When a company becomes insolvent and enters the liquidation process, this can be a stressful and confusing time for those directly involved. This article is a guide to the process and what your role may involve.
We will end with advice on how to recover from financial difficulties and avoid insolvency and the threat of liquidation for your business.
Liquidation vs Bankruptcy
To avoid confusion, bankruptcy is a means for a person to release themselves from their debts. Liquidation is a process for a company to settle all, or some, of their outstanding debts.
How did we get here? or Why does a small business go into liquidation?
A creditor has applied to the court to obtain the settlement of outstanding debt and the court has appointed a liquidator to wind up the company.
Creditors vote (Voluntary Administration)
Company creditors voted for the company to be put into liquidation as an outcome of voluntary administration.
Company directors may have decided to place the company in the hands of an administrator. The three possible outcomes of the Voluntary Administration process, voted upon by the company’s creditors, are:
- the company is returned to the control of the directors and normal trading continues.
