The administrator must regularly submit to creditors a statement of receipts and payments in accordance with Form 524.

Question 4

What are the three options a administrator can offer to the creditors after reporting the state of the company?

Answer 4

(1) end the voluntary administration and return the company to the directors’ control (2) approve a deed of company arrangement through which the company will pay all or part of its debts and then be free of those debts, or (3) wind up the company and appoint a liquidator.

Question 5

What does the Corporations Act provide for insolvency?

Answer 5

For an insolvent company to be administered in a way that maximises the chances of the company continuing in existence; or if that is not possible, results in a better return for the company’s creditors and members than would result from an immediate winding-up of the company.

Question 6

Is insolvency one of the main reasons for a company to be wound up by a court order?

Answer 6

Yes

Question 7

What is the main purpose of a statement of affairs?

Answer 7

It is to estimate the realisable value of the company’s assets and to assess whether there is a surplus or deficiency for the members.

Question 8

What is one of the first tasks once a company commences winging-up for the liquidator?

Answer 8

It is the preparation of a statement of affairs, the format of which is found in Form 507 available on the ASIC website.

Question 9

Who puts in place voluntary winding-up?

Answer 9

A voluntary winding-up may be put in place by either the members or the creditors of a company.

Question 10

Who controls the winding-up process when it is a creditors voluntary winding-up?

Answer 10

Both creditors and members control the winding-up process. No declaration of solvency exists and creditors must be sent a summary of affairs (in accordance with Form 509) attached to the notice of the forthcoming creditors’ meeting.

Question 11

True or False?
In a members’ voluntary winding-up, there is usually a declaration of solvency prepared in
accordance with Form 520.

Answer 11

True

Question 12

True or False?

If the company is insolvent, it is not entitled to be wound up voluntarily unless leave is granted by the court.

Answer 12

True

Question 13

What happens when it is a winding-up of the court?

Answer 13

In a winding-up by the court, the liquidator has many powers under s. 477, including carrying on the business, selling properties of the company, collecting calls from contributories, and paying creditors before winding up the company.

Question 14

Does the liquidator have to keep many records?

Answer 14

A liquidator is required to keep proper records, containing entries and proceedings of meetings.

Question 15

How are the liquidators powers specified in a voluntary winding-up?

Answer 15

In a voluntary winding-up, the liquidator’s powers are specified by s. 506 and include all the powers given by s. 477.

Question 16

What kind of records does the liquidator have to keep?

Answer 16

The liquidator must keep proper records, including the preparation of a statement of receipts
and payments in accordance with ASIC Form 524.

Question 17

Is there a date cutoff date for creditors?

Answer 17

All debts payable by or claims against the company up to the relevant date are admissible for
proof against the company.

Question 18

Does the liquidator have to determine which debts are admissible and which are not?

Answer 18

Yes

Question 19

What is the order in which creditors are paid?

Answer 19

In order of priority, which is usually the following order: creditors secured by a specific charge, creditors secured by a floating charge, preferential unsecured creditors, ordinary unsecured creditors, deferred creditors.

Question 20

Is there a rank for creditors?

Answer 20

In cases of insolvency, some preferential unsecured creditors rank for payment ahead of creditors secured by a floating charge, namely wages payable, leave payable and retrenchment payments payable.

Question 21

T or f?
Contributories, who may include past members in certain circumstances, are required to pay up to a maximum of the issue price of their shares in order to pay creditors in full.

Answer 21

True

Question 22

Do dividends have to be paid?

Answer 22

Dividends which are a legal debt must be paid after all creditors have been paid, and dividends undeclared or in arrears are not paid unless the constitution specifically says so.

Question 23

Do calls in advance get repaid?

Answer 23

Calls in advance, to the extent that they do not need to be called up by the liquidator, are repaid to shareholders after all creditors have been paid and before any distribution of capital to shareholders.

Question 24

What happens if the constitution is silent?

Answer 24

Then a deficiency is borne by each share holder, preference and ordinary, in accordance with the number of shares held.

Question 25

What is the rights of contributories?

Answer 25

The rights of contributories, in both a deficiency and surplus situation, are determined by the requirements laid down in the company’s constitution.

Question 26

What is the initial record for the liquidator to prepare?

Answer 26

It is a statement of affairs showing the estimated realisable values of assets, the potential payments to creditors and the estimated surplus or deficiency for contributories.

Question 27

What is the main purpose of the liquidation account?

Answer 27

The main purpose of the Liquidation account is to calculate the deficiency or surplus on liquidation and to show how it is distributed between contributories, whereas the Shareholders’ Distribution account shows the capital amount due to contributories, the share of surplus or deficiency on liquidation, and the final cash payments to each class of contributory.

Question 28

What are the major account used for liquidation?

Answer 28

They are the Liquidation account, the Shareholders’ Distribution account and the Liquidator’s Cash account.

Question 29

How are receivers appointed?

Answer 29

Usually by secured creditors such as mortgage holders. The main effect of appointing a receiver is that the secured property can be sold in order to repay the debt of the secured creditor. The receiver is responsible to the secured creditor, not to the company.

Question 30

True or False?
If the receiver is appointed by secured creditors under a floating charge, the receiver will need to repay certain preferential unsecured debts, such as wages, superannuation contributions and leave entitlements and retrenchment payments, ahead of any payment to the secured creditor.

Answer 30

True

Question 31

What is the administrator?

Answer 31

An independent and suitably qualified person appointed under ss. 436A, 436B or 436C of the Corporations Act 2001

Question 32

What is the contributory?

Answer 32

A person liable as a member or past member to contribute to the property of the company if it is wound up

Question 33

What is the declaration of solvency?

Answer 33

A legal document, as specified in Form 520 of Schedule 2 of the Corporations Regulations, which is used in a members’ voluntary winding-up to declare that the company is able to pay its debts in full

Question 34

What is floating charge?

Answer 34

A secured creditor’s claim which does not relate to specific pieces of property of the company, but relates to all assets. The security takes form (‘crystallises’) over specific assets on appointment of the liquidator

Question 35

What does insolvent mean?

Answer 35

For a company, the satisfaction of any of the conditions specified in s. 459C(2) of the Corporations Act

Question 36

What is liquidation?

Answer 36

A process by which a company is dissolved by means of selling its assets, paying creditors and paying final distributions (if any) to contributories

Question 37

What is preferential unsecured creditors?

Answer 37

Unsecured creditors given priority of payment over other unsecured creditors under the requirements of s. 556 of the Corporations Act

Question 38

What is the receiver?

Answer 38

A person appointed, either by a court or creditors, to take charge of a company or property of a company

Question 39

What is a secured creditor?

Answer 39

A creditor secured by a specific charge or a floating charge

Question 40

What is a specific charge?

Answer 40

A secured creditor’s claim against specific property of the company, e.g. a mortgage over land and buildings

Question 41

What is a statement of affairs?

Answer 41

A document, specified in ASIC’s Form 507, which aims to inform constituents of the estimated realisable value of a company’s assets, the likely order of payment of creditors, and any estimated surplus or deficiency available for contributories

Question 42

What is the summary of affairs?

Answer 42

A document, specified in ASIC’s Form 509, which is used in a voluntary winding-up to inform constituents briefly of the estimated realisable value of a company’s assets, the likely order of payment of creditors, and any estimated surplus or deficiency
available for contributories