But what happens when a company goes into liquidation in Australia? It’s a complex process, but one that sets you on a path toward resolving your situation. That’s why understanding the business liquidation process is critical to your future. And our expert guide walks you through the steps to take to protect your professional interests.
What Happens to Creditors When a Company Goes Into Liquidation?
The liquidation of a company will not, of itself, affect the rights of a secured party in company property which is subject to a security interest.
The secured party may realise the security interest outside the liquidation process or consent to its realisation. Where there is a shortfall after deducting the net value of the security interest, the balance of the debt will rank as unsecured.
However, some classes of secured parties. The holders of circulating security interests (formerly known as floating charges)- will have their claim to priority subordinated to the unpaid entitlements of employees.
Effects on Unsecured Creditors
Once a liquidator is appointed, an unsecured creditor’s rights against a company or its property are replaced by a right to prove in the liquidation for the amount of the outstanding debt.
The claims of unsecured creditors rank equally in a winding up subject to any priorities imposed by the Corporations Act. Where realisations in the liquidation are insufficient to discharge all creditors’ claims in full, the distribution of dividends will be on a pro-rata basis.
Business Liquidation Advice: The Path to a Debt-Free Future
Liquidation is a process by which the assets of a registered company are realised, its financial affairs finalised, and the company is deregistered, meaning it ceases to exist.
When you’re dealing with financial distress and continue incurring trading loss, with no conceivable way to repay debt, this is when it’s a suitable decision. Other key factors of consideration are when you have:
- Given personal guarantees, if you do not pay the creditors, they can commence legal action against you personally
- A liquidator can pursue directors personally for insolvent trading if they continue to trade the business after the company became insolvent, and you want to avoid personal liability
- Issues meeting your tax obligations
- Struggles with paying employees
- Creditors are calling to chase payment, and you cannot pay your bills as and when payment is due
- Poor or deteriorating working capital
- Difficulties collecting debts
What are the Benefits of Liquidation?
There are many reasons to consider this route, from a business and professional standing, including:
- Immediately ending the stress of continual creditor harassment
- Diverting attention to the liquidator’s office and away from the Director
- Protection from possible personal liability for insolvent trading and unpaid taxes
- Bringing to an end an unwinnable fight that has often been fought for years
- Being able to concentrate on obtaining a regular income
- Being in a position to improve health and personal relationships, undone by years of stress
Why Should a Business Go Into Liquidation?
It ensures assets are distributed among creditors in an orderly way and helps minimise the risk of insolvent trading. This way, you can provide creditors, directors, and shareholders with a fair means of investigation into your business to ensure debts are repaid.
An insolvent liquidation will result in the proper distribution of a company’s assets to its creditors by order of priority as detailed under the Corporations Act.
Remember, the liquidation process in Australia does mean your company will come to an end. This may be upsetting or create concerns about your professional future, but it is a process that can repay debts and end affairs in an amicable, legally compliant way. As such, in future you may still be able to return to prominent roles in other companies.
The Types of Liquidation
Below are the types to be aware of. Which one is suitable will depend on your specific circumstances.
1. Creditor’s Voluntary Liquidation
This insolvency process occurs when a company’s members/shareholders determine the company is insolvent, or likely to become insolvent, and can no longer satisfy its debts.
The business liquidation process enables the orderly winding up of a company’s affairs without the need for court intervention. This is completed by orderly realisation and distribution of a company’s assets among its creditors and for a liquidator to investigate as to why the company failed.
Once the above has been achieved, the company will be deregistered. After a company goes into liquidation, unsecured creditors can’t commence or continue legal action against the company unless the court permits.
