COML204: Insolvency and Liquidation

Liquidation (Definition)

The winding up of a company's affairs to orderly settle debts and inquire into its failure before formal deregistration[cite: 6].

Who can initiate liquidation? (s 241)

Shareholders, directors (if constitution allows), creditors (at a watershed meeting), or the Court (usually after a statutory demand)[cite: 6].

Who CANNOT be a liquidator? (s 280)

Current shareholders, directors, receivers, and creditors of the company; the liquidator must be an independent, licensed insolvency practitioner[cite: 6].

Liquidator vs. Receiver

A liquidator winds up the whole company for the benefit of all creditors; a receiver is appointed to realise specific secured property for one specific secured creditor[cite: 6].

Pari Passu Principle

The fundamental liquidation principle that creditors within the same class must be treated on an equal footing without unfair benefit[cite: 6].

Preferential Claims Order (Schedule 7)

Paid in strict order: 1st Liquidator fees, 2nd Employee wages, 3rd Layby sales, 4th Creditor meeting costs, 5th IRD taxes[cite: 6].

Insolvent Transactions (s 292)

Payments made when the company was unable to pay its debts, allowing a creditor to receive more than they would in liquidation; voidable if within 6 months (arm's length) or 2 years (related party)[cite: 7].

Continuing Relationship Test (s 292(4B))

When a company and supplier have a running account, all transactions are viewed together as a single transaction to assess the overall net benefit/loss[cite: 7].

Shephard v SBP (2013)

Court confirmed you must look at the entire continuing relationship to assess an insolvent transaction, rather than picking peak indebtedness, but one-off exceptional payments can still be voided[cite: 7].

Voidable Charges (s 293)

A security charge granted to a creditor within 6 months (arm's length) or 2 years (related party) of liquidation while the company was insolvent[cite: 7].

Good Faith Defence (s 296(3))

A creditor can stop a liquidator's clawback by proving they: (1) acted in good faith, (2) reasonably did not suspect insolvency, and (3) gave value or altered their position[cite: 7].

Allied Concrete Ltd v Meltzer (2015)

Supreme Court case confirming that "value" for the good faith defence (s 296(3)) can be given in a once-off transaction, not just continuing relationships[cite: 7].

Transactions Undervalue (s 297)

The liquidator can claw back the undervalued amount of an asset sold within 2 years of liquidation if the company was insolvent at the time[cite: 7].

Transactions with Related Persons (s 298)

Reverses mispriced deals with directors/relatives made within 3 years of liquidation; notably, it does NOT require the company to have been insolvent at the time[cite: 7].

Failure to keep accounting records (s 300)

Past and present directors face personal liability if they failed to keep proper accounting records and that failure caused a financial loss[cite: 7].

Breach of Duties Recovery (s 301)

The court can order directors to personally compensate the company for financial damage caused by breaching their duties (e.g., reckless trading)[cite: 7].

Removal from the Register (s 318)

The actual legal "death" of the company, which only happens at the very end after the liquidation process is fully completed[cite: 7].