Author
Grahame WardDirector & ASIC Registered Liquidator
(02) 9220 7120
Navigating the Liquidation process can be daunting for any business owner. Understanding how it works and its implications are crucial steps in making informed decisions during challenging times.
Our guide breaks down the process of liquidation into manageable steps, providing clarity and actionable insights for Australian businesses.
What Liquidation Means for Businesses
Liquidation is a legal procedure through which a company’s assets are distributed to repay creditors before the business closes permanently.
Types of liquidation
There are five types of company liquidation:
- Creditors' Voluntary Liquidation: A process initiated by directors of an insolvent company, allowing creditors to appoint a liquidator to wind up the business.
- Members' Voluntary Liquidation: Used when a company is solvent; directors and shareholders voluntarily choose to wind up the business and distribute surplus assets.
- Court Liquidation: Ordered by the court, usually after a creditor application, when a company is unable to pay its debts and no voluntary action has been taken.
- Provisional Liquidation: A temporary measure where the court appoints a liquidator to preserve company assets while assessing whether full liquidation is needed.
- Simplified Liquidation: A streamlined version of CVL for eligible small businesses, with reduced reporting requirements and lower costs.
Step-by-Step Liquidation Process
The liquidation process can vary depending on the company’s situation and the type of liquidation chosen, so there’s no fixed number of steps. However, the general process typically follows these key stages:
Step 1: Meeting of Shareholders
The liquidation process begins with a meeting of the company’s directors, where they assess the company’s financial position and decide whether it is insolvent. If they determine the company is unable to pay its debts, they resolve to appoint a liquidator and call a shareholders’ meeting to confirm the decision.
Step 2: Appoint a Liquidator
When Liquidation is chosen as the best pathway for the business, a licensed insolvency practitioner is appointed as the liquidator.
The liquidator's role is to:
- Take control of the company
- Assess the company's financial affairs
- Manage the distribution of these assets to creditors
The liquidator can call a creditors’ meeting, or creditors may request one themselves. During the meeting, creditors can approve the liquidator’s proposed course of action, request more information or vote to appoint a replacement liquidator.
Step 3: Sign Appropriate Documents
All directors and shareholders must sign the necessary documents to formally appoint a registered liquidator. These documents are essential for the liquidator to commence their work and must be completed and returned promptly to ensure the process moves forward without delays.
Step 4: Assess Assets
The liquidator evaluates the company’s assets, including property, inventory, and intellectual property. They will prepare a report summarising your company’s affairs for the creditors. During this stage, the Liquidator will liaise with all creditors on behalf of the company to share process updates.
Step 5: Sell Assets and Distribute Proceeds to Creditors
Company assets are then sold, and the proceeds are used to repay creditors in order of priority, as defined in section 556 of the Corporations Act 2001. After the sale of assets, the Liquidator distributes the proceeds to creditors. First, they will pay secured creditors, followed by unsecured creditors and, if funds allow, shareholders.
Step 6: Deregister the Company
Once outstanding debts have been paid to the extent possible, the company is deregistered and legally ceases to exist. The process of liquidation concludes with a final report to creditors, outlining the actions taken and the outcomes achieved.
How to Navigate the Liquidation Process
If Liquidation appears inevitable, early preparation can help mitigate the impact on all parties involved.
This includes:
- Gather financial records
- Cease operations ethically
- Communicate transparently with creditors and employees
- Early engagement with insolvency professionals can provide valuable guidance and support.
Liquidation signifies the end of your business operations, but understanding this process is vital to navigating it with dignity and compliance. It ensures that the company's creditors are treated fairly and that the business is wound down in an orderly manner.
Seek professional help
Liquidation, though challenging, can be managed effectively with expert knowledge and support. Our team of Liquidation experts can help you understand your obligations, explore all available options, and ensure the process is carried out efficiently and effectively.
FAQs
What happens to employees during Liquidation?
In Liquidation, employees are often among the first to be affected, facing job loss. Employees are generally classified as priority unsecured creditors for unpaid entitlements such as wages, superannuation, and leave. They are paid before other unsecured creditors, but only after secured creditors and liquidation costs have been covered.
Employees may be eligible for support through the Fair Entitlements Guarantee (FEG). This government scheme assists employees in recovering certain unpaid entitlements when their employment ends due to the employer’s insolvency or bankruptcy, providing a financial safety net in challenging times.
Under the FEG, employees may claim:
- Unpaid wages
- Redundancy pay
- Annual leave
- Long service leave
However, it’s important to note that the FEG does not cover superannuation and entitlements due to contractor status.
How long does the Liquidation process typically take?
The duration of the Liquidation process varies depending on the complexity of the company’s financial situation and the ease of selling assets. Typically, it could take 6 to 12 months. Early engagement with a liquidator can help streamline the process.
Is Voluntary Liquidation better than compulsory Liquidation?
Choosing Voluntary Liquidation can offer more control over the process, potentially leading to a more favourable outcome for directors and owners. It demonstrates a proactive approach to addressing financial difficulties, whereas compulsory Liquidation initiated by creditors may have more severe consequences for directors.
Are directors liable for company debts?
Directors of companies may face personal bankruptcy if they’ve guaranteed company debts or are held personally liable for certain company obligations, such as outstanding employee entitlements.
It is illegal to trade while insolvent, and it is a director’s duty to prevent insolvent trading. If you have received a Director Penalty Notice (DPN), this is an indicator that you should be aware that your company may be insolvent.
Can I start a new company after liquidation?
In normal circumstances, there is nothing to stop you from being the director of another company. There are however instances where ASIC will prevent and ban an individual from starting a new company. This can be the case if an individual has been the director of several failed companies, has been convicted of criminal offences relating to their directorship, or has a history of immoral indiscretions.
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