WHAT IS LIQUIDATION?
Liquidation is the process of winding up and finalising a company’s affairs. A liquidation is conducted under the Corporations Act. It usually involves the collection of assets, the undertaking of investigations, and the distribution of funds to creditors and then shareholders. Directors often choose to liquidate a company so as to get protection from Insolvent Trading laws, a Director Penalty Notice from the ATO and to bring a company’s affairs to an end.
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- May prevent you from becoming personally liable for the company’s tax debt
- Brings to a close the stress and worry of trying to save the business
- Stops creditors hassling you
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Table of Contents
- Overview: Why consider company liquidation?
- Before liquidation: what are the other options?
- Is a liquidation preferable to a voluntary administration?
- What are the pros and cons of liquidation?
- Which type of liquidation should I choose?
- Solvent liquidation: Member’s Voluntary Liquidation (MVL)
- Insolvent liquidation: Creditor’s Voluntary Liquidation (CVL)
- Recuperating debt: Court Liquidation
- Provisional liquidation
- What is the liquidation process?
- How are different parties affected by a liquidation?
- Creditor priorities and types
- Who gets paid first in a liquidation?
- During a liquidation, when does the company cease to trade?
- How long does the liquidation process typically take?
- How do liquidators sell the assets of the company?
- What kinds of investigations does the liquidator do?
- What kinds of meetings will the liquidator hold with various parties?
- When does the liquidation process end?
- How much does a liquidation cost?
- Other Questions
- How do I appoint a liquidator?
- Does a liquidation also stop enforcement of personal guarantees?
- What is a phoenix company?
- What can creditors do if they’re unhappy with how the liquidation is proceeding?
- How many liquidations happen each year?
- Can a director of a company in liquidation still be a director of other companies?
- Will creditors still contact a director after liquidation?
- What is a liquidator?
- Can a liquidator recover property disposed of?
- Does the liquidator contact the creditors?
- Personalised advice
Overview: Why consider company liquidation?
There are various circumstances and pressures that a company can face that could lead its directors to consider a liquidation. Most often, the company is under some form of financial stress. This could take the form of any of the following:
- Struggling or unable to pay company tax
- Struggling or unable to pay employees
- Struggling or unable to recover money owed to your business
- Creditors hassling for payment of debts
In short, many of the above things could be signs that the company is considered insolvent, which is defined as “being unable to pay debts as they fall due”. Insolvency is not necessarily binary (various things influence whether a company would be considered insolvent or not), but if the company is insolvent and it continues to trade then it and its directors may be at risk of breaching insolvent trading laws which can have personal consequences for the directors.
Liquidation is often a very good option for a director. Being a director of an insolvent company is stressful and worrying. A director will be facing pressure from employees, shareholders, the bank and creditors. A liquidation will often:
- Help protect a director from Insolvent Trading;
- Help protect a director from personal liability for tax debts that might result from a Director Penalty Notice from the ATO – this is a complicated area so check out the page on DPNs.
- Relieve a director’s worry and stress by legally bringing the affairs of the old-company to a close.
Even if the company is solvent, the company and its directors may still consider liquidating it for tax benefits. There are different types of liquidation for these circumstances.
Under other circumstances, a liquidation can be imposed from outside the company by order of a court (called a “court liquidation”). This occurs when a creditor has first issued a Creditors’ Statutory Demand. If they have been unsuccessful in recuperating their debts after 21 days, they can then approach the court to issue a wind up notice leading to an enforced liquidation.
All of the above are general circumstances under which a liquidation process may be initiated, and there are various kinds of liquidation for the different circumstances.
If you are not sure that you need to liquidate a company, read our article explaining the reasons for liquidating your company. Or access our service page to learn the benefits of Dissolve’s liquidation service.
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- Read about Simplified Liquidation and Simplified Restructuring
Before liquidation: what are the other options?
Most directors consider liquidation in circumstances of financial stress. But before a director turns to liquidation there are a whole range of other solutions that can be considered. Those solutions come under the general banner of Corporate Restructuring. The overriding philosophy is to find the “Least Drastic Solution”.
