Liquidation isn’t the end: what a liquidator can come after next

Why liquidation isn’t the end

For the liquidator, a winding up is the start of an investigation. Part of the job is looking back at what happened on the way down, and deciding what can be unwound or recovered.

This comes up in a few recurring patterns:

• a director who kept taking customer deposits and ordering stock on credit for months after the accounts showed the company couldn’t pay its debts;
• a director who repaid a $50,000 loan from their spouse three weeks before the liquidator was appointed, while $200,000 owed to suppliers went unpaid; and
• a director who transferred the company’s $18,000 ute to their adult son for $1,000, six weeks before liquidation.

In each case, the liquidator can recover money from the director, the family member, or both.

“We kept trading because we thought it would turn around.” Is that a problem?

It can be. A director must prevent the company from incurring a debt while it is insolvent, or if the debt makes it insolvent, where there are reasonable grounds to suspect insolvency.¹ The test is objective: what would a reasonable director in your position, with your information, have suspected?

A sincere belief that things would improve isn’t enough. The belief has to be reasonable on the information available at the time.² If the duty is breached, the liquidator can recover compensation from you personally, equal to the loss creditors suffered on the debts incurred while the company was insolvent.³

The director taking deposits and ordering stock on credit is the classic case. An overdue BAS is a warning sign in its own right, and can make you personally liable for the tax under a director penalty notice.

“I paid back my wife’s loan first.” Can the liquidator take that back?

Often, yes. An unfair preference is a payment that leaves one creditor better off than they would have been in the winding up.⁴ It can be unwound if the company was insolvent when it was made, or became insolvent because of it.⁵

For an ordinary creditor, the payment must fall within six months before the relation-back day, usually the date the winding-up application was filed or the company first went into administration. For a related entity, which includes a director’s spouse or relative, the period is four years.⁶

The liquidator’s claim is against the spouse, as the person who received the money, not only the director who authorised it.⁷

“The company sold the ute to my son.” Is that an uncommercial transaction?

Probably. An uncommercial transaction is one a reasonable person in the company’s circumstances wouldn’t have entered into, having regard to the benefit and detriment to the company and what each party got out of it.⁸ It covers money leaving the company with nothing coming back, and sales at undervalue.

It can only be unwound if the company was insolvent at the time or became insolvent because of it. The look-back period is two years, or four years for a related entity.⁹

The son has no formal role in the company, but that doesn’t help him. The court can order him to repay the difference or hand the ute back.¹⁰

“It was a bonus I’d earned.” Does it matter that the company wasn’t insolvent?

Not for this claim. An unreasonable director-related transaction is a payment, transfer or share issue to a director or a director’s relative, including a spouse, that a reasonable person in the company’s circumstances wouldn’t have entered into.¹¹ The liquidator doesn’t need to prove insolvency, and the look-back period is four years.¹²

A retrospective $80,000 bonus approved six months before liquidation, while turnover had halved, is a realistic example. No finding of dishonesty is needed.

“We moved the business to a new company.” What’s a creditor-defeating disposition?

This claim targets illegal phoenix activity. It covers a transfer of company property for less than market value that stops, hinders or significantly delays the property becoming available to creditors.¹³ It can be unwound if it happened within 12 months before the relation-back day and the company was insolvent at the time, or went into external administration within 12 months as a result.¹⁴

Directors who fail to prevent one, and anyone who helps arrange one, including advisers, face civil penalties and criminal charges.¹⁵

“I didn’t do anything dishonest.” What about directors’ duties?

Directors owe duties of care and diligence, good faith, and proper use of their position and information.¹⁶ These duties sharpen as a company nears insolvency, because it’s then the creditors’ money at risk, and directors must take their interests into account.¹⁷

A director who keeps putting personal expenses on the company card while super goes unpaid is exposed here, whether or not an insolvent trading claim also succeeds. The liquidator can bring the claim in the company’s name and seek compensation from the director personally.¹⁸

“I thought we could trade out of it.” Doesn’t that protect me?

