Liquidation

The formal process of winding up an insolvent company, realising its assets, and distributing the proceeds to creditors in priority order. Most Australian residential builders that fail end up in liquidation.

Definition

Liquidation is the formal process under the Corporations Act of winding up an insolvent company, realising whatever assets it has, paying creditors in priority order, and dissolving the company. A registered liquidator manages the process. Most Australian residential construction insolvencies end in liquidation, either after a period of voluntary administration or directly through compulsory or members' voluntary liquidation.

Why it matters

For homeowners with a build in progress when the builder is liquidated, liquidation usually means the build stops, the contract is functionally terminated, and the owner becomes one of many creditors waiting to see what the liquidator can recover. For subcontractors and suppliers, liquidation means the chance of recovering unpaid invoices drops dramatically; they become unsecured creditors at the back of the priority line.

How it works in practice

The liquidator takes control of the company's assets, realises them (usually by selling), and distributes the proceeds to creditors in the priority order set out in the Corporations Act:

1. Costs of the liquidation itself 2. Secured creditors (banks holding charges over specific assets) 3. Priority unsecured creditors (employees, ATO, certain other categories) 4. General unsecured creditors (subcontractors, suppliers, homeowners with deposit claims) 5. Shareholders (rarely receive anything)

In residential construction insolvencies, general unsecured creditors typically receive a fraction of what they're owed, and sometimes nothing. Distribution timelines are long: the liquidator has to investigate the company's affairs, recover any improperly transferred assets, sell what can be sold, and then distribute. Twelve to twenty-four months from insolvency to any distribution to general unsecured creditors is typical.

The liquidator also investigates the company's conduct and the directors' actions, looking for insolvent trading, breaches of director duties, or illegal phoenix activity. The findings can lead to civil or criminal proceedings against directors, although these proceedings typically don't return funds to creditors.

Common misconceptions

Liquidation means something illegal happened

Not necessarily. Liquidation is the formal process for winding up an insolvent company, regardless of why it became insolvent.

Creditors get a clear timeline for payment

They don't. Initial estimates from the liquidator are rough and often optimistic. Final distributions can take years.

Personal assets of the directors are at risk

Usually not, unless specific misconduct (insolvent trading, breach of duties, illegal phoenixing) is established. Directors operate through limited liability companies that protect personal assets in most cases.

This entry provides general information only and is not legal advice. If you're a creditor in a builder liquidation, get advice from a construction lawyer or an insolvency professional.