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Most company directors have no experience with how to deal with a struggling company and often don’t understand the terms advisers use. Here are the basics on what liquidation is and a run down of the different types of liquidation.

Liquidation is a formal way to wind up a registered company. It is only possible for companies registered with the Australian Securities and Investment Commission (ASIC). You can tell if you have a registered company if it has an ACN number and usually has Pty Ltd (short for Proprietary Limited) at the end of its name. If you run a business as a Sole Trader or in a Partnership framework you can’t wind it up with a liquidation.

There are three main types of liquidation: Creditors Voluntary Liquidation, Members Voluntary Liquidation and Official Liquidation. We’ve explained each of them below. They differ depending on the initiator and the state of the company at the time of liquidation.

A Voluntary Liquidation is started by resolution of the company’s Directors and then its Shareholders. A Voluntary Liquidation takes one of two forms depending on the solvency of the company (if it can pay its debts when they fall due). We have a simple online test you can run called Is My Company Insolvent that will help you to decide if your company is Solvent or Insolvent.

Solvent companies require a Members Voluntary Liquidation (MVL). Insolvent companies require a Creditors Voluntary Liquidation (CVL).

Members Voluntary Liquidation

A Members Voluntary Liquidation (MVL) is a formal way to wind up a solvent company. An MVL requires the company to be able to pay all of its debts and that all tax lodgements are up to date. We have a detailed information page on MVLs here: Solvent Company Liquidations

Creditors Voluntary Liquidation

If your company is insolvent (can’t pay its’ debts when they fall due) then it needs a Creditors Voluntary Liquidation (CVL). Don’t be confused by the name, a CVL is still initiated by the shareholders of a company. We have a detailed information page on CVLs here: Creditors Voluntary Liquidations

Official Liquidation

In an Official (or Court) Liquidation a creditor of the company applies to court to force the debtor into liquidation. The process to do so is lengthy and can be relatively expensive for the creditor. The process involves the creditor serving a Statutory Demand on the company to pay a debt pursuant to section 459E of the Corporations Act. If the company fails to pay the money demanded in the Statutory Demand the creditor then makes an application to the Court to have the company wound up. In urgent cases involving assets that may be at risk an applicant can request a Provisional Liquidator be appointed to protect those assets.

We have a detailed information page on Court Liquidations here: Court Liquidations

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