Restructuring a company or business can involve a wide variety of measures including performance improvement, informal restructuring, voluntary administration or even liquidation of some companies within a group. There are a lot of technical terms used and a lot of different solutions. Sometimes professionals try and bring some order to the assessment process by using what is called The Restructuring Spectrum. It describes the broad range of situations a company may be facing. For each situation there is an appropriate solution and a corresponding solution.
So let’s look at some easy examples.
- On the left side of the Restructuring Spectrum would be “Under performance” and the solutions might be simple Performance Improvement measures or Cost Cutting.
- In the middle of the Spectrum would be Financial Distress which might require an Informal Workout with Creditors.
- On the right side of the Spectrum would be Insolvency requiring more drastic solutions such as using Voluntary Administration.
Probably the most common method used to restructure a company is Voluntary Administration. In a voluntary administration the directors appoint an administrator to oversee the running of the company for 30 days while they try to form a deal to be put to creditors. You can read more about voluntary administration in our guide here.
A restructuring can be achieved in a short space of time or it can take years to complete. Some restructurings can be dealt with by a company entirely internally by focusing on performance improvement. That is, it is not necessary to involve external parties such as the company’s bankers or trade creditors. In more serious situations a company will need to approach its creditors and agree some sort of forbearance by the creditors whilst the company deals with its problems. This is often referred to as a “workout“. A workout can involve an informal agreement between the company and its creditors.
It is often difficult for a director to figure out what position their company is in and what are the potential solutions to the problem. So, there is an easy to use online tool called AskIRA. By answering four easy questions, IRA can diagnose the problem and suggest possible solutions.
If none of those options are possible, then liquidation can be a good option to consider.
Is a liquidation preferable to a voluntary administration?
Voluntary Administration is designed to save or sell a company with a viable business. Liquidation is used to close a company with a business that is not viable. Voluntary Administration is more complicated and therefore quite a bit more expensive than Liquidation.
A lot of insolvency practitioners will recommend a Voluntary Administration no matter what – simply because it allows them to charge more! At Dissolve we don’t upsell you on bells and whistles you don’t need, if it is apparent to us a VA won’t work, we will recommend you go straight to liquidation – saving you time and money.
What are the pros and cons of liquidation?
|Can help directors to avoid personal liability||The business comes to an end|
|Closes a company that cannot continue and stops it incurring further debt||All assets of the company must be surrendered for sale|
|Can Trigger the Government Fair Entitlement Scheme to pay employees when the company can’t||The reason the company cannot pay it’s debts will be investigated (this could be a pro or a con)|
|Stops creditors hassling the directors||Any wrongdoing will be reported to ASIC|
|Can help protect the director and creditors from insolvent trading|
Which type of liquidation should I choose?
Depending on your circumstances different types of liquidation may be applicable. As a general rule:
- If your company is solvent, consider a member’s voluntary liquidation – which is used to voluntarily finalise the affairs of a solvent company
- If your company is insolvent, consider a creditor’s voluntary liquidation – the most common type and the one that a director and shareholders use to voluntarily appoint a liquidator to an insolvent company
- If you’re looking to recuperate corporate debt from a debtor, consider a Statutory Demand which can lead to a court liquidation – where the Court appoints a liquidator on application by a creditor
- In complex internal disputes or similar difficult situations you may go to court to have a Provisional Liquidator appointed – where the Court appoints a liquidator for a period of assessment in a director’s dispute
The next sections will go over these types of liquidation in detail.
Solvent liquidation: Member’s Voluntary Liquidation (MVL)
A Members Voluntary Liquidation (MVL) is available only to solvent companies. The primary reason for a liquidator being appointed to a solvent company is to return capital to shareholders and finalise the company’s affairs. MVL appointments are commonly made as part of the simplification of a group of companies to save on administration costs or to obtain tax benefits when distributing past profits to shareholders. The conduct of an MVL is quite procedural including formal meetings, forms to be lodged with ASIC, notifications to government authorities and advertisements in ASIC’s Insolvency Website. In a practical sense, the affairs of the company must be wound up, including the disposal of all assets, and payment of all liabilities.
