Which type of liquidation do I need?
If you are a director considering the possibility of liquidating your company, you will need to establish if the company is either solvent or insolvent. If it is insolvent, then your course of action will be a Creditors Voluntary Liquidation and if it is solvent you will need a Members Voluntary Liquidation. Directors do not normally opt for court or ‘official’ liquidations as they are imposed on the company by the Courts on application from an unpaid creditor.
How do I know if my company is insolvent?
Ask yourself: ‘is there sufficient cash available to pay debts in full as and when they fall due?’ If the answer is no, then your company may be insolvent. Symptoms of insolvency can include being unable to afford to pay all creditors as per their trading terms, entering into instalment repayment agreements, ongoing trading losses, an inability to borrow funds, being issued demand notices from creditors, having cheques dishonoured, or an inability to produce accurate financial records.
What if my company is insolvent?
If your company is insolvent, it is important to prevent any further activity that would allow it to incur further debt. You will then need to determine the most appropriate course of action, like a suitable insolvency option like company liquidation. However, you may also be able to restructure, refinance or obtain equity funding to recapitalise your company.
How long is the liquidation process?
There is no set time or general rule of thumb that informs a liquidation process’ duration. The length of any liquidation process depends on a company’s size, the complexity of its business operations, and more important the complexity of its financial situation. A liquidation process could be as little as six months or it could take years. Its speed is also impacted by company directors and other stakeholders’ willingness to comply with a liquidator in an efficient manner.
What is the role of the liquidator?
The role of a liquidator will investigate the financial affairs of the company and ascertain whether or not improper or illegal transactions have been made. This could include actions such as void transactions or preferential payments, insolvent trading or offences committed by company officers. The liquidator will also thoroughly investigate a company’s books and records – a responsibility governed by the Corporations Act 2001 (Cth), ASIC Regulations and Professional Standards. Usually, a liquidator’s investigation will delve into the possibility of insolvent trading, whether the directors committed any offences, whether there are any recoverable payments to particular creditors, whether there are any hidden assets to be recovered or if there are any other legal actions to consider.
What is the consequence for me if my company has traded while insolvent?
Corporations legislation makes it an offence for directors to trade and incur debt if their company is insolvent. A liquidator (or other eligible parties) can also seek monetary compensation from a director equivalent to the loss suffered by insolvent trading. There are defences stipulated in the legislation which directors may be able to avail themselves of. It is always prudent for company directors to seek their own independent legal advice about any potential personal ramifications.
Can I instruct a liquidator?
No. If you’re are a director it is your responsibility to co-operate with the liquidator to provide all necessary company information they need to conduct their duties. A liquidator must act, and be seen to act, independently and without bias from any stakeholders (including directors). Typically, liquidators will understand and appreciate the difficulties and stress you may be experiencing and will be available to answer your queries as best as possible.
Does a liquidation affect a director’s credit rating?
Liquidation does have an effect on a director’s credit rating. Credit reporting agencies will keep a director’s name and the company in liquidation on record, which could affect the ability to secure business-related credit as lenders will have access to this information during background checks. However, it is important to know that liquidation does not have a significantly negative impact on a director’s personal credit rating. A company is a separate legal entity to a director and the company’s directors are not automatically liable for a company’s debts. Therefore, unlike bankruptcy, company liquidation is unlikely to affect a director’s ability to secure personal loans or non-business-related lines of credit.
Does liquidation affect my ability to act as director for other companies?
Your ability to act as director for other companies will be affected if the Australian Securities and Investments Commission (ASIC) finds a pattern of corporate insolvency that indicates you are unsuitable for the job. If you have been a director of two or more companies that entered liquidation within the last seven years, you can be banned from acting as a director for up to five years under the Corporations Act 2001 (Cth).