Restructuring & Insolvency
Investigations in liquidation
Investigations performed by the liquidator
The liquidator must investigate:
- why the company is insolvent;
- when the company became insolvent;
- if a potential insolvent trading claim exists against the directors;
- whether any offences have been committed by the company’s officers;
- if any voidable transactions, including unfair preferences, can be reversed; and
- if any other recoveries may be available.
Much of the above information is reported to ASIC. A liquidator’s powers include holding public examinations, seizing books and records and gaining access to property.
The liquidator may apply to ASIC for external funding to pursue certain avenues of investigation should there be insufficient funds within the company to undertake those investigations.
Recovering property sold before the liquidation
The liquidator can recover money from creditors who received payments that gave them ‘preferential’ treatment in the six months before the liquidation.
In addition, the liquidator will review any sales or transfers of property in the years before liquidation. If property transactions appear improper, uncommercial, or were undertaken to defraud creditors, the property or its value may be recoverable.
How does an insolvent trading claim arise?
Directors have a duty to ensure their company does not continue incurring debts when it is insolvent.
If the directors breach that duty, the liquidator can bring an action against them, personally, for recovery of the amount of the debts incurred during the period that the company was insolvent.
Are directors’ personal assets at risk?
A liquidator can only take possession of a company’s assets. Taking possession of the directors’ personal assets is not permitted.
However, if directors took company assets without paying market value for them, the liquidator can recover those assets. Similarly, if the company loaned money to the directors, the liquidator would seek to recover those funds.
Recovering assets, obtaining repayment of loans, and pursuing insolvent trading claims can all lead to court proceedings. Those proceedings can result in a director being made bankrupt, at which point their personal assets will be made available to the trustee, realised and used to satisfy the director’s debt, including those debts brought by the company’s liquidator.
Can creditors attack a directors’ personal assets?
Yes, but only if the director signed a personal guarantee on a contract or agreement the company entered into with a creditor.
It is common practice for directors to give personal guarantees for the company’s credit arrangements, for example:
- lease agreements;
- equipment finance or hire purchase finance – i.e. vehicles; and
- company loans.
When a director signs a personal guarantee, it becomes a personal arrangement between creditor and director, as guarantor, and
it is not affected by liquidation. It follows that the liquidation cannot extinguish personal guarantees. Creditors can enforce the personal guarantee at any time during the winding up process. Note that this differs from voluntary administration where the moratorium also extends to personal guarantees.
It should also be noted that if more than one director provides a personal guarantee, the claim is ‘joint and several’. The creditor can pursue 100% of the claim from each director until the claim is paid. If one director pays the claim on behalf of the other directors, they will have what is called a ‘right of contribution’ claim against the other directors.
If your business is experiencing financial difficulty, contact us to arrange a free, no-obligation discussion to give you clarity on your position and options available.