Written with the assistance of Nic Giannantonio.
In June 2010 Shock Music Publishing ('Shock'), the publishing arm of Australia's largest independent entertainment company, announced that it had gone into liquidation and appointed administrators to be responsible for the affairs of the company.
Sadly, many artists who published music with Shock may be owed money they may never recoup. This article aims to inform artists, regardless of their artistic practice, of what to do if a business they are dealing with goes into liquidation.
Understand the lingo
A company is a separate legal entity or person that comes into existence when registered with the Australian Securities and Investments Commission (ASIC). That entity is distinct from those who found, direct or work for that company. The company will cease to exist when it is wound up or liquidated.
Liquidation is the process of winding up the affairs of a company so as to close down the company. The liquidation process may start when a company is in debt and as a debtor cannot pay its debts on time. Either a court orders the company to be liquidated upon the request of its creditors or the directors volunteer to liquidate their company. Once a company is liquidated, it is also deregistered by ASIC.
When a company goes into liquidation, a chartered accountant from the private sector is appointed as liquidator. It is the liquidator's job to sell the assets of the company. To the extent that it is practical from money held by the company, the liquidator must also try to obtain payment of debts owed to the company. The liquidator must also pay debts owed by the company from net proceeds of sale of company assets. For that purpose, the liquidator may sometimes appoint an administrator to carry on the company's business if there is a prospect of selling that business as a going concern.
Once the company assets are sold and reduced to cash, the liquidator must finalise all company debts to the extent possible with the cash at hand. The liquidator must then wind up all company operations, close its accounts and deregister the company as required by the Corporations Act 2001 ('the Act').
Paying company debts in the course of a liquidation
This means that in the course of winding up a company, the liquidator must settle debts owed by the company to its creditors (who are people owed money). Fines and penalties owed by the company to government agencies and taxes owed to the Tax Office are to be paid before any claim from a creditor.
Furthermore, secured creditors will receive payment by selling a security which has been granted to them by the company. A secured creditor is one that has received a right to seize all or portion of the company's property in the event that the company cannot pay a debt to that secured creditor. A secured creditor is usually granted a 'charge' or 'mortgage' over all or specific assets owned by the company; that asset can be sold to pay the secured creditor in full. To do so, the charge or mortgage will be enforced by that secured creditor, not the liquidator, without any obligation to leave money for unsecured creditors.
An unsecured creditor simply contracts to provide goods or services for payment. If a creditor has provided goods or services to a company but remains unpaid, that creditor is an unsecured creditor. An unsecured creditor cannot seize the property of a company; that property can be seized only by a secured creditor or by the liquidator.
Section 556 of the Act contains a list of categories of unsecured creditors. The list ranks these categories of unsecured creditors in the order that they have to be paid by a liquidator. At the top of the list are creditors who incurred their legal fees to obtain a court order for the company to be liquidated. Also at the top to be paid are fees and expenses incurred by the liquidator while winding up the company. The employees of the company also receive priority payment for their wages, superannuation, leave entitlements and retrenchment pay.
Once the priority unsecured creditors listed in section 556 are paid by the liquidator, the remaining unsecured creditors (and that will be most artists who are owed money by a company) are entitled to be paid, if the liquidator has any money left over, which is rare.
Get in line
Unsecured creditors stand in line in decreasing order of priority to be paid from the money left over after secured creditors of a company are paid in full. This means unsecured creditors are far more financially vulnerable, at the back of the queue. Sadly, many artists fall into the category of unsecured creditors.
By being aware of the process of liquidating a company you increase your chance of recovering your money – even as an unsecured creditor with a small claim. Here are our tips.
Talk to the liquidator
No matter how small your claim against the company, you have a right to contact the liquidator and be informed of the financial position of the company. You can find out who the liquidator is by calling ASIC. You should ask the liquidator to send a Proof of Debt for you to complete and return to the liquidator specifying the debt owed to you.
Know the Liquidation Process
The liquidator will investigate the affairs of the company.
The liquidator will report to creditors on the company's business, property and financial circumstances, usually 5 weeks after the process of liquidation begins.
The liquidator will settle all company assets and debts, bank any cash and use it to pay the costs and expenses of the liquidation, including the liquidator's fees as well as unpaid taxes, fines and penalties.
The liquidator will then distribute any of the leftover proceeds of sale of company assets to priority unsecured creditors such as the liquidator him/herself and employees of the company etc.