Insolvent liquidation: Creditor’s Voluntary Liquidation (CVL)
Creditors Voluntary Liquidation (CVL) is the most commonly used type of liquidation. It is easy to start, low cost and initiated by the directors and shareholders. It is the voluntary way to close a company that has debt that it can’t pay. It starts with the directors resolving that the company is insolvent and the directors then, with the help of a Registered Liquidator, call an Extraordinary General Meeting for the shareholders to pass a Special Resolution to wind up the company. When you have appointed the liquidator, they will sell any company assets (if available) and distribute the proceeds among the company’s creditors. Any remaining debt owed by the company is legally discharged.
A Court Liquidation is a liquidation ordered by a Court, usually on the application of a creditor. They differ from a CVL (above) in that they can be ordered whether the company’s directors agree or not, so they are not voluntary. Court Liquidations were called Official Liquidations until a law change in 2016 . A winding up by the court is started by creditors, directors, shareholders or ASIC. To start the court liquidation process, a creditor will serve a Statutory Demand on the company to pay a debt pursuant to section 459E of the Corporations Act. Failure to pay the money demanded in a Statutory Demand allows an application to be made to the Court to have the company wound up.
The appointment of a Provisional Liquidator can be made by a Court upon the application of the company, its directors, or its creditors. In making an application to the Court, evidence is put forward as to the financial state of the company and the reasons for the need to remove the directors from their positions. The most common two reasons given to a Court are that there is a shareholders’ dispute relating to the management of the company and/or the directors are not acting in the interests of the company. The primary role of the Provisional Liquidator is to take control of the company and to preserve its assets. That is, to maintain the “status quo” until the Court can hear an application to wind up the company. During the period of Provisional Liquidation, the director’s powers are suspended.
What is the liquidation process?
The process of a liquidation can vary a little depending on whether it is a Creditors Voluntary Liquidation, a Members Voluntary Liquidation or a Court Liquidation. The liquidator runs the process which will include:
- Lodgement of various appointment documents at ASIC;
- Advise various government organisations, such the Australian Tax Office and state government revenue offices, of the appointment;
- Requesting the director(s) complete a Questionnaire and to deliver the books and records of the company to the Liquidator;
- Collects and sells the assets of the company;
- Prepares a Creditors Report;
- Reviews the books and records and reports findings to ASIC;
- Maybe commence recovery processes if there were “hidden assets“ or assets that should be recovered;
- If funds are available, pay a dividend to creditors;
- Finalise the liquidation by preparing a Final Report for Creditors, lodge various documents with ASIC and request that ASIC deregister the company.
How are different parties affected by a liquidation?
A good-willed director may be concerned for all parties involved in a liquidation. Winding up a company affects various parties in various ways. Here are a few:
The directors of the company
A liquidation may have an effect on a director’s credit rating, but not a severe effect. Credit Reporting Agencies keep track of companies that enter liquidation (for insolvent companies) and the names of the directors of those companies. However, a liquidation is not bankruptcy! A company is a separate legal entity to a director and the company’s directors are not automatically liable for a company’s debts. A personal bankruptcy is a serious black mark on your credit rating – being a director of a company that went into liquidation is a less serious mark.
The shareholders of the company
There are no repercussions for a shareholder of a company that enters liquidation – other than the loss of any value the shares they held once may have had.
The employees of the company
Liquidation will mean the company’s employees lose their employment. It might be a blessing in disguise though because if the company is unable to pay the employee’s entitlements then once it is in liquidation the government steps in to help. Through their Fair Entitlements Guarantee, an employee of a company that has entered liquidation may be able to claim:
- unpaid wages—up to 13 weeks
- unpaid annual leave and long service leave
- payment in lieu of notice—up to five weeks
- redundancy pay—up to four weeks per full year of service
For anything else they are owed they become a priority creditor in the liquidation
The ATO is a creditor to some degree in almost every liquidation. By and large they rank as an unsecured creditor, meaning they rank at the bottom with everyone else when it comes to repayment.
