Discover the fundamentals of liquidationDiscover the fundamentals of liquidation

Liquidation: A Guide for Australian Businesses (2022)

  • July 25th, 2022
  • Mitchell Ball

What is the meaning of liquidation?

Liquidation is the process of winding up the company’s affairs, conducted under the Corporations Act.

Generally, the process involves the breakdown of the company’s structure in an orderly manner, and the appointed liquidator investigates the company’s affairs. The company’s assets are also sold in an attempt to pay off all outstanding debts.

While the company structure survives during the liquidation process, once the process is finalised, the company is dissolved. During the process, all control of assets, the conduct of business, and any other financial affairs are transferred to the liquidator.

Once a company goes into liquidation, its unsecured creditors (those without a claim to the company’s assets) cannot instigate or continue legal action against the company unless permitted to do so by the court. Nevertheless, creditors have a range of entitlements in their pursuit to recover as much of their debt as possible.

Business trading can only resume if the liquidator believes that continued trading would be in the best interests of the creditors, and any necessary employment can be rehired by the liquidator. This generally happens when the liquidator believes the business will be sold as a ‘going concern,’ or to complete work-in-progress and sell inventory.

Importantly, the liquidator is obliged to wind up the affairs and cease trading as quickly and as cost-effectively as possible. This will help keep the cost of liquidation to a minimum.

Why consider entering liquidation?

There are many reasons why a company would consider entering liquidation. Entering liquidation can be a suitable path for both insolvent and solvent companies.

An insolvent company is when a company is unable to pay debts when they are due. When the company is experiencing some form of financial distress which can include:

  • Struggling to meet their tax obligations (PAYG, SGC and company tax)
  • Unable to recover money owed
  • Experiencing creditors hassling for payments

If the company continues to trade whilst insolvent, the director may be at risk of breaking insolvent trading laws, which can have serious consequences for the director. Many may consider liquidation as this alleviates the stress of running an insolvent company. Entering liquidation helps protects directors from personal liability by trading insolvent or from receiving a director penalty notice (DPN) from the ATO.

Director Penalty Notice (DPN)

If you as a director has received a director penalty notice (DPN) issued by the Australian Tax Office (ATO), you may need to place the company into liquidation. Entering the company into liquidation may remove you from being personally liable for the company’s debt. Each situation is different, and there are different types of director penalty notices. It is best to act as quickly as possible to ensure you are working with the ATO to repay the company’s tax obligations before they issue you with a formal DPN.

If you have received a director penalty notice, contact our insolvency experts for your free consultation.

A solvent company may enter liquidation for tax benefits, members of a company wanting to end operation or to proceed to another path.

What are the benefits and considerations of liquidation?

There are both benefits and considerations to liquidation you should be aware of.

Benefits of liquidation

  • A clean break –Liquidation allows you to set a clean break from your debts.
  • Relatively low costs –Entering liquidation usually includes a one-off payment, all other payments will be made from the sale of company assets. Liquidation offers a relative low-cost path for directors wanting to wind up the company’s affairs.
  • Outstanding debts can be written off – liquidation results in all debts incurred by the company that are owed to e.g., the ATO. You can move on and put your efforts towards the future.
  • The stress will be over – all the stress you have suffered as a director of a failing company will be behind you and you can look forward to moving on to a more positive time in your life.
  • Avoid personal liability – entering into liquidation means you are likely to avoid being personally liable for the company’s tax.
  • Stops creditors hassling you – creditors may begin to receive their dividend in order of priority once entering liquidation, they will be in communications with the liquidator as opposed to you.

Considerations of liquidation

  • All assets will be gone – the company’s assets will be sold in order to repay the debts of the company.
  • Potential reporting of any wrongdoing
  • Business closes – trading is ceased, and the company’s affairs are wound up.

What is the difference between voluntary and involuntary liquidation?

Liquidation can either be voluntary or involuntary, it is important to know the difference. Voluntary liquidation is decided by a of the company’s members or creditors to enter liquidation. This is referred to as Members Voluntary Liquidation for solvent companies and Creditors Voluntary Liquidation for insolvent companies.

In comparison, involuntary liquidation occurs following a court decision. This is known as a court-ordered liquidation. A court-ordered liquidation occurs when a liquidator is appointed by the court to wind up the company. This generally happens following an application to the court, usually by a creditor.