- Any leftover funds (referred to as a 'dividend') will be distributed to unsecured creditors who are not given priority under the Act, pro-rata to the quantum of their claims (this may result for example in unsecured creditors receiving ten cents in the dollar).
The liquidator must pay each category of unsecured creditor in accordance with its ranking in the list of priorities in full before the next category of creditor can be paid. You can now see why most unsecured creditors are referred to as being 'at the back of the line'.
Tips for making your claim
It is important to get involved in the liquidation process to make sure that you are aware of all information available from the liquidator.
Contact the liquidator
Start by contacting the liquidator to give notice that you have an interest in the liquidation. You should provide your Proof of Debt to the liquidator along with copies of documents which prove the debt, including any contract, invoice or receipt of purchase.
Attend the creditors meeting
A creditors meeting is usually held about 5 weeks after the company goes into liquidation. You may attend this meeting. If you cannot attend, you may appoint a proxy to attend on your behalf. A proxy is a person over the age of 18 appointed in writing by you. If you cannot attend the meeting, you should ask the liquidator to send you a copy of the minutes of the meeting.
Get a copy of the liquidator's report
If the liquidator does not hold a meeting, he/she must prepare an administrator's report. You are entitled to a copy of this report free of charge upon request.
The report will set out:
- An account of the liquidator's acts and dealings;
- The conduct of the company in the preceding year;
- A summary of tasks yet to be done in the liquidation;
- An estimate of when the liquidation is expected to be finished.
Lodge your proof of debt
The liquidator will require you to lodge a form called a 'proof of debt'. You have 14 days to submit a proof of debt form after being given notice by the liquidator. The completed proof of debt form must be delivered or posted to the liquidator.
When submitting your proof of debt form, ask the liquidator to acknowledge receipt and advise if further information is needed. The liquidator must notify you within seven days if they reject your claim as not disclosing a debt at all. If you are dissatisfied with that decision, you have 14 days to appeal to a court.
Debt Agreements prior to commencement of liquidation
If a company is having trouble paying you and you suspect that it may go into liquidation, you should consider trying to negotiate a debt agreement with it. This agreement might set out a timeframe for payment of the debt or for payment of a lesser amount to discharge the debt. A debt agreement may be your best option once it is apparent that the company may not be able to pay you since after the liquidation process starts, funds available to distribute to unsecured creditors are usually minimal. It is best to speak to the Insolvency and Trustee Service Australia (ITSA) about such an agreement.
Retaining ownership of your works until you are paid
Artists may have the opportunity to give possession of their work to a company but to retain ownership of that work until they are paid. This is the reverse of the usual process where the company is deemed by the law to be the owner of a work as soon as it is given possession, even before it has paid for it. To remain owner of your work after delivering it to a company, you will need a properly drafted agreement to be executed prior to delivering your work to the company. If that agreement is properly entered into, you may be in a position to ask the liquidator to simply return your work rather than the liquidator being obliged to sell your work and distributing the proceeds amongst all creditors.
Claims against the personal assets of directors of a company
In limited circumstances, the Act provides for a director of a company which has been liquidated to be personally liable for the balance of unpaid debts of the company. For instance, if a director is proved to have received payment from the company in the form a loan repayment when in fact it is proved there was no advance of money from the director. Otherwise, if a director is proved to have allowed the company to continue trading while it was in debt, accumulating more debt when the company was clearly unable to pay. The liquidator will have to consent as to whether a creditor is allowed to sue a director in respect of company debts under section 588R of the Act. You may present evidence to the liquidator which suggests that the directors were incurring more debt at a time when they should have known their company could not pay. Legal advice will be required before you are able to assess whether a personal action against the directors may succeed; failure will mean you have to pay the director's legal costs.
Find out more
You should contact ASIC to find out whether a company has entered liquidation. You can also make a complaint to ASIC about the conduct of a company or the liquidator. ASIC might be able to take legal action on your behalf.
Infoline: 1300 300 630
Email: [email protected]
The Insolvency and Trustee Service is the government agency responsible for the administration and regulation of the personal insolvency system in Australia, including Debt Agreements.
Aaron Taranto is a recent graduate of Business (Management) / Law (with honours) from the University of Western Sydney. Aaron operates his own clothing brand and management company and has a key interest in artistic rights and the changing nature of the entertainment industry.
Nic Giannantonio is a solicitor at the Australia Government Solicitors currently on secondment to Arts Law.