Author
Mitch BallChief of Insolvency Operations & ASIC Registered Liquidator
(02) 9220 7117
When a business gets into trouble, it has a number of insolvency options. Whether you’re an advisor to a company in financial strife or in charge of such a business, liquidation is one possible outcome. However, many people are surprised to discover that even profitable, thriving businesses may choose to enter liquidation. But why would they?
We’ve broken down what liquidation is in business, what it involves, and why you might choose it.
What Is Liquidation in Businesses?
To determine if this could be a viable option, we must first understand business liquidation’s meaning.
Liquidation involves winding up a company’s financial affairs and selling off its assets to repay its debts. It also includes dismantling the company’s structure in an orderly way. The liquidator is also tasked with investigating what might have gone wrong with the business if the company is liquidating due to financial issues.
Liquidation applies only to companies (businesses operating under the company structure). Bankruptcy – a different concept sometimes confused with liquidation – only applies to individuals, including sole traders and partners in partnerships.
During business liquidation, a liquidator is appointed to oversee the process. Your liquidator has full control over the company’s operations, financial affairs and assets. Your liquidator is tasked with winding up affairs and ceasing trading as cost-effectively as possible.
Liquidation is different to selling a business, which only involves a change of ownership. Liquidation for businesses is the only way to wind up a company and terminate its existence. Once a company is liquidated, it is completely dissolved and permanently ceases operations.
The Business Liquidation Process
Knowing the intricacies of liquidation and its meaning in business allows us to make data-driven decisions. Liquidation may occur when a business is unable to pay its debts. This is called involuntary liquidation. Usually, this involves a court order made after an application by a creditor, though directors or a majority of shareholders can also apply to the court.
In addition, businesses might choose to liquidate if they want to stop operating for insolvency or other reasons. This is known as voluntary liquidation, and it’s decided by a members’ or creditors’ resolution. With voluntary liquidation, the company might have already gone through voluntary administration and/or a Deed of Company Arrangement (DOCA) and have since decided that the business is no longer viable, choosing to wind it up. This could mean they have noticed the early signs of insolvency, such as receiving a Director Penalty Notice (DPN), cashflow issues, or accumulating and overdue debt.
Unsecured creditors cannot continue or start legal action unless they have permission from a court once the company is in business liquidation. This means directors no longer have authority, and the company’s bank accounts are frozen. Any trading that continues is at the discretion of the liquidator.
Liquidation can last as long as necessary, but depending on the liquidation type, the process must conform to strict rules and procedures.
Why Choose Liquidation for Your Business?
Liquidation in business is the only way to wind down operations and shut down a company in an orderly way. It ensures assets are distributed among creditors and helps minimise the impact of insolvent trading. It also gives shareholders, creditors and directors the opportunity to have an independent expert investigate and manage the liquidation.
So, the top reasons include control, lower costs, and freedom from the stress of insolvent trading.
Business Liquidation vs Voluntary Administration
Voluntary administration is very different from liquidation. Although liquidation is possible, voluntary administration won’t necessarily result in business liquidation. It’s a chance for directors to appoint an external administrator to potentially help overcome the business’s financial problems and return to normal trading. The business could enter a DOCA, return to the directors’ control, or be liquidated. In contrast, liquidation means the company will soon cease to exist with no chance of returning to trading.
While both processes involve bringing in an expert to manage the business, voluntary administration opens the door to a wider range of possibilities than liquidation for businesses, which always results in the company shutting down.
Outcomes of Liquidation for Business Employees
During a business liquidation, once the liquidator is appointed, the company’s directors lose all legal authority and the liquidator could decide to terminate all employees. However, if the liquidator believes temporarily continuing trading is the best course of action, employees could continue in their roles or be rehired. This typically happens if the liquidator intends to sell the business.
Employees are likely to lose their jobs in the event of liquidation business. Meaning, they could also lose out on entitlements if there are insufficient assets to cover the cost of the entitlements. However, employees could recover some of this through the Fair Entitlements Guarantee (FEG). The FEG is a government scheme that lets liquidation-affected employees claim up to 13 weeks of unpaid entitlements like wages, annual leave, redundancy pay, long service leave, and payment in lieu of notice.
What Other Options Are Available Apart from Business Liquidation?
Before considering business liquidation, exploring options like a small business restructure or company restructure where feasible, can provide pathways to recover and maintain your company’s financial viability. Restructuring involves reorganising your company’s financial and operational aspects to better manage debt obligations and improve overall efficiency. This strategic move can significantly reduce financial strain and potentially prevent the need for liquidation for businesses.
Engaging early in restructuring processes can safeguard directors from personal liabilities and give the business a fresh start. Corporate debt restructuring specifically allows businesses to renegotiate terms with creditors, including lowering debt amounts or extending payment terms. This helps manage cash flow while preserving core business functions and stakeholder relationships.
By taking proactive steps through restructuring, your business may not only avoid business liquidation but also emerge stronger and more resilient.
Why Would a Successful Business Liquidate?
Liquidation is sometimes voluntarily entered into by profitable businesses as it’s the only way to shut down operations, and if the owner does not or cannot sell the business.
For example, if a business has been built based on the services of a single person, then the stepping down of that person may require the business to be liquidated even though the business is currently viable. Another scenario may be if there has been an attempted ‘hostile takeover’ of a successful business, then to prevent the business from being taken away from them, the owners may choose to liquidate.
Are You Ready to Talk Business Liquidation?
For struggling businesses, choosing to liquidate is the best way to ensure assets are fairly distributed to creditors by an external expert and in an orderly way.
At Mackay Goodwin, we have a team of certified and experienced liquidators to assist your business during this difficult time. If you’re thinking of liquidating your business, contact our expert team at 1800 330 511 and our specialists will readily assist you.
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