The different types of liquidation

Liquidation can differ depending on your business’ circumstances and what you’re seeking to achieve. The types of liquidation are:

Creditors’ voluntary liquidation (CVL)

Creditors’ voluntary liquidation is the most common type of liquidation for insolvent companies. It’s commenced voluntarily by a special resolution of the company’s members.

Opting for creditors’ voluntary liquidation could allow the business to act quickly, minimise the risk of serious consequences, and avoid incurring further debt.

The process begins by the director or secretary of the company calls for a meeting of all shareholders, this is usually done at a short notice. During this meeting, they conclude the company is insolvent and to place the company into liquidation by appointing a liquidator. Once your shareholders agree to appoint a liquidator, your chosen liquidator will then take care of the rest.

Your company directors will provide information in the form of a summary statement about your company to the liquidator. This statement includes information about your property, affairs, and financial circumstances.

The liquidator may convene a meeting of your company’s creditors within a given time frame, and the creditors might choose to appoint a committee of inspection to assist and advise the liquidator in his or her work.

Members’ voluntary liquidation (MVL)

A members’ voluntary liquidation could occur if a solvent company, but directors are choosing to stop trading. The main reason why a company would enter a MVL is to return capital and finalise affairs. This provides an opportunity for the director/s to explore a new path.

The process for a members’ voluntary liquidation starts by a majority of the company’s directors making a declaration of solvency and lodging it with ASIC. A declaration of solvency means the directors believe the company will be able to pay off all its existing debts within 12 months of the liquidation starting. Note if the company directors can’t provide a declaration of solvency, the company needs to opt for a creditors’ voluntary liquidation.

Next, the company members pass a special resolution to wind up the company. Then the liquidator is appointed, and once the appointment takes effect, the liquidator can begin to wind up the company’s affairs.

For more information on MVLs, read our article ‘What is a Members Voluntary Liquidation?’.

Provisional liquidation

Your company could opt for a provisional liquidation if you need to protect your business assets from risk of damage or loss.

A provisional liquidation means a court-appointed liquidator takes control of your company while an issue is resolved. Despite the name, a provisional liquidation doesn’t lead to liquidation; it only has an expert temporarily take over your business.

An example of the types of circumstances could lead to companies applying for provisional liquidation.

  • Debtor company hiding assets – If you’re a creditor and you think a debtor company is hiding assets or making them unavailable, a provisional liquidation could be the right option.
  • Directors acting recklessly – Provisional liquidation could be considered if you’re a stakeholder and you think the company directors are acting recklessly or in an unprofessional or self-interested way.
  • Director disputes – You could choose to enter provisional liquidation if the company directors are in a dispute.

A provisional liquidation gives the company a chance to resolve the situation, lets you protect the company from further damage, and could reduce the risk of damage or loss to business assets.

To learn more about Provisional Liquidation, read our article ‘What is Provision Liquidation?’.

Court liquidation

Court liquidation occurs when an application has been made to the Courts to wind up the affairs of a company. This can be initiated by a number of stakeholders, including but not limited to the creditors, members, liquidator, ASIC or APRA by serving a Statutory Demand. A Statutory Demand states the company to pay a debt in accordance to section 459E of the Corporations Act.

Once the courts have appointed a liquidator, the process is then followed in the same sequences as a Creditors Voluntary Liquidation (CVL).

What is the difference between company liquidation and voluntary administration?

There are large differences between voluntary administration and liquidation. Voluntary administration is often instigated by the company’s directors when they see insolvency looming. By appointing an administrator, they may be able to overcome the company’s financial problems and return to trading.

Voluntary administration may lead to the company executing a Deed of Company Arrangement (the preferred Voluntary Administration outcome), placed into liquidation, or handed back (though quite rarely) to the directors.

The Deed of Company Arrangement (DOCA) is a formal agreement between the creditors and the company to administer the company in a certain way, and this may include continuing to trade, selling assets, or refinancing debts. The aim is always to create a better return for creditors than what would result from liquidation.

Liquidation is quite the opposite to voluntary administration. Whether called for by creditors, shareholders, or the courts, liquidation means the writing is on the wall and the company will soon cease to exist. The liquidation process involves winding up the company’s affairs, selling assets to pay the creditors in order of priority, and closing the doors.

What are the roles involved?

