What is a business liquidation?
Liquidation is a legislated 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.
In nearly every case, liquidation boils down to a cash flow issue. When it is no longer possible for a company to repay debts, and there are no remaining sources of available credit, it’s often necessary for the company to go into liquidation.
An insolvent company liquidation is one where there are insufficient funds available to pay all outstanding claims in full. This type of liquidation requires appropriate investigations to be undertaken a Registered Liquidator who is required to explain the cause of failure and report those results, together with any offences against the law, to creditors and ASIC.
An insolvent liquidation will ultimately result in the proper distribution of a company’s assets to its creditors in accordance with the order of priorities as detailed under the Corporations Act.
It’s important to think about this early, as directors can often breach their duties under the Corporations Act, in what is called insolvent trading. This is when a director becomes personally liable for any debts they incur whilst the company was considered insolvent.
Why should a business go into liquidation?
- Liquidation ensures assets are distributed among creditors in an orderly way and helps minimise the risk of insolvent trading.
- It gives shareholders, creditors, directors the opportunity to have an independent expert investigate and manage the liquidation.
When should you consider placing your Company into Liquidation?
- You continue to incur trading losses;
- You have given personal guarantees and 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;
- Your company cannot meet its tax obligations;
- It is likely you will not be able to pay your employees their entitlements;
- Creditors are calling to chase payment and you cannot pay your bills as and when payment is due;
- You have poor or deteriorating working capital;
- You have difficulties collecting debts.
Steps involved in a business Liquidation – what is the process of Liquidation?
We encourage you to call us free of charge on 1800 621 308 and obtain advice specifically tailored to your particular circumstances.
At Corporate Lifeline we provide free, no-obligation discussion to answer all of your questions about the liquidation process and insolvency in general. If liquidation is not appropriate, we will let you know the best solution to move forward. We can also provide advice on ways to restructure the company’s affairs in order to avoid formal insolvency administrations.
We have registered liquidators licensed with ASIC who are available to speak with you from the get-go.
What are the different types of Liquidations?
There are three (3) types of Liquidations:
1. Creditors’ Voluntary Liquidation
2. Court Liquidation
3. Members’ Voluntary Liquidation
What is a Creditors’ Voluntary Liquidation?
Creditors’ Voluntary Liquidation is an insolvency process that occurs most often when the company’s members/shareholders determine that the company is insolvent, or likely to become insolvent and can no longer satisfy its debts.
The process allows for the winding up of a company’s affairs without the need for Court intervention.
The aim is to wind up the affairs of the company 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.
There are other ways for a company to enter creditors’ voluntary liquidation which include creditors vote for liquidation following a voluntary administration or when a deed of company arrangement is terminated.
After a company goes into liquidation, unsecured creditors cannot commence or continue legal action against the company unless the court permits.
The liquidator will send the following to creditors:
- initial information about creditors’ rights in the liquidation;
- a statutory report within three months after their appointment; and
- other reports as the liquidator decides or that creditors reasonably request.
From time to time, a liquidator may call a creditors’ meeting to inform creditors about the liquidator’s progress, to find out creditors’ wishes on a matter or to approve the liquidator’s fees.
A liquidator is entitled to be paid for the necessary work they properly perform. Their fees will usually be paid from available assets before any payments are made to creditors. If there are no assets or only limited assets, the liquidator is sometimes not paid (or only partially paid) for the work they do. The liquidator may arrange for a third party to contribute to their fees.
A liquidator can recover, for the benefit of all creditors, certain payments the company made to creditors/directors known as voidable transactions.
What is a Simplified Liquidation?
A simplified liquidation is still a creditors’ voluntary liquidation but it is considered streamlined thus less timely and costly:
- liabilities of the company on the day a liquidator is first appointed in the creditors’ voluntary winding up must not exceed $1 million;
- the company will not be able to pay its debts in full within twelve (12) months;
- the directors must within five business days (after the day of the meeting of the company at which the resolution for voluntary winding up was passed) give to the liquidator:
- a report on the company’s business and affairs; and
- a declaration that they believe, on reasonable grounds, the company meets the eligibility criteria for the simplified liquidation process.
- no person who is a director of the company, or who has been a director of the company within the twelve (12) months before the date a liquidator was first appointed, has been a director of another company that has been under restructuring or subject to the simplified liquidation process within the period of the preceding seven (7) years;
- the company has not undergone restructuring or been the subject of a simplified liquidation process in the preceding seven (7) years;
- the company has given returns, notices, statements, applications and other documents required under the Income Tax Assessment Act 1997.
The liquidator in the creditors’ voluntary winding up may adopt the simplified liquidation process if:
- they believe on reasonable grounds 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;
- the liquidator has given each member and creditor, at least ten (10) business days before adopting the simplified liquidation process, written notice of:
- a statement that they believe on reasonable grounds the eligibility criteria for the simplified liquidation process will be met;
- an outline of the simplified liquidation process; and
- a statement they will not adopt the simplified liquidation process if at least 25% in value of creditors direct in writing not to adopt the simplified liquidation process.
What is a Court Liquidation?
A court liquidation is a type of insolvency that 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 the liquidator is to investigate the company’s affairs and report any offences and other relevant matters to shareholders.
What is a Members’ Voluntary Liquidation?
A Members’ Voluntary Liquidation 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.
In a members’ voluntary liquidation 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 are distributed in their actual form rather than in the form of post-sale cash proceeds.
The main reason for a solvent company to liquidate 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.
