In brief - Your business can be affected if a customer has gone
into liquidation due to insolvency
If a company goes into liquidation and owes you money, whether
you get it back from the liquidator depends on a number of factors,
including whether there is money available to make any payments at
I have just found out that one of my customers has gone into
liquidation. What does that mean?
Liquidation, also referred to as "winding up", is the
process by which a company's assets are liquidated and the
company closed, or deregistered.
There is one term that is crucial to understanding
liquidation:"insolvent". A company is solvent if it can
pay its debts when they fall due and insolvent if it can't. The
financial state of the company is important because it determines
what kind of liquidation the company will enter, as well as the
types of investigations that a liquidator will undertake.
A solvent company is brought to an end via a members'
voluntary winding up. By contrast, an insolvent company can be
wound up by the court or by a creditors' voluntary winding up.
This last method is called a creditors' voluntary winding up
because, while the company's members decide whether to appoint
a liquidator, it is the creditors who decide whether a liquidator
will stay involved in the company.
Your business will only be affected if your customer has gone
into liquidation due to insolvency. In a members' voluntary
winding up, the company's debts will all be paid. Where a
company is insolvent, this doesn't always happen. This article
focuses on the processes involved in court liquidation and in
creditors' voluntary wind-ups of insolvent companies.
What is the role of the liquidator?
The role of the liquidator in an insolvent liquidation is
essentially to collect, and deal with, the company's assets,
and, where possible, to make a distribution to the creditors and
only then to the members.
The liquidator also conducts investigations into the failure of
the company, the conduct of its directors and, sometimes, the
conduct of third parties, like creditors.
What happens after the liquidator is appointed?
The liquidator must follow particular timeframes as set out by
the relevant legislation.
Once the company is placed into liquidation, the liquidator will
send out a notice to known creditors. The notices may include proof
of debt forms and proxy forms for voting at meetings called by the
liquidator, depending, in part, on whether there are funds
available in the company.
If there are funds in the insolvent company, the proof of debt
lets you tell the liquidator how much the company owes you and why.
The liquidator will look at each proof of debt and decide whether
the claim is valid. If the claim is rejected by the liquidator,
either in whole or in part, no payment will be available to that
The liquidator may decide to take action against directors
and/or third parties, including court proceedings. This will
lengthen the process of the liquidation. It will also impact the
amount, if any, that is available for distribution to
That company owes me money. Will I get it back from the
Unfortunately, there is no absolute answer to that question.
Assuming that your proof of debt is accepted by the liquidator,
there are many factors which influence whether or not you will
receive a payment, including:
The company may not have enough money available to make any
payments at all.
If there is money available, there is a specific order of
payment which a liquidator must follow. Depending on where your
claim sits, you may not be entitled to a payment, or a full
The situation is slightly different if your debt is secured. An
example of a secured debt would be a debt secured by a retention of
title clause and which has been properly registered under the new
Personal Property Securities Act. If your debt is secured, you sit
outside the liquidation and you can rely on the security to get
your money back. However, sometimes a secured debt will be included
in the liquidation process.
The liquidator is talking about unfair preferences. What does
A liquidator has the power to "claw back" certain
transactions, including certain transactions involving a creditor.
These transactions are known as "unfair preferences".
An unfair preference is a payment made to a creditor in the six
months before the liquidation started (or the date that the
application was filed in the case of a court ordered liquidation).
The payment must have been received while the company was insolvent
or it causes the company to become insolvent, and the creditor must
have received more than it would have received in the
Liquidators can claw back unfair preferences via an application
to the court. If your business receives a preference claim,
it's best to see a lawyer.
When determining if a DOCA is to be terminated, public interest can, and often will, outweigh any benefit to creditors.
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