Discover the roles of directors during liquidation

The role of directors during liquidation

The role of directors during the liquidation process is to cooperate with the liquidator. They must meet with the liquidator to help as required, hand over all information about the company including all books and records, advise the liquidator about all company property and its location.

Directors must also produce a report on company’s affairs and property (ROCAP) within fourteen days of the appointment of the liquidator (for court liquidation), or within seven days.

Discover the roles and responsibilities directors have during liquidation, here.

The role of the liquidator during company liquidation

Appointing an independent liquidator to undertake the liquidation process ensures adequate protection for creditors, directors, and members. The liquidator will:

  • Communicate and keep to all creditors (including banks), staff and suppliers up to date on the liquidation process.
  • Find, protect, and realise the assets of the company.
  • Investigate the affairs of the company.

If there are assets available after the cost of liquidation is covered, distribute the proceeds to secured creditors, employees, unsecured creditors, and if there is a surplus, then also to shareholders.

The role of creditors during liquidation of company

There are three types of creditors:

  • Secured creditors 
    Those who hold a security interest in some or all the company’s assets, such as a bank or other lender.
  • Unsecured creditors 
    Those who are owed money but hold no interest in a company asset. Employees of the company are unsecured creditors who receive priority in the distribution of realised assets – their outstanding entitlements are paid ahead of the claims of other unsecured creditors.
  • Contingent creditors
    A contingent creditor is a creditor that is owed funds that may not present legal obligation. A contingent creditor is under an existing obligation, which may or may not become subject to liability depending on a certain event occurring. In that event arising, the company is obligated to pay a sum of money.

Whether secured or unsecured, the role of creditors is to regain all or as much as possible of what is owed to them by the company, and they participate in the liquidation process in the following ways:

  • Receive initial notice of the liquidator’s appointment and their rights as creditors.
  • Receive a report from the liquidator after three months advising of the estimated value of company assets and liabilities, the progress of the liquidation, their likelihood of receiving a dividend, and possible recovery actions available to them.
  • Arrange or attend creditors’ meetings to discuss progress and, if required, vote on any resolution put to the meetings such as the amount being offered to creditors, approval of the liquidator’s fees, and even removal and replacement of the liquidator.
  • Form or sit on a committee of inspection (made up of creditors) to assist and advise the liquidator, monitor their conduct, and approve or deny certain steps in the liquidation process where appropriate.

Note: secured creditors are entitled to vote at creditors’ meetings if they don’t receive all that the company owes them and are also entitled to share in any dividend being paid to unsecured creditors if they have a shortfall. Learn more about what to do if a company that owes you money has gone into liquidation.

What is the general process of liquidation?

Together we will work through the steps involved during liquidation.

Company liquidation follows a series of clearly defined steps which are outlined in the Corporations Act. If a company is solvent (able to pay its debts), then it can simply be wound up by a resolution of its shareholders.

Winding up an insolvent company is a more complex procedure that involves the following steps:

  • The directors or company secretary call a meeting of members (shareholders) at the members meeting they (shareholders) resolve the company is insolvent.
  • The shareholders appoint a liquidator, who must be approved by a 75% majority.
  • The liquidator may not call a creditors’ meeting and may choose instead to lodge a progress report with ASIC. The report must include the liquidator’s acts and dealings, the conduct of the winding up, a summary of the tasks yet to be completed, and an estimate of when the liquidation will be finalised.
  • The liquidator may also ask creditors whether they wish to appoint a committee of inspection. This committee assists the liquidator and approves fees.

On January 1, 2021 we witnessed the introduction of a simplified liquidation process that was specifically designed for small businesses. It is accessible by those with 20 or fewer employees and no more than $1 million in liabilities. The purpose of this was to create a straightforward and simple process to save time and ultimately minimise costs.

Who gets paid first in liquidation?

The question of who gets paid first in liquidation is one of interest for all parties involved. The order, and the likelihood, of interested parties being paid from the realisation of a company’s assets.

  1. Secured creditors
    Those with proprietary claims over the company’s assets have priority over unsecured creditors so they are generally not negatively affected. It is common for secured creditors to allow the selling of assets, as long as the liquidator recognises their claims.
  2. Priority Creditors
    The first type of unsecured creditor to be paid ahead of others, generally referring to employees.
  3. Unsecured creditors
    Generally speaking, unsecured creditors are no longer able to pursue ordinary courses of action to recover debts. A raft of other claims are considered before theirs, including unpaid calls on shares, rights of actions for damages, compensation for insolvent trading, and property previously disposed of by the company.
  4. Shareholders
    They’re at the bottom of the priority list and only receive a return once the liquidator and all creditors are paid in full.

