A Guide to Australian Company Liquidation

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:

1. Struggling or unable to pay company tax
2. Struggling or unable to pay employees
3. Struggling or unable to recover money owed to your business
4. 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. Not sure where your company stands? Find out how to know if your company is solvent or insolvent.

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.

Another key benefit of liquidation is that it provides a structured and transparent process for winding up a company’s affairs. It also benefits creditors by maximising the potential recovery of debts through the fair distribution of available assets.

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.

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.

1. On the left side of the Restructuring Spectrum would be “Under performance” and the solutions might be simple Performance Improvement measures or Cost Cutting.
2. In the middle of the Spectrum would be Financial Distress which might require an Informal Workout with Creditors.
3. 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?

Which type of liquidation should I choose?

Depending on your circumstances different types of liquidation may be applicable. As a general rule:

1. If your company is solvent, consider a member’s voluntary liquidation – which is used to voluntarily finalise the affairs of a solvent company
2. 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
3. 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
4. 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.

The Difference Between Voluntary and Involuntary Liquidation

Voluntary Liquidations happen when company officers vote and agree to put their company into liquidation, these take the form of Member’s Voluntary Liquidations for solvent companies, and Creditors Voluntary Liquidations for Insolvent companies.

Involuntary Liquidations are where a company is forced into liquidation. This most commonly happens as a result of a creditor applying to court to appoint a liquidator, called a Court Liquidation.

Solvent liquidation: Member’s Voluntary Liquidation (MVL)

A Members Voluntary Liquidation (MVL) is available only to solvent companies (see our full guide here). 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, notifications to government authorities and advertisements in the Insolvency Notices 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. Learn more about liquidation for solvent companies.

Insolvent liquidation: Creditor’s Voluntary Liquidation (CVL)

A Creditors Voluntary Liquidation (CVL) occurs when an insolvent company’s directors and shareholders resolve to appoint a liquidator after determining the company can no longer pay its debts (see our Creditors Voluntary Liquidation guide here). 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.

Learn more about liquidation for insolvent companies.

Court Liquidation

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 or shareholders. 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.

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.

Simplified Liquidation

Simplified Liquidation is a faster, low-cost version of the Creditors’ Voluntary Liquidation (CVL) process, designed for small Australian businesses with debts under $1 million. Introduced in 2021, it streamlines the winding-up process by reducing reporting, investigations, and costs, making it easier for insolvent small businesses to close efficiently.

What is the liquidation process?

General 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. Liquidation begins with the appointment of a registered liquidator, who is responsible for managing the process, which will include:

• Lodgement of various appointment documents;
• 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, such as equipment, stock, vehicles, property, and any remaining business inventory;
• Prepares a Creditors Report;
• Reviews the books and records and reports findings;
• 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 and request deregistration of the company;
• Once the liquidation process is complete, the company is dissolved, deregistered, and no longer exists as a legal or operational entity.

Get a full overview of what happens when a company goes into liquidation in Australia.

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. Learn more about what happens to a company director when the company is in liquidation.

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

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.

The creditors

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. Find out more about what return creditors typically receive in a liquidation.

Payments to creditors follow a strict order of priority. The costs of the liquidation are paid first, followed by secured creditors who hold claims over company assets. Unsecured creditors are paid last, if there are any remaining funds.

The liquidator

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.

Creditor priorities and types

Secured Creditor

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.

Unsecured Creditor

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.

ATO

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
4. Unsecured creditors.

Learn more about who gets paid first in a liquidation.

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?

Whilst the liquidation takes effect immediately, a straight forward liquidation of a small company with no assets can be complete in six months. A more complex liquidation with significant assets where wrongdoing is being investigated may be active for years. In recent tests, Dissolve completed liquidations in an average of 8 months, whereas the average for our competitors was 12 months.

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 the regulator and to creditors in a “3 month” report.

What reports does a liquidator give to creditors?

The liquidator issues an initial report 10 days into the liquidation process announcing the liquidation and providing information on creditors rights. A detailed report is issued 3 months into the process that explains the findings of the investigation phase and the likelihood of a dividend to creditors. In complex matters there may be a further final report or remuneration report.

What formal meetings will the liquidator hold with creditors?

The law regarding creditors meetings in older liquidations

Previously the liquidator had to hold several meetings with creditors of the company to allow them to vote on various matters.

The law regarding creditors meetings since 2017

Regulations changed in 2017 that meant now there is no requirement for a creditors meeting 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 creditors vote by post. However, creditors with claims of a certain value can request in writing that the liquidator hold a meeting of creditors. The right to request meetings, including in the circumstances described below, is not available if a simplified liquidation process is adopted.

What creditors meetings can be held?

A liquidator can call a meeting of creditors whenever they wish. Creditors can also force a liquidator to call a Meeting. A meeting may be requested by creditors in the first 20 business days in a creditors’ voluntary liquidation if 5% or more of the value of the creditors request the meeting. Otherwise, meetings can be requested at any other time or in a liquidation by:

• 10% but less than 25% of the known creditors on the condition that those creditors provide security for the cost of holding the meeting; or
• 25% or more of known creditors; or
• creditors by resolution, or
• a Committee of Inspection (this is a smaller group of creditors elected by, and to represent, all the creditors).

If a request complies with these requirements and is ‘reasonable’, the liquidator must hold a meeting of creditors as soon as reasonably practicable.

When does the liquidation process end?

The liquidation process ends once the liquidator has finished investigating any matters they see as relevant, and the regulator have provided clearance for them to apply for company strike off. The liquidator will then lodge their final return which causes the company to be deregistered 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 the 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.

What can creditors do if they’re unhappy with how the liquidation is proceeding?

Can creditors request information?

Creditors have the right to request information from the Liquidator at any time. A liquidator must provide a creditor with the requested information if their request is ‘reasonable’, the information is relevant to the liquidation, and the provision of the information would not cause the liquidator to breach their duties. A liquidator must provide this information to a creditor within 5 business days of receiving the request, unless a longer period is agreed. If, due to the nature of the information requested, the liquidator requires more time to comply with the request, they can extend the period by notifying the creditor in writing.

Can creditors tell a liquidator what to do?

Creditors, by resolution, may give a liquidator directions in relation to a liquidation. A liquidator must have regard to these directions, but is not required to comply with the directions. If a liquidator chooses not to comply with a direction given by a resolution of the creditors, they must document their reasons. An individual creditor cannot provide a direction to a liquidator. Creditors can also compel the liquidator to call a meeting and can vote at that meeting to replace the liquidator with another of their choice. Learn more about how creditors can replace a liquidator in Australia.

Personalised advice

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.

Frequently Asked Questions