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Duties of Directors when a Liquidator is Appointed

Duties of Directors when a Liquidator is Appointed

During liquidation, control of a company is handed to a liquidator, but if they are in control what duties does a director still have?

28th April 2020
Reading Time: 3 minutes

During insolvency, a company faces financial difficulty and is unable to pay its debts on time. A process of liquidation may be required to fairly apply the company’s assets in a way that’s best for all creditors, and a liquidator is then appointed to carry out this process. In the liquidators appointment, directors hand control of the company over to the liquidator. However, if the liquidator is in control of the company, what role or duties do the directors have?

This article will explain what a liquidator is and their role in the company, and the duties of directors while there is a liquidator in appointment.

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What is a liquidator?

When it faces insolvency, a company will appoint a liquidator to begin liquidation. Insolvency arises when a company it is unable to pay for its debts and obligations when they are due. During liquidation the company is bringing its processes to an end. The remaining assets of the business are sold or redistributed to pay creditors. This is based on the priority of interests.

Liquidators oversee the process of liquidation and take control of the company. Their primary role is to apply the assets and property of the company and pay the company’s creditors. This is because the liquidators primary duty is to all of the company’s creditors. Additionally, liquidators have a number of other functions to carry out in their appointment, these include;

  • Investigating and reporting the company’s affairs to creditors.
  • Investigating the circumstances of the company’s failure and potential breaches of law, for report to ASIC
  • After the costs of liquidating, the proceeds of the realisation of assets will be distributed. Priority is given first to secured creditors. These are often people who have a registered interest on the PPSR. Unsecured creditors will then follow.

Duties of a Director during liquidation

During liquidation director’s lose control of the company, handing it over to the liquidator. The Liquidator has control of the company’s affairs. Whilst in control, liquidators wound the company up, orderly and fairly for the benefit of the company’s directors.

Whilst in control, liquidators wound the company up, orderly and fairly for the benefit of the company’s directors.

Despite not being in control a director’s traditional duties still apply. They must;

  • Exercise powers and duties with the care and diligence
  • Exercise powers and duties in good faith in the best interests of the company and for a proper purpose
  • Not improperly use the position to gain an advantage for yourself or someone else, or to cause detriment to the company
  • Not improperly use information obtained through your position to gain an advantage for yourself or someone else

In appointing a liquidator, directors have duties to help them in the matter. Such help includes:

  • Details on the location of any company property
  • Deliver any such property in their possession to the liquidator
  • Provide the liquidator with company books and records
  • Supply them with a written report about the company’s business, property and financial circumstances
  • Meeting with, or reporting to, the liquidator to help with any enquiries.

Just as important, during liquidation directors have a duty to prevent the company from trading. This duty also applies if the company is facing insolvency. As a director, you need to be constantly aware of your company’s financial position. Trading while insolvent or during liquidation can incur various consequences and penalties, including criminal charges.

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Author
Adam Watters

Adam is a legal intern at Lawpath. He is currently completing his double degree in Law and Commerce at Macquarie University. With interests in contracts and accounting, he is looking to complete further study and gain experience in the area of commercial law