Employees

Employees are one of the main parties affected by liquidation. For business owners and employees alike, liquidation is regularly something that none of the parties have any experience with. Employees entitlements in liquidation include unpaid wages, superannuation, annual leave, and retrenchment.

In the event that there are insufficient funds, they may be able to recover some of their losses through the Fair Entitlements Guarantee (FEG).

How long does is the liquidation process?

Whilst entering liquidation takes an immediate effect, the process from start to end can vary depending on each case. We complete liquidations in a cost and time effective manner, averaging a 6–12-month process.

When does liquidation officially end?

Liquidation officially ends once the liquidator has finalised their investigations and applied for the company strike off. Once this is completed, the liquidator then lodges the final return for the company to be deregistered within a 3-month time period.

What is the cost of liquidation?

The cost of liquidation is largely dependent on the size of the company and the value of assets. We offer a free consultation to assist you with your queries and questions, from this we would be able to estimate a quote of liquidation for the company.

Contact the Australian Debt Solvers team to learn more about the costs involved in liquidating a company.

What can creditors do if they’re unhappy with the liquidation process?

Creditors have the right to request information from the liquidator at any time during the process. Given the request is reasonable, relevant and doesn’t breach the duties of the liquidator, the information must be provided to the creditor within 5 business days. If the liquidator requires more time to comply with the request, this will be done so in writing to the creditor the extension of the time period.

Creditors can also provide the liquidator with directions in relation to the process. However, the liquidator is not required to comply with the directions if they choose to do so it must be documented in writing with their reasoning.

Creditors have the right to call for a creditors meeting for an update of how the liquidation is progressing. They can also vote at the meeting to replace the liquidator with another of their choice.

Conclusion of the liquidation

Liquidation has no time limit; however, we act in a timely and cost-effective manner.

There is no set time limit on liquidation and the process lasts as long as necessary. However, the liquidator is obliged to complete the task in a timely and cost-effective manner. The liquidation is finalised when the liquidator releases the company’s available property, and the funds are distributed accordingly. A 5603 report must also be submitted to ASIC, the purpose of the report is to show the outcome of the administration following the end of the company’s affairs

In liquidation, the liquidator is not required to hold a final meeting of creditors. Following a decision that the company’s affairs are wound up, the liquidator may seek an order for release from the court and request that ASIC deregister the company or go directly to ASIC to deregister the company.

After Liquidation

The first thing to remember as the director of a liquidated company is that you’re not alone. It is important for directors to be aware of legislative changes as they may provide additional options. This includes safe harbour provisions which have been designed to provide directors additional time while protecting them from personal liability for insolvent trading.

As a former director of a liquidated company, you may experience some short-term fallout. When you’re a director of a liquidated company, this is flagged on the ASIC file and this information then finds its way to the various credit agencies such as Veda or Dun and Bradstreet.

Personal guarantees

If you are applying for finance, you’ll be asked about what happened, and in most cases, it won’t be a deal breaker with the financer. Provided your own financial situation is sound, you should still be able to obtain finance, even if you have to pay a little more for it.

Contrary to popular belief, you can also become a director of another company after liquidation.

Want to find out more?

At Australian Debt Solvers we’re experts at solving debt-related issues for businesses large and small, and we’re registered liquidators and administrators with ASIC and members of the Australian Restructuring Insolvency & Turnaround Association (ARITA).

If you have any questions about liquidation that haven’t been answered by this guide, or you’re requiring specialised advice tailored to your business situation, feel free to contact us on 1300 789 499 and we’ll be happy to help. We’ve helped countless Australian businesses through the liquidation process, and we offer a complete in-house service, meaning we can keep your costs to a minimum.

As you can see there is a lot to take in when it comes to liquidation irrespective of the size of the company. The complexities and potential legal ramifications further highlight the need to obtain expert advice from insolvency professionals. The team at Australian Debt Solvers comprises of industry specialists across all aspects of insolvency including liquidation. Contact us for a free consultation today.

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