Another reason to wind up the affairs of a company is if the objectives/projects have been concluded.
What are the consequences of going into business liquidation?
Effect of liquidation on directors
On liquidation, the powers of the directors’ cease. It is the liquidator who is given extensive powers and responsibilities to undertake any actions in the conduct of the winding up.
Directors do, however, have statutory responsibilities during the liquidation.
Directors must deliver the company’s books and records to the liquidator.
The directors are also required to meet with the liquidator and provide information about the company’s affairs as the liquidator reasonably requires. Generally, a liquidator 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. He or she may have a claim for a loan account balance or may be an employee. Directors do not receive any statutory priority for retrenchment payments. Any amount of a director’s employee entitlements claim which is in excess of the statutory limit, will rank as an unsecured creditor.
The liquidator’s 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 which specifically target directors. Directors may be potentially exposed to claims for insolvent trading and voidable transact ions as well as compensation claims for breach of directors’ duties.
Effect of liquidation on employees
The appointment of the liquidator results in the deemed termination of contracts of employment. 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.
Effect of liquidation secured creditors
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 by the liquidator.
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.
Effect of liquidation on unsecured creditors
Once a liquid at or 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 liquidator will distribute dividends on a pro-rata basis.
What is the difference between business liquidation and voluntary administration?
The simple difference is 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.
What is the role of a liquidator?
Irrespective of the type of winding up, or the method the liquidator’s appointment, the liquidation process is largely similar.
Except under limited circumstances, and then only for the beneficial disposal or winding up of the company’s business the company’s business and trading operations will cease when a liquidator is appointed.
The liquidator’s duty is to 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 affairs of the company to determine whether there have been any offences committed in relation to the management of the company. If so, the liquidator must report such offences to ASIC.
The liquidator must also review the company’s precious trading and transactions. This may disclose certain potential recovery actions which may be available to the liquidator against directors or others.
When the liquidator has 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.
What are the benefits of liquidation?
- Immediately ending the stress of continual creditor harassment
- Diverting attention to the Liquidators 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 often has been fought for years
- Being able to concentrate of obtaining a regular income
- Being in a position to improve health and personal relationships undone by years of stress
The liquidator’s investigation
The liquidator must establish whether all of the available assets of the company have been disclosed and realised.
A liquidator’s investigation must also consider and report whether there have been any offences committed in relation to the company.
A major aspect of the liquidator’s investigation is the determination of whether there are legal actions or other recoveries available to improve the return to creditors.
The investigation conducted by a liquidator in a members voluntary winding up is likely to be less extensive than for other types of liquidation due to the company’s solvency and the fact that all creditors’ claims will be paid in full.
The investigation conducted by a provisional liquidator will likewise be less extensive – as the purpose of the provisional liquidation is to maintain the ‘status quo’. However in some cases, the Court order appointing the provisional liquidator may require that investigation into a specific aspect of the company’s operations be conducted.
Initially, the liquidator will review the report as to affair s, company records and financial statements to confirm asset acquisitions and disposals, movements in loan accounts and major asset write-downs. The liquidator will account for any discrepancies to ensure all assets have been realised.
Establishing when the company became insolvent is a critical element of a liquidator’ s investigation. There are a number of recovery actions available to a liquidator under the Corporations Act which have the effect of overturning certain pre-liquidation transactions or enable recoveries to be made from third parties.
However, in order for recoveries to be successful, the liquidator needs to establish that the company was insolvent at the time of the transaction – or became insolvent as a consequence of the transaction.
The actions available to a liquidator include:
Insolvent trading claims against the company’s directors (or a holding company), where the liquidator may recover compensation for losses suffered by the company as a result of the directors incurring debts at a time when the company was insolvent.
Unfair preference claims, where creditors received payment within six months of the liquidation at a time when the company was insolvent and the creditor in quest ion received more than the creditor would have received on liquidation. A longer period of four years applies to related entities.
Uncommercial transactions, where the company entered into a transaction at the time it was insolvent which was to the detriment of the company given the relative benefits to the company and other party(ies) to the transaction.
A liquidator will also give careful consideration to transactions involving directors. ” Unreasonable” director related transaction s are capable of being set aside by a liquidator. The insolvency of the company is not necessarily a factor.
Other investigations by a liquidator will include the consideration of the validity of any security interests in property of the company, whether any transactions are void under statute, or whether any other recoveries can be made.
The purpose of a liquidator’s investigation is to maximise realisations for the benefit of the company’s creditors. The liquidator has a range of statutory powers to assist in the investigation process – including the conduct of public examinations and the power to seize company property and records.
Should the liquidator’s investigation disclose any offences committed in relation to the management of the company, or the conduct of its business, a statutory report must be lodged with ASIC.
Finalisation of a liquidation
Once all funds have been realised, clearances received from the regulators and dividends paid in accordance with the statutory priorities, the liquidation can be finalised. A Court liquidation is finalised by an order of the Court releasing the liquidator and ordering the company be deregistered.
If the liquidator has insufficient funds to apply for a Court order, he or she may apply to ASIC to deregister the company.
A voluntary liquidation can be finalised by statute – the deregistration of the company occurs three months after the liquidator lodges a return of the final meeting.
Alternatively, if no final meeting is held, the liquidator may apply to ASIC to deregister the company.
How long does Liquidation take?
There is no set time frame to complete liquidation. However, at Corporate Lifeline we aim to complete a simple liquidation within 4-6 months. Occasionally if the matter is more complex a liquidation may take longer than this.