What Is Company Liquidation?
Company liquidation is the formal process of ‘winding up’ an insolvent company. The process includes realising the company’s assets, ceasing or selling operations, distributing the realisation’s proceeds among creditors and distributing any surplus among shareholders. Liquidation is often associated with insolvent companies that need to be dissolved, but the process can be applied to both insolvent and solvent companies. The process involves appointing an independent and suitably qualified person (the liquidator) to take control of the company so that its affairs can be wound up in an orderly and fair way for the benefit of all creditors.
What causes a company to liquidate?
here are many reasons to enter into company liquidation but some of the most common reasons include:
- Unmanageable company and business tax debts;
- Cash flow problems;
- High rents;
- PAYG overdue;
- Inability to uphold taxation payment plans;
- Debtors not paying on time – causing cash flow problems;
- Inability to meet payment plans;
- Inability to uphold Director’s guarantees;
- Inability to uphold personal guarantees to suppliers; and
- Receipt of a Directors Penalty Notice.
When And Why Should I Liquidate?
Ideally, you should commence company liquidation as soon as it comes to your attention that your company is insolvent. There are benefits to company liquidation that makes it a viable option for insolvent companies. For example, upon commencement of a company liquidation, the company’s creditors will cease pursuing payment from the Director and instead deal exclusively with the appointed liquidator. This takes the stress of constant harassment and threats of legal action off your shoulders and allows you to move on with your life.
Additionally, a Director Penalty Notice (DPN) issued against the company director will be rescinded if the company is placed into company liquidation within 21 days of the date of issue (provided it is not a “knock-down” DPN).
Any potential for criminal prosecution due to breaches of Insolvent Trading laws will be averted, and once the liquidation process is complete, the director and the company board will be free to move on to more prosperous future business ventures. For more information on insolvent trading, visit our Directors page.
What are the different types of company liquidation?
There are three core types of liquidation, which reflect the types of ways liquidation can commence and the condition of the company:
- Creditors Voluntary Liquidation – the type of liquidation that directors 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;
- Court Liquidation – where the Court appoints a liquidator on as a result of an application or request made by a creditor.
For more information, visit our Types of liquidation page.
Who gets paid first and when?
Generally, the order in which funds are distributed is:
- Costs and expenses of the Company Liquidation, including liquidators’ fees;
- Outstanding employee wages and superannuation;
- Outstanding employee leave of absence (including annual leave, sick leave—where applicable—and long service leave);
- Employee retrenchment pay; and
- Unsecured creditors.
Each category is paid in full before the next category is paid. If there are insufficient funds to pay a category in full, the available funds are paid on a pro rata basis (and the next category or categories will be paid nothing).
What does the liquidator do?
Throughout a company liquidation, the liquidator has a duty to all of the company’s creditors. To fulfil this duty, liquidators must:
- Secure and realise all company assets and make all recoveries;
- Distribute resources to creditors;
- Conduct all relevant investigations into the financial affairs of the company;
- Make distributions to creditors (and distribute any surplus to shareholders);
- Inform both creditors and asic of their actions; and
- Arrange the de-registration of the company.
The liquidator is appointed as a qualified and independent party which creditors rely on to advise them about dividend prospects. With this responsibility on their shoulders, liquidators are obligated to:
- Act impartially;
- Act with skill and diligence; and
- Avoid placing themselves in a position where personal interests could conflict with professional duties.
If the company is without sufficient assets, one or more creditors may agree to reimburse a liquidator’s costs and expenses of taking action to recover further assets for the benefit of creditors.
If any additional assets are recovered then the liquidator or particular creditor can apply to the court for the creditor to be compensated for the risk involved in funding the liquidator’s recovery action throughout the company liquidation.
For more information, visit our Liquidators page.
What happens after a company liquidation?
Company liquidations effectively end when the liquidator has realised and distributed all the company’s available property and made their report to ASIC.
In a creditors’ voluntary liquidation, the liquidator must hold a final joint meeting of the creditors and members to give an account of how the company liquidation has been conducted and of how company property has been disposed. After the final meeting is held, the company is automatically deregistered by ASIC three months after a notice of the holding of the meeting is lodged.
In a court liquidation, the liquidator is not required to hold a final meeting of creditors. After the liquidator decides that the company’s affairs are fully wound up, they may:
- Seek an order for release from the court;
- Seek an order for release and that ASIC deregister the company; or
- If there are insufficient assets to obtain a court order for the company’s deregistration, request that ASIC deregister the company.
A company ceases to exist after it has been deregistered.