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Pitfalls in liquidations for Secured Creditors

Upon the appointment of a liquidator to a company, a secured creditor should be mindful of a number of areas which may affect their eventual recovery:

Liquidator’s fees

If a secured creditor allows a liquidator to deal with assets over which they have a charge, then the liquidator would then be acting as an agent of the secured creditor. In that case, the secured creditor and the liquidator should reach an agreement about the terms of that agency particularly in relation to the liquidators fees and the expenses of the sale. If there is no agreement, based on case law, the liquidator is in a position to recover the portion of his remuneration attributed to costs, charges and expenses reasonably incurred in the care, preservation and realisation of the property charged.
Fixed and floating charge

A distinction should be made as to a distribution made to a secured creditor from funds realised from assets subject to a fixed verses a floating charge. Under section 561 of the Corporations Act, claims by employees for unpaid entitlements have priority over floating charges. This is not the case in relation to fixed charges.

Validity of a Charge

One of the roles of a liquidator is to check the validity of any charges over a company’s assets. A common area of conflict is whether or not a charge was created without fresh consideration being given to the company within six months before the commencement of the liquidation. Another area of conflict is whether a charge is invalid because it was created at a time when it gave the secured creditor an unfair preference over other creditors.
Attendance at Creditors Meetings

Usually a secured creditor can only vote in respect of the difference between the estimated value of the security and their claim as a creditor. The secured creditor should be very careful not to inadvertently surrender security by voting for the full debt at a meeting of creditors.