Creditors are the people or companies that are owed money by the company entering liquidation.
All creditors will be notified at the start of the liquidation by mail. They will receive several reports from the liquidator, informing them of the process of the liquidation and the likelihood of them receiving any of the money owed to them (sometimes called a distribution or dividend by the liquidator).
In the majority of liquidations creditors receive between 0 and 10% of the total amount owed to them.
The liquidator “becomes” the company upon appointment. That means he or she is personally liable for any debts the company incurs whilst in liquidation. That is why companies very rarely continue to trade whilst in liquidation.
The Australian Securities and Investments Commission (ASIC) oversees the registration of companies and company liquidators. A key part of the liquidation process is for the liquidator to prepare a report to ASIC telling them why the company failed, and what caused the failure. ASIC then decide if there are matters in the liquidators report that they wish to pursue. Actions arising from this process included Director Banning, civil and in extreme cases criminal penalties.
Creditor priorities and types
A Secured Creditor is a creditor who holds a valid security interest that is registered on the Personal Property Securities Register (PPSR) – once upon a time called a “Charge”. More often than not secured creditors are banks or finance companies.
If there are funds to be distributed to creditors in a liquidation, secured creditors are paid first.
Priority Unsecured Creditor
Employees of the company in liquidation enjoy priority over other unsecured creditors. This often comes in to play with Superannuation which is not covered by the Government’s Fair Entitlements Guarantee scheme like other entitlements are.
An unsecured creditor is a company or person that is owed money by the company in liquidation, but has not registered a security on the PPSR. Most creditors fall into this category.
Unsecured creditors receive payment in a liquidation only after all other creditor categories have been satisfied.
The ATO ranks as an Unsecured Creditor. Many years ago they used to be Secured, but traded Secured Creditor status for the ability to pursue company directors personally for unpaid PAYG, Superannuation and now GST with a Director Penalty Notice.
Who gets paid first in a liquidation?
1.Secured creditors are paid first.
Any surplus is then distributed as follows:
2.The costs of liquidation
3.Priority unsecured creditors (employees); and then
During a liquidation, when does the company cease to trade?
In nearly all cases the liquidator will insist the company ceases trading before the liquidation becomes effective, or at least at the same time. When the liquidation becomes effective, the liquidator becomes personally liable for any debts the company incurs, so very few liquidators take the risk of continuing to trade.
How long does the liquidation process typically take?
The straightforward liquidation of a small company with no assets can be complete in as little as six months. A more complex liquidation with significant assets where wrongdoing is being investigated may be active for years.
How do liquidators sell the assets of the company?
Company liquidators usually outsource the process of selling assets to an auctioneer. Selling company assets is usually near the top of the list of tasks to complete in a liquidation so it is usually complete within one month of commencing the liquidation process.
What kinds of investigations does the liquidator do?
A liquidator is required by the Corporations Act to undertake some investigations into the affairs of a company. The investigations will include a review to see if any offences were committed and a review of past transactions to see if any money can be recovered for creditors. The liquidator reports on the investigation findings to ASIC and to creditors in a “3 month” report.
What kinds of meetings will the liquidator hold with various parties?
Once upon a time the liquidator had to hold several meetings with creditors of the company to allow them to vote on various matters. Regulations changed in 2017 that meant now there is no requirement for creditors to meet in a standard liquidation. If a liquidator needs the creditors to vote on a matter it can be done remotely through a “resolution without a meeting” – a process where the liquidator sends a letter outlining the resolution with a polling slip and the creditor votes by post.
When does the liquidation process end?
The liquidation process ends once the liquidator has finished investigating any matters they see as relevant, and ASIC have provided clearance for them to apply for company strike off. The liquidator will then lodge their final return which causes ASIC to move the company to deregistered status in 3 months time.
How much does a liquidation cost?
