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Busting 8 of the Most Common Liquidation Myths

  • May 15th, 2017
  • David Hill

Liquidation is the winding up of your business with assets sold to pay creditors. While it’s a final option for shutting down the business, for struggling businesses this step can come as relief. However, myths still persist about liquidation. If you’re considering liquidation as an option for your business, it’s vital to debunk these so you can make an informed choice about what to do next.

1. Directors can liquidate their own companies

While, as a company director, you might believe you can liquidate your company’s assets, this is incorrect. Liquidation must be carried out by a registered liquidator to ensure full compliance. There are three main types of liquidation: members’ voluntary, creditors’ voluntary, and court liquidation.

Members’ voluntary liquidation begins with the shareholders while the other two are started by company directors or a court. In both scenarios the appointed liquidator is the only person who can direct the liquidation process.

Australian Debt Solvers are registered liquidators and can provide you with any assistance you require to begin the liquidation process, or even simply to discuss whether liquidation is the best option for your business. Contact us today for an obligation-free discussion.

2. Business insolvency means I’ll go bankrupt too

It’s not uncommon for company directors to believe liquidation will definitely affect their own personal finances. Your company going into liquidation doesn’t mean you’ll also enter bankruptcy proceedings. The company is a separate legal entity and your personal finances are separate from your company’s finances.

Exceptions might exist if, for example, you’ve made personal guarantees against the company’s loans. You’ll also be personally liable if the company has unpaid company tax relating to Pay As You Go (PAYG) withholding or Superannuation Guarantee Charge (SGC) amounts.

However, whether you become bankrupt depends on your personal financial resources. If you can comfortably meet your guarantees against the business loans and/or the unpaid PAYG and SGC, you’ll avoid bankruptcy.

3. I’m prevented from starting a new company after liquidation

If you’re a director of a company going into liquidation, you’re not barred from starting new companies in the future. If you’ve met regulatory requirements as a director and fulfilled your duties, you won’t automatically be prevented from starting new companies to act as a company director.

Find out more in this video here.

4. The ATO gets paid first

A common myth about liquidation involves the ATO getting paid first. The ATO’s tax debts from your business is ranked equally with unsecured creditors. The costs of liquidation have first priority. If funds are left over after paying liquidation costs, employees with outstanding wages and super are paid. Next in priority is outstanding employee leave of absence payments, followed by retrenchment pay.

Unsecured creditors – including the ATO – are the last to be paid. However, an exception does apply where your business has unpaid superannuation guarantee charges. In this case the ATO will have priority over unpaid creditors.

5. The liquidator works for the creditors

Some company directors think the liquidator works for the creditors. In practice, liquidators don’t work for creditors, the company directors, or any specific person. While they can be appointed by company directors or creditors, their role is defined by the Corporations Act 2001. Liquidators need to collect, protect, and realise the company’s assets. They distribute the proceeds according to the priority of claims.

However, when it is a receivership, the receiver is appointed by and works for the bank or other secured creditor. Find out what the differences between a liquidation, administration and receivership is here.

6. Directors of a liquidating company can’t be directors of other companies

Usually you’re allowed to act as a director of as many companies as you want. Unless you’ve been disqualified or restricted, it makes no difference if one of the companies you act for is in liquidation.

However, if you’ve been declared bankrupt, you can’t act as a director of any company until you’re discharged from bankruptcy (usually three years). Another possibility is if you’ve served as an officer for two or more liquidated companies. In this case ASIC could investigate and ban you for up to five years.

A third scenario is if you’ve been convicted of an offence under the Corporations Act 2001. If the offence is punishable by imprisonment of more than 12 months, you will be automatically disqualified for the term you serve.

7. I’ll face a ban or disqualification from acting as a director

As mentioned above, liquidation won’t automatically disqualify or ban you from acting as a director. It’s important to recognise liquidation isn’t a bad thing. It can be a sensible option and an orderly way to wind down a business.

Directors of liquidated companies have gone on to serve successfully as directors of other companies. If you haven’t committed any offences and you’ve acted in the best interests of shareholders and creditors during liquidation, you probably can continue to serve as a director.

8. Creditors will harass me during the liquidation process

Once liquidation has begun, your creditors are prevented from pursuing and harassing you for payment. After liquidation is complete, creditors can’t demand any outstanding debt. So don’t be concerned that starting the liquidation process will leave your business open to creditors’ demands. If liquidation is the right option for your business, it can be a way to take care of your company’s debt and wind down without facing constant demands from creditors.

If you’ve been issued with a Statutory Demand from a creditor, you can find out what the best course of action is in this video here.

Liquidation can put a stop to worries about insolvency and debt, but it’s a last step for winding down your business. If you’re weighing up the suitability of liquidation for your business, consult insolvency experts so you can make an informed decision. Working with experts ensures you carry out any insolvency processes legally and in a timely manner.

Australian Debt Solvers are insolvency experts with years of experience in helping clients resolve the most challenging business issues. If you’re wondering whether liquidation is the right option, contact our consultants today for a discussion.

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