Sometimes, companies suffer from financial distress and can no longer pay off their debts as they fall due. This may lead to the ‘winding up‘ of the company, actioned by either members, creditors or the Court. This article will explore what duties liquidators have to the company during this process. For more information or if you need further assistance, contact a lawyer today.
Role of the liquidator
During the winding up process, company directors and officers cannot exercise any of their functions. The powers of the company pass on to a liquidator, who is independent from the company, and takes over in order to wind up the company. Accordingly, liquidators need to have the company’s best interests at all times – not just creditors.
Liquidators are responsible for a number of things, including:
- carrying on the company’s business to the extent of winding up
- taking possession of and realising the company’s assets for distribution
- investigating and reporting on the company’s affairs – for instance, to determine what action should be taken against certain directors and/or officers who are at fault for the company’s failure
Once a liquidator has realised the assets of the company, the money is generally distributed to pay creditors after the costs of the liquidation and any outstanding employee entitlements are paid. The liquidator’s primary duty on this front, is to creditors. As such, usually, shareholders’ claims to funds are a lower priority than creditors’ claims.
Other duties of the liquidator
However, liquidators also owe certain duties to the company during the winding up process, under case law and the Corporations Act.
Liquidators have a number of fiduciary duties to the company. For example, the fiduciary duty to:
- act honestly, especially since they have so much power throughout the winding up process
- avoid conflicts of interest, meaning that they must not profit from the position aside from the payment for the work done as a liquidator
- act impartially at all times and should not be biased
To become a liquidator in the first place, a person must be registered by ASIC. Usually, this requires the person to have an educational background in accounting or commercial law. The person also needs to be fit and proper to act as a liquidator (for example, they must not have been convicted of an offence related to dishonesty). Accordingly, liquidators owe duties of care and skill to the company. Liquidators should perform the winding up process as efficiently as possible and must seek further advice from other professionals if need be, in areas where they are not qualified. As officers of the company, liquidators must also act in accordance with how a reasonable director or officer would act in the same position.
There are also other duties that liquidators owe to the company. For instance, they:
- must exercise their own professional judgement and discretion – this cannot be delegated
- cannot improperly use any inside information of the company to gain an advantage
- must keep proper records and accounts during the winding up process
Conclusion
Unfortunately, not all companies go as well as planned. Sometimes, a company will need to be wound up. During this process, liquidators owe certain duties to the company, including fiduciary duties and duties of care and skill. If you need more information or further assistance, contact a lawyer today.
