What does liquidation mean for your businessWhat does liquidation mean for your business

What does liquidation mean in business?

  • April 27th, 2022
  • Domenic Calabretta

The definition of liquidation is the process of winding up a company’s affairs under the Corporations Act. When a company is trading insolvent meaning it is unable to meet financial commitments or pay debts, which means the company will then enter liquidation. The assets are liquidated (sold) in order to repay debts and the company will be deregistered.

It is important for directors to be aware that it is illegal to trade when insolvent, and continuing to do so will result with the risk of being personally liable.

Our registered liquidators are based Australia wide and will guide you through the liquidation process, our aim is to minimise your stress.

What happens if a company goes into liquidation?

The director will appoint a liquidator to wind up the company’s affairs. When a company goes into liquidation, the liquidation order of priority is shifted to the appointed liquidator. During this process the liquidator will control all assets, conduct the business and all financial matters.

It is up to the liquidator’s discretion on the liquidation order of priority, that means the liquidator will determine if the business should continue to trade if it benefits creditors. During this process all bank accounts are frozen and employees can be terminated.

The liquidator’s role is to wind up the affairs of the company in a quick and cost-effective manner to keep the cost of liquidation to a minimum.

Learn more about what happens when a company enters liquidation by reading our guide, ‘The Complete Guide to Business Liquidation’.

Who gets paid first when a company goes into liquidation?

If a company goes into liquidation, the main concern is who gets paid first and what the order of priority of debt is. What happens in liquidation is the follow the order of who gets paid first, that order is that secured creditors will receive payment first. Any surplus is then distributed to the costs of liquidation, priority unsecured creditors and then followed by unsecured creditors.

A secured creditors is defined as one who holds a valid security interest on the registered Personal Property Securities Register, also known as a “charge”. More often a secured creditor is often a bank or finance company.

An unsecured creditor is one who has no collateral or security over the company’s assets, this is why they are secondary when it comes to payment in liquidation. An unsecured creditor could be trading partners that supply goods and services to the business.

To learn more about who gets paid if a company goes into liquidation, read our article ‘Who gets paid first when a company goes into liquidation?’.

What is a director's responsibility in liquidation?

As a director it is important to understand a director’s responsibility in liquidation. Liquidation can be a difficult process for directors who might be unsure of their responsibilities. Directors are responsible for ensuring the business is trading insolvent, if any signs of insolvency directors must act quickly to ensure they are not personally liable. It is important to note that directors of solvent company can also enter liquidation through a Members’ Voluntary Liquidation (MVL).

When it comes to winding up a company, directors must make a declaration of solvency and lodge with ASIC. It is the director’s responsibility in liquidation to then appoint a liquidator to begin the process.

Learn more about Director’s responsibility in liquidation in our article ‘Director Responsibilities and Liquidation’.

What is the difference between voluntary and involuntary liquidation?

Liquidation is the process of winding up the company’s affairs, selling assets and distributing accordingly to repay creditors.

There are two types of liquidations, voluntary and involuntary liquidation.

  • Voluntary Liquidation
    A voluntary liquidation is also referred to known as Creditor’s Voluntary Liquidation (CVL) which occurs when the business is insolvent and must cease trading. During a CVL, the Director/s appoint a liquidator to continue the process of liquidation.
  • Involuntary Liquidation
    An involuntary liquidation differs as this is initiated by a creditor by applying a winding up order to the courts. If the application is deemed successful by the courts, they will appoint a liquidator on the director/s behalf.

The team at Australian Debt Solvers are registered by ASIC liquidators who will guide you through the process and alleviate your stress during this time. Discover our liquidation services today and together, we will find a path best suited for your financial situation.

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