When a company in Australia becomes insolvent, one of the key decisions that the director(s) must make is the choice of a liquidator. A liquidator is a licensed professional who is responsible for winding up the affairs of the company and distributing its assets to its creditors. However, the choice of a liquidator can have a significant impact on the outcome of the liquidation process, and directors need to understand the potential consequences of making the wrong choice.
In this article, we will explore the factors that company directors in Australia should consider when selecting a liquidator. We will also examine the potential risks associated with making the wrong choice, including personal liability for directors. Finally, we will offer some practical tips for selecting a liquidator that is best suited for the specific needs of your company.
What is a Liquidator?
Before we dive into the discussion of liquidator choice, let’s first define what a liquidator is. As we mentioned earlier, a liquidator is a licensed professional who is appointed to wind up the affairs of an insolvent company. The primary role of a liquidator is to sell the company’s assets and distribute the proceeds to its creditors.
In Australia, there are a few different types of liquidation, including court liquidations, members voluntary liquidations, and creditors voluntary liquidations. This article will focus on creditors’ voluntary liquidations, as this appointment type affords the greatest degree of choice available for directors and their financial advisors.
It is important to note that liquidation is not the only insolvency option available to directors, for detailed explanations of insolvency options, click here.
Factors to Consider When Choosing a Liquidator
When choosing a liquidator, there are several factors that company directors in Australia should consider:
Professionalism, Experience, and Dedication to Investigations
One of the most important factors to consider when selecting a liquidator is their level of professionalism and experience. You want to choose a liquidator who is licensed, experienced, and has a good reputation in the industry.
In this regard, it is also important to consider if your chosen liquidator will take the time to thoroughly investigate recoveries such as preference payments, uncommercial transactions, and insolvent trading.
It is a common criticism of many liquidators that insolvent companies are assigned no more than a desk-bound accountant with little incentive to conduct in-person investigations and interviews if tangible assets are not found. This can lead to fewer overall asset recoveries and open the director up to a larger insolvent trading claim.
Cost
Another factor to consider is the cost of the liquidator’s services. It is important to obtain quotes from several liquidators and compare their fees before making a final decision.
Most liquidators in Australia will operate on a time cost basis, however other cost options are available. If a time cost basis is quoted ensure that you are provided with a schedule of rates to accurately consider the total cost.
Availability and Accessibility
You want to choose a liquidator who is available and accessible to answer your questions and provide guidance throughout the liquidation process. It is important to choose a liquidator who is responsive and communicates clearly and effectively.
Compatibility
Finally, directors should choose a liquidator who is compatible with their goals for the insolvency proceeding. There are many ways for a liquidator to approach a liquidation and it is important to have thorough discussions with your potential appointee about this. For example, depending on the state of the company, trading on the business can be one avenue for a liquidator to make more favorable recoveries for creditors, potentially reducing further director liability.
It is also important to consider whether your choice of liquidator has had experience with insolvency proceedings in the industry in which your company operates. A liquidator with limited experience in winding up construction companies might not be a good pick for a trade.
Risks Associated With Making the Wrong Decision
Choosing the wrong liquidator can have serious consequences for company directors in Australia. Here are some of the potential risks associated with making the wrong choice:
Delays in the Liquidation Process
If you choose a liquidator who is not experienced or does not have the necessary resources to handle your case, it could lead to delays in the liquidation process. This could result in additional costs and could also prolong the stress and uncertainty of the process for both the directors and the creditors.
Inaccurate Asset Valuations
A liquidator is responsible for valuing the assets of the company and distributing the proceeds to the creditors. If the liquidator undervalues the assets or fails to identify all the company’s assets, it could result in an inadequate distribution of proceeds to creditors.
Personal Liability for Directors
If a liquidator is not able to realise substantial assets, or conducts their valuations and sales in an inefficient manner, this can open up company directors to personal liability through insolvent trading or other misconduct claims.
It is worth noting however that directors who have not traded their company whilst insolvent or engaged in other misconduct can not be held personally liable from these types of claims.
Reputation Damage
Choosing the wrong liquidator can also damage the reputation of the director. If the liquidator is not professional or does not handle the liquidation process properly, it could damage your relationships with other business partners, customers, suppliers, and employees.
Tips for Selecting the Right Liquidator
Now that we have discussed the potential risks associated with making the wrong choice, here are some practical tips for selecting the right liquidator:
Research and Compare
Take the time to research and compare several liquidators before making a final decision. Look for licensed professionals who have experience in your industry and a good reputation in the industry.
Get References
Ask for references from the liquidator and contact them to get feedback on their experience with the liquidator. This can give you valuable insights into the liquidator’s professionalism, experience, and ability to handle your case.
Consider All Costs
Obtain quotes from several liquidators and compare their fees before making a final decision. Keep in mind that the cheapest option may not always be the best option.
As mentioned previously make sure you determine what type of costs are being proposed and obtain a detailed schedule of rates.
Discuss Compatibility and Strategy
Look for a liquidator who understands your business and is committed to helping you achieve your objectives for the liquidation. There may be other options available besides liquidation and it is a good idea to get a sense of what strategy the liquidator is proposing.
Key Takeaways
Choosing the right liquidator is a critical decision for an insolvent company’s director(s). The wrong choice could lead to delays, inadequate asset valuation, personal liability, and reputation damage. To mitigate these risks, it is important to research and compare several liquidators, obtain references, consider costs, and look for compatibility. By taking these steps, directors can ensure that they choose a licensed professional who is experienced, reputable, and committed to achieving their objectives. Ultimately, selecting the right liquidator can help to ensure a smoother and more successful liquidation process for all parties involved.
If you have any questions about the content of this article or would like to discuss your options considering insolvency matters, please use the button at the top of this page to set up an obligation-free consultation or email us at enquiries@rriadvisory.com.au
Frequently Asked Questions (FAQs)
Q. Can I Choose Any Liquidator I Want?
A: Yes, directors have the right to choose their liquidator. However, the liquidator must be a licensed professional and meet the requirements set out in the Corporations Act 2001.
Q. How Do I Know if a Liquidator is Licensed?
A: You can check the Australian Securities and Investments Commission (ASIC) register to confirm if a liquidator is licensed.
Q: What Should I Do If I am Not Happy With the Liquidator’s Performance?
A: If you are not satisfied with the liquidator’s performance, you should contact the liquidator directly to discuss their strategy. If communication fails, you can seek legal advice or talk to ASIC. It is important to act quickly to mitigate any potential risks.
Disclaimer
This information and the contents of this publication, current as at the date of publication, is general to offer assistance to RRI Advisory’s clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.