The cost of a liquidation can vary depending on the circumstances. We will normally want to see an amount paid upfront to cover minimum expenses, but if they company has assets of sufficient value, we may waive that requirement. If the company can pay the fee, it should, if not the liquidation can be funded by anyone.
Here at Dissolve we are small and efficient. This means we can provide a liquidation process faster and cheaper than big firms.
How do I appoint a Liquidator?
Appointing a liquidator is an easy process in a Creditors Voluntary Liquidation and a Members Voluntary Liquidation. It requires a resolution (simply signing a document) of the directors and then a resolution by the shareholders. You will need to contact a registered liquidator, who can provide the draft Minutes of Meeting and a Consent to Act as Liquidator – you can’t appoint a liquidator without that liquidator providing a written Consent first. If you are a creditor and want to appoint a liquidator to a company that owes you money you will need to contact a Lawyer – it is a long, technical and often expensive process.
Does a liquidation also stop enforcement of personal guarantees?
No, a creditor with a personal guarantee from a director can still enforce that personal guarantee after a company enters liquidation. If personal guarantees are extensive then it may be worth considering a Voluntary Administration as they are not enforceable whilst the VA is in progress.
What is a phoenix company?
The general concept is that a Phoenix Company is a company that “rises from the ashes” of a failed company. The term has strongly negative connotations because Phoenix Companies are used to transfer assets illegally and to avoid paying creditors. If a sale of assets is not carried out correctly – and legally – then the directors could have problems in the future with a liquidator, ASIC and the ATO. A director should never contemplate using a Phoenix Company. The most common scenario painted is when:
- A new company, which we call “NewCo”, begins trading as an identical business from the same location, with a similar trading name as another company, which we call “OldCo”.
- The assets of OldCo are transferred to NewCo and no consideration is paid for those assets.
- OldCo probably enters liquidation and leaves a number of creditors unpaid.
What can creditors do if they’re unhappy with how the liquidation is proceeding?
Creditors can compel the liquidator to call a meeting, and can vote at that meeting to replace the liquidator with another of their choice.
How many liquidations happen each year?
Australia currently averages 8,000 liquidations per year. That is likely to increase significantly once government COVID protections end.
Can a director of a company in liquidation still be a director of other companies?
Yes. There is no automatic prohibition on a director of a company that enters liquidation holding another, or many other, directorships. However, the Corporations Act gives ASIC the power to ban someone from being a director for a period of up to five years if they have been a director of two or more companies that entered liquidation within the last seven years. In practice, ASIC has informed us that in the financial years 2018, 2019 and 2020 the number of directors disqualified was 45, 59 and 51 respectively.
Will creditors still contact a director after liquidation?
Usually creditors will stop contacting a director after a company enters liquidation. The practical situation is that a director’s powers cease on the appointment of a liquidator so it is of no use for a creditor to chase a director. The exception is that a creditor may continue to contact a director if they hold a personal guarantee.
What is a liquidator?
A liquidator is the person who administers company liquidations. It is a personal appointment – a liquidator may work for a company, such as Dissolve, but they conduct the liquidation in their own name. For a Creditors Voluntary Liquidation, the liquidator must be a Registered Liquidator. Many liquidators are also members of a professional accounting body such as Chartered Accountants Australia New Zealand (CAANZ) and also the professional body for insolvency practitioners, Australian Restructuring and Turnaround Association (ARITA).
Can a liquidator recover property disposed of?
Yes, in some circumstances, a liquidator does have the power to recover property sold or disposed of prior to the liquidation. It’s a complicated area but in brief a liquidator may seek to recover asset where a disposal of assets was uncommercial or done to defeat creditors.
Does the liquidator contact the creditors?
Yes, in a Creditors Voluntary Liquidation, the liquidator must call a Creditors Meeting and notify anyone who is, or may be, a creditor.
Every company’s circumstances are different. We strongly encourage anyone considering liquation to give us a call to discuss your specific circumstances. We may even recommend a cheaper (or free!) solution.