The defences to insolvent trading are narrower than most directors assume, and it’s on you to prove them.¹⁹ You may have a defence if:

• you had reasonable grounds to expect the company was solvent, for example by relying on a competent person giving you accurate information;
• because of illness or some other good reason, you didn’t take part in managing the company at the time. Being uninvolved by choice rarely qualifies; or
• you took all reasonable steps to stop the company incurring the debt.

There is also the safe harbour, which protects debts incurred while you develop a course of action reasonably likely to lead to a better outcome than administration or liquidation.²⁰ It only works if it’s in place before the debts are incurred, and only if employee entitlements are being paid and tax lodgements are up to date.²¹

Family members can defend an unfair preference or uncommercial transaction claim if they acted in good faith, had no reasonable grounds to suspect insolvency, and gave value or changed their position.²² That defence isn’t available against an unreasonable director-related transaction. A spouse or adult child who knew the business was struggling will often find that hard to show.

What happens once a claim is made out?

These claims are cumulative. One set of transactions can produce several claims at once, against different people. Before any claim is filed, the liquidator can have you examined on oath, in public.²³ ASIC can also seek to have you disqualified from managing companies.²⁴

What should I actually do right now?

1. If insolvency is a real possibility, stop incurring new debt and get advice now.
2. Keep BAS and superannuation lodgements up to date, even if you can’t pay.
3. Don’t repay family loans, approve bonuses, or move assets to relatives or a new company.
4. Keep your management accounts, cash flow forecasts and board minutes in order. They are your evidence later.
5. If a liquidator has been appointed, get advice before you answer questions or attend an examination.

Will it affect other proceedings?

If a party to a property settlement is, or was, a director of a failed company, a liquidator’s claim attaches to them personally, including their house and savings. Money or property that passed to the other spouse can be clawed back too. Either way, it’s a real liability affecting the asset pool and needs to be on the table in settlement negotiations.

In short

“It’s the company’s debt” feels like an answer. Once a liquidator is appointed, it often isn’t.

Whether you’re exposed comes down to:

• when the company became insolvent, and what you knew or should have known;
• what left the company, to whom, and when;
• whether the person who received it was a director, relative or other related party; and
• whether you can prove a defence.

This is worth a conversation if you are:

• A director of a company that is struggling to pay its debts.
• A director of a company that has just gone into liquidation or administration.
• A family member who was repaid a loan or received company property before a winding up.
• A director who has received a demand or examination summons from a liquidator.

If any of this sounds like your situation, contact us or call 07 5522 5777. We can work with you on a liquidator’s claim or examination, or review your governance and compliance before it gets that far.

Legislation and cases

1. Corporations Act 2001 (Cth) s 588G(1)–(2). ↩
2. Hall v Poolman [2007] NSWSC 1330, [251], [262], [307] (Palmer J). ↩
3. Corporations Act 2001 (Cth) s 588M(2). ↩
4. Ibid s 588FA(1). ↩
5. Ibid s 588FC. ↩
6. Ibid ss 9 (definition of ‘related entity’), 91, 588FE(2), (4). ↩
7. Ibid s 588FF(1). ↩
8. Ibid s 588FB(1). ↩
9. Ibid ss 588FC, 588FE(3)–(4). ↩
10. Ibid s 588FF(1). ↩
11. Ibid s 588FDA(1). ↩
12. Ibid s 588FE(6A). ↩
13. Ibid s 588FDB(1). ↩
14. Ibid s 588FE(6B). ↩
15. Ibid ss 588GAB, 588GAC. ↩
16. Ibid ss 180–183. ↩
17. Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722, 730 (Street CJ). ↩
18. Corporations Act 2001 (Cth) ss 1317H, 1317J(2). ↩
19. Ibid s 588H(2)–(5). ↩
20. Ibid s 588GA(1). ↩
21. Ibid s 588GA(4). ↩
22. Ibid s 588FG(2). ↩
23. Ibid ss 596A, 597(4). ↩
24. Ibid s 206C. ↩