In order to succeed in business, you must understand all its aspects, including those that are less appealing. And given the current economic climate, many companies are having to rethink their strategies, with some considering liquidation as a last resort when all other options have been exhausted.
While liquidation is never the prefered outcome, it is important for businesses to educate themselves on the liquidation process in case they reach the point where it becomes the only viable path forward.
So, here is everything you need to know about the liquidation process.
What is Business Liquidation?
Liquidation is a legal process that involves winding up a company and distributing its assets to claimants. This typically occurs when a company is insolvent, meaning it can’t pay its debts when they are due.
In Australia, the process of liquidation is governed by the Corporations Act 2001, ensuring it is conducted in an orderly and fair manner. It’s a complex process, requiring the expertise of a registered liquidator who takes control of the company, disposes of its assets, pays off its debts, and finally dissolves the company.
What are the 3 Types of Liquidation?
There are three primary types of liquidation.
Creditors’ Voluntary Liquidation
Initiated by the company’s directors, this form of liquidation takes place when they believe insolvency is imminent. An administrator is appointed to investigate the company’s affairs, find solutions, and make recommendations to the company’s creditors.
Members’ Voluntary Liquidation
A member’s liquidation occurs when the company’s shareholders decide to voluntarily wind it up, typically when but the shareholders have decided to stop doing business even if they’re running a solvent company.
Compulsory (Court) Liquidation
Also referred to as involuntary liquidation, this is initiated by a court order, often following a petition from a creditor. If the court finds sufficient grounds, it will appoint a liquidator to commence the liquidation process.
What Happens When a Company Goes into Liquidation in Australia?
When a company goes into liquidation in Australia, it ceases to trade, and its assets are sold to repay creditors. The process begins with the appointment of a liquidator, who takes control over the company’s affairs. The liquidator’s responsibilities include collecting and selling the company’s assets, investigating and reporting on the company’s affairs, and distributing any available funds to creditors.
The liquidator must also enquire into the company’s financial affairs and may even report to the Australian Securities and Investments Commission (ASIC) about the conduct of the company’s directors and any offences they may have committed.
Once all assets have been dealt with and all investigations completed, the company is deregistered. At this point, the company ceases to exist and can no longer carry out business operations.
The Liquidation Process: A Step-by-Step Guide
The process of liquidating a business involves several key steps, each with its own complexities and requirements. The following is a simplified step-by-step guide on how a typical business liquidation process unfolds:
Step | Description |
Assessment of Financial Affairs | The liquidator reviews the company’s financial records to understand its financial health and the extent of its debts. |
Evaluation of Claims Against Company Directors | The liquidator evaluates potential misconduct or mismanagement by the company directors. Legal action may be taken against directors if they haven’t fulfilled their fiduciary duties. |
Establishment of Claims Against Debtor Companies | The liquidator identifies debtor companies or individuals and establishes claims to collect outstanding debts. |
Reporting to Creditors | Regular updates are provided to the creditors about the progress of the liquidation, potential recoveries, and any other relevant information. |
Realisation of Company’s Assets | The liquidator sells off the company’s assets, including tangible assets like property and equipment, and intangible assets like intellectual property. The proceeds from these sales are used to repay the company’s debts. |
Payment to Creditors | The liquidator distributes the proceeds to the creditors in a specific order of priority, usually starting with secured creditors, followed by unsecured creditors, and finally, if any funds remain, the shareholders. |
Deregistration of the Company | The liquidator applies to deregister the company, formally ending its existence in the eyes of the law. |
Impact of Liquidation on Various Parties
The impact of a business going into liquidation is far-reaching, affecting a variety of stakeholders, from company directors to employees and from secured creditors to unsecured creditors.
Implications for Company Directors
Upon the appointment of a liquidator, company directors lose their decision-making authority. While directors are generally protected during the liquidation process, there are instances where they may be held personally liable, such as for breach of their director duties or operating unlawfully.
Note: A director’s duties include acting in good faith and exercising reasonable care and diligence. Directors must not use their position to gain an advantage for themselves, and they must prevent and avoid insolvent trading.
Implications for Employees
When a company enters liquidation, its operations usually cease, leading to employees often being made redundant. In certain jurisdictions, there are provisions to ensure that employees receive their unpaid wages, accrued leave, and other entitlements from the proceeds of asset sales.
Implications for Creditors
Secured creditors, who hold a vested interest in some of the company’s assets, have a legal guarantee to get their money back from the liquidated companies. However, unsecured creditors may only get some of their money back or nothing at all, as they are only repaid after secured creditors and priority unsecured creditors, such as employees.
Key Takeaways
- Liquidation is a legal process for winding up insolvent companies and distributing its assets to claimants. It is governed by the Corporations Act 2001 in Australia.
- There are three main types of liquidation – creditors’ voluntary, members’ voluntary, and compulsory liquidation. Each has different initiating events and processes.
- When a company enters liquidation, a liquidator takes control, sells assets, pays creditors, investigates affairs, and eventually deregisters the company.
- The liquidation process involves steps like assessing finances, evaluating claims against directors, establishing debtor claims, reporting to creditors, selling assets, paying creditors, and deregistering the company.
If you need more advice or assistance, don’t hesitate to contact KNS Accountants and Business Advisors. Our team of experienced professionals are here to help guide you through the process with expert advice and personalised solutions.
FAQs
How to Check if a Company is in Liquidation in Australia
If you suspect a company is in liquidation in Australia, you can verify it using the ASIC published notices listing. Simply search by the company name or number to find out whether a business has become insolvent and who has been appointed as an administrator.
Who Gets Money First in Liquidation?
When a company goes into liquidation, the proceeds from selling its assets are distributed to creditors and claimants in a specific order:
- Secured creditors get paid first. These are creditors, like banks or lenders, that have a security interest in some company assets.
- Preferential creditors are paid next. These include employee wages, taxes owed, and payments owed in certain employee benefit plans.
- Unsecured creditors are paid after preferential creditors. These are suppliers, vendors, contractors, or other unsecured lenders. They are ranked by the size of their claims.
- Shareholders are last in line for any remaining funds, though they rarely receive anything in liquidation.
So in summary:
- Secured creditors
- Preferential creditors
- Unsecured creditors
- Shareholders
The liquidator oversees this process to ensure creditors are fairly paid in order of priority according to the company’s remaining assets.
What Happens to Unsecured Creditors During Liquidation?
When a company enters liquidation, unsecured creditors find themselves lower in priority compared to secured creditors when it comes to getting paid. They are unlikely to receive full repayment on debts owed by the insolvent company, as the liquidator will first use proceeds from asset sales to pay secured creditors.
And unsecured creditor will have to submit a proof of debt to the liquidator to establish the amount they are owed. The liquidator will then pay unsecured creditors based on the size of their proven claims, but only after paying the secured creditor first.. If funds remain after priority creditors are paid, unsecured creditors receive a proportional share based on their claim size. However, in most cases, proceeds from asset sales are insufficient to fully pay unsecured creditors after higher priority creditors are paid.
So at the end of the process, unsecured creditors often receive little to nothing on debts owed, and their only recourse is to pursue legal action to try to recover amounts owed.
Do You Sell a Company’s Assets During Liquidation?
Yes, selling off a company’s assets is a key part of the liquidation process. The appointed liquidator is tasked with identifying all assets owned by the insolvent company and liquidating them to generate proceeds. This includes both tangible assets like property, equipment, and inventory, and intangible assets like intellectual property, licenses, and trademarks.
The liquidator values the assets and sells them in a fair and orderly manner, typically via auction or private treaty. Secured assets are sold with consent from the secured creditors who have a claim on them. The liquidator aims to obtain the best reasonable price for the assets, sometimes appointing professional valuers and agents to assist with sales. The proceeds from asset sales are then distributed to creditors based on priority of claims, with secured creditors paid first. Selling assets converts them to cash so debts can be paid and also ensures assets are not left idle or deteriorating.
Disclaimer
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.