2. Simplified Liquidation
This is a creditor’s voluntary liquidation, but it’s legally considered a streamlined version that takes less time and costs less money. The liquidator in the winding-up process may adopt the simplified process if:
- They believe on reasonable grounds that the eligibility criteria are met
- Not more than twenty (20) business days have passed since a liquidator was first appointed in the creditors’ voluntary winding up
- They have given each member and creditor, at least ten (10) business days before adopting the simplified process, written notice of
- A statement that they believe, on reasonable grounds, the eligibility criteria for the process will be met
- An outline of the simplified process
- Statement they won’t adopt the simplified process if at least 25% in value of creditors directly write not to adopt it
3. Court Liquidation
Requires an application to the court by creditors, company members or other interested parties to wind up a company due to unpaid debts. A liquidator is appointed by the court to administer the insolvency process in order to realise the company’s assets and disburse funds to creditors in accordance with established priorities.
The responsibility of this individual is to investigate the company’s affairs and report any offences and other relevant matters to shareholders.
4. Members’ Voluntary
This is a method by which a solvent company is wound up and its assets are distributed to its members. The members appoint the liquidator after the Directors make a declaration that the company can pay all debts in full within twelve (12) months.
All creditors are paid in full, with any surplus assets being distributed to its members/shareholders. Assets might be realised (sold) or you could have assets distributed in specie, which means they’re distributed in their actual form rather than in the form of post-sale cash proceeds.
The main reason for a solvent company to use this process is the taxation benefits afforded to liquidators. These benefits include capital profits generated by a company from pre-CGT assets (i.e. acquired prior to 20 September 1985) will retain their pre-CGT status and small business CGT concessions.
The Consequences of Business Liquidation
This can be broken down into the impact on directors and employees.
Effect on Directors
The powers of the director cease. It’s the liquidator who is given extensive powers and responsibilities to undertake any actions in the conduct of the winding up. The directors are also required to meet with them and provide information about the company’s affairs as the liquidator reasonably requires. Generally, they will request, at a minimum, that a director completes a questionnaire about the company’s business, assets and activities.
A director can lodge a claim as a creditor in the liquidation. They may have a claim for a loan account balance or be an employee. Directors do not receive any statutory priority for retrenchment payments. Any amount of a director’s employee entitlements claim that is in excess of the statutory limit, will rank as an unsecured creditor.
The investigation will also scrutinise certain transactions of the company involving the company’s directors and related parties. This is because certain recovery actions are available in a liquidation that specifically target directors. Directors may be potentially exposed to claims for insolvent trading and voidable transactions as well as compensation claims for breach of directors’ duties.
Effects on Employees
The appointment of the liquidator results in the deemed termination of employment contracts. Employees are unsecured creditors in a liquidation, but their claims are entitled to be paid in priority to other unsecured creditors – and even in priority to certain holders of security interests.
When there are insufficient funds available to meet the claims of employees in full, the Federal Government’s Fair Entitlements Guarantee (FEG) may have application. Under FEG, employees may receive payment for unpaid wages and leave entitlements, payments in lieu of notice of up to five weeks and redundancy of up to four weeks per year of service. FEG does not cover unpaid superannuation contributions.
Stop Your Financial Distress – Claim a Free Liquidation Consultation
At Corporate Lifeline, we’ve helped hundreds of businesses overcome financial distress and successfully repay their debts. Claim your free consultation with our expert business liquidation advice and begin your journey toward a debt-free future.
What is the Role of a Liquidator?
They must secure, realise and dispose of the company’s assets and property for the benefit of its creditors. A liquidator is also required to investigate the company’s affairs to determine whether any offences have been committed in the management of the company. If so, the liquidator must report such violations to ASIC.
Another duty is to review the company’s precious trading and transactions. This may disclose certain potential recovery actions that are available to the liquidator against directors or others.
When they have made all possible realisations and pursued all potential areas of recovery, he or she must apply the funds in his or her possession to discharge the company’s liabilities. The Corporations Act outlines the priority in which payments are to be made to creditors.
How Long Does Liquidation Take?
There’s no set time frame for completion. However, at Corporate Lifeline we aim to complete a simple process within 4-6 months. Occasionally, if the matter is more complex, it may take longer.
What is the Difference Between Business Liquidation and Voluntary Administration?
The simple difference is that voluntary administration is intended to save or sell a viable business, where liquidation is designed to close a company with a business that is not viable.
