Answer ... (a) Debtor
As detailed above in question 4.3.
(b) Directors of the debtor
Upon the appointment of a liquidator, the powers of the directors of the debtor are suspended. However, the directors are not removed from office as a result of the liquidation.
The directors’ powers remain in force on the appointment of a receiver; however, they are subject to any restrictions contained in the security agreement between the debtor and the secured creditor and the extent of the assets of the debtor over which the receiver is appointed. Directors are obliged to assist the liquidator or receiver and must not obstruct them in carrying out their duties.
The liquidator is responsible for investigating the conduct of directors of the debtor prior to the liquidator’s appointment and reporting breaches of directors’ duties in the Corporations Act. A receiver is not obliged to conduct an investigation into the affairs of the debtor; however, the receiver is obliged to report any irregularities or breaches identified over the course of their appointment to ASIC. The Corporations Act empowers the liquidator to make a claim against the directors for orders compensating the company for losses suffered by the company as a result of any breaches.
(c) Shareholders of the debtor
A liquidator can call on shareholders of the debtor to pay any unpaid share capital to the debtor. Once the liquidation of a debtor has commenced, a transfer of shares or alteration of the status of a member is void unless the court makes an order authorising the transfer or alteration, or the liquidator consents to the transfer or alteration (unconditionally or subject to certain conditions which have been met). A creditor, the transferor or transferee may apply to the court for an order authorising the transfer or for any conditions imposed by the liquidator on the transfer to be set aside.
The appointment of a receiver does not have direct impact on the shareholders of the debtor. Receivers are not obliged to report to shareholders as to the conduct of the receivership.
(d) Secured creditors
Liquidation does not prevent secured creditors from enforcing their security interests, unless the security interest has vested in the debtor as a result of the appointment of the liquidator (eg, as a result of the security interest being unperfected or unenforceable at the time of the appointment of the liquidator).
A liquidator cannot deal with or otherwise dispose of an asset that is subject to a security interest without the secured creditor’s consent. Where secured property is dealt with or disposed with the consent of the secured creditor, the secured creditor is entitled to be paid out of the proceeds of sale in priority to other creditors; however, the liquidator will likely have a lien over the proceeds of sale for the costs, expenses and remuneration incurred for the care, preservation and realisation of the secured property.
(e) Unsecured creditors
Where a liquidator is appointed to a debtor, all unsecured creditors that have a debt owing from or a claim against the debtor are entitled to submit a claim with the liquidator. If their claim is admitted, they are entitled to receive a proportional distribution of the assets available to meet the claims of creditors in accordance with the priorities in the Corporations Act (detailed below in question 4.8).
Where there are mutual liabilities between a creditor and a debtor in liquidation, the Corporations Act provides for those liabilities to be automatically set off against each other, subject to certain conditions being met, leaving the balance to be a claim against or by the debtor.
As the primary beneficiaries of the liquidation process, once their claim has been admitted by the liquidator, unsecured creditors are entitled to:
- vote on resolutions proposed by the liquidator;
- receive reports and request information or inspect the books of the liquidator;
- approve the liquidator’s remuneration;
- replace the liquidator;
- direct that the liquidator call a meeting of creditors; and
- appoint a reviewing liquidator to review the liquidator’s remuneration or the costs and expenses of the liquidation.
The Corporations Act also gives unsecured creditors the ability to form and be appointed to a committee of creditors. The role of the committee of creditors is to monitor, assist and advise the liquidator as representatives of the general body of creditors. The committee may direct the liquidator as to the conduct of the liquidation and approve certain actions of the liquidator in place of the general body of creditors.
The appointment of a receiver itself does not have any direct impact on the unsecured creditors of the company. However, a receiver has an obligation to pay the proceeds of certain circulating assets to employees in satisfaction of their outstanding entitlements.
Where a debtor in administration proceeds to liquidation, it is ordinarily the case that the administrator of the debtor takes on the role of the liquidator, unless:
- in the case of a creditors’ voluntary liquidation, the creditors resolve that a different individual should be appointed as liquidator; or
- in the case of a compulsory liquidation, the court appoints a different individual as liquidator.
If a receiver is appointed at the same time the debtor is in liquidation, the receiver has priority to deal with its secured assets.
The appointment of a liquidator does not result in the automatic termination of employees of the company. Employees have all the rights of unsecured creditors and, as detailed in question 4.8, have priority over ordinary unsecured creditors for their unpaid wages, superannuation, leave and redundancy entitlements.
The commonwealth government operates a fair entitlements guarantee scheme whereby employees whose employer has been placed into liquidation are, in certain circumstances, entitled to make a claim for payment of their unpaid wages, unpaid leave entitlements and unpaid redundancy entitlements up to a certain statutory limit. The commonwealth subrogates for the employees’ claims and is entitled to receive any dividends that would be paid to those employees in the winding up, and is afforded the same priority in respect of its claim as the claims it has paid.
Similarly, the appointment of a receiver does not automatically terminate employment contracts. The receiver has the power to engage or discharge employees on behalf of the debtor. The impact of a receivership on employees will depend on the extent of the security held by the secured creditor appointing the receiver. Where the security is held in respect of specific assets only, the receivership is unlikely to have an impact on employees. However, where the security extends over a substantial part of the business, the receiver may want to continue employing the employees until the business is sold. Where employees remain employed, the receiver will be personally liable under the Corporations Act for the wages of the employee.
(i) Insolvency officeholder
Liquidators and receivers act as agents of the debtor and are officers of the debtor who are subject to the duties imposed on officers of the debtor by the Corporations Act, including:
- a duty of care;
- a duty to act in good faith and in the best interests of the debtor; and
- a duty not to use their position or information gained as a result of their position to obtain a benefit for themselves or someone else while causing a detriment to the debtor.
The liquidator’s role is to:
- preserve and realise the assets of the debtor;
- investigate the conduct of the directors;
- identify and pursue any voidable transactions (detailed at question 4.10);
- report to creditors and ASIC; and
- make distributions to creditors in accordance with the priorities in the Corporations Act (detailed at question 4.8).
A receiver owes no direct duties to the general body of the debtor’s creditors, other than as set out in question 4.6(e)in respect of employees and certain circulating assets. However, the receiver must not sell the secured assets for less than their market value or, where the security does not have a market value, the best price reasonably obtainable in the circumstances.
The court has a limited role in the conduct of receiverships and liquidations. However, receivers and liquidators are subject to court oversight and can approach the court for directions.