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.
This page contains general information about company liquidations in Australia. To read about our company liquidation service in particular, please visit this page instead.
- What are the different types of liquidation?
- How do I appoint a Liquidator?
- What is a Creditors Voluntary Liquidation?
- What is a Members Voluntary Liquidation?
- What is an Official Liquidation? (Also called a “Court Liquidation”)
- What is a Provisional Liquidation?
- Which type of liquidation do I need?
- Why would I choose to liquidate my company?
- What is the process of liquidation?
- Does a liquidation affect a director’s credit rating?
- Does a liquidation also stop enforcement of personal guarantees?
- 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?
- What investigations does the liquidator do?
- How long does a liquidation take?
- Does the liquidator hold meetings?
- Can a liquidator recover property disposed of?
- Does the liquidator contact the creditors?
- What is a Phoenix Company and is it relevant?
What are the different types of liquidation?
There are four basic types of liquidation:
- Creditors Voluntary Liquidation – the most common type and the one that a director and shareholders use to voluntarily appoint a liquidator to an insolvent company
- Members Voluntary Liquidation – used to voluntarily finalise the affairs of a solvent company
- Official Liquidation – where the Court appoints a liquidator on application by a creditor
- Provisional Liquidation – where the Court appoints a liquidator for a period of assessment often in a director’s dispute
There is more detail below a little further down this page on each of these.
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 liquidator, such as Dissolve, 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.
What is a Creditors Voluntary Liquidation?
Creditors Voluntary Liquidation (CVL) is the most commonly used type of liquidation appointment. It is easy, low cost and initiated by the directors and shareholders. 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.
What is a Members Voluntary Liquidation?
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.
What is an Official Liquidation? (Also called a “Court Liquidation”)
An Official 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. Official Liquidations and Court Liquidation are the same thing by a different name. 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 Court orders the appointment of an Official Liquidator.
What is a Provisional Liquidation?
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.
Which type of liquidation do I need?
If you are a director and you think you might need to liquidate your company, then you need to establish if the company is solvent or insolvent. If it is insolvent, then you will choose a Creditors Voluntary Liquidation (“CVL”) and if it is solvent you will need a Members Voluntary Liquidation (“MVL”). Normally a director does not “choose” Official or Provisional liquidation – they are imposed on the company by the Courts on application form an unpaid creditor.
Why would I choose to liquidate my company?
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.
What is the process of a liquidation?
The process of a liquidation can vary a little depending on whether it is a Creditors Voluntary Liquidation, a Members Voluntary Liquidation or an Official 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 and hold a Creditors’ Meeting;
- 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.
Does a liquidation affect a director’s credit rating?
Yes, 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.
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.
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 bans around 100 directors a year.
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. That is, they are registered and supervised by ASIC and you can check out their registration by looking on the ASIC website. 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). And yes, the partners at Dissolve are Registered Liquidators (Registration 155400) and members of CAANZ and ARITA.
What investigations does the liquidator do?
The liquidator must conduct investigations into the company’s affairs as a result of the Corporations Act, ASIC Regulations and Professional Standards. Usually it will include investigations of the following matters:
- When the company became insolvent and whether any debts were incurred after that date (that is Insolvent Trading);
- Whether the directors committed any offences;
- Whether there are any payments to particular creditors that are preferential and may be recoverable;
- Whether there are any hidden assets to be recovered or other legal actions to consider.
How long does a liquidation take?
There is no set time limit on a liquidation. It will take as long as necessary to complete all matters. That can be as little as six months but may take years. However, provided a director completes the relevant forms and delivers all books and records to a liquidator then the director’s role finishes very quickly.
Does the liquidator hold meetings?
The requirements for a liquidator to hold a Creditors Meeting varies a little depending on the type of liquidation, but in general, a liquidator will hold three types of Creditors Meetings:
- A first Creditors Meeting, which will be within 18 days of being appointed in a Creditors Voluntary Liquidation, or when there are matters to consider in an Official Liquidation;
- An Annual Meeting within 3 months of the yearly anniversary of appointment (in a small liquidation it is common that no one attends those meeting);
- A Final Meeting of Creditors at the end of the liquidation (again it is common that no one attends those meetings).
A liquidator may call other Creditors Meetings at their discretion or when demanded by creditors.
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.
What is a Phoenix Company and is it relevant?
A Phoenix Company is a term applied to a new company that “rises from the ashes” of an old 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.