The liquidator is compelled to distribute all realised funds to satisfy the debts and liabilities of the company in the proper order. Secured creditors with a fixed charge over the company’s assets can usually enforce their security. If the realisation of the assets produces insufficient funds to discharge the debt, the creditor will have to claim the balance in the liquidation as an unsecured creditor. The order that the proceeds must be distributed is usually to pay, firstly, the expenses of the liquidation, including the liquidator’s fees, then priority goes to preferential creditors, which includes payment of tax bills and employees’ salaries, then come any creditors with floating charges, and then ordinary unsecured creditors. Any surplus can then be distributed amongst the shareholders.
The liquidator is under a duty to preserve the assets of the company and to augment them in order to increase the fund available to pay the company’s creditors. This may be achieved in various ways. The liquidator may disclaim onerous property, namely unprofitable contracts and property that is unsaleable or not easily saleable or that might give rise to a continuing liability. Those found to have been participating in fraudulent trading, where there is intent to defraud creditors, or wrongful trading, where directors allowed the company to continue trading in circumstances where he should have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, can be made personally liable to contribute to the company’s assets.
The liquidator may also apply to the court to set aside any transaction at an undervalue, which is a gift or where the consideration received is significantly less than that given, or any preference, which is a payment or other transaction made by the company placing a creditor or a person connected with the company in a better position than they would have been otherwise. In order to be set aside, the payment or transaction must have been made or entered into by the company within a certain period before the liquidation and the company must have been insolvent at the time or became insolvent as a result. However, if the purpose of the transaction at an undervalue was to defraud creditors, there is no time limit and the insolvency of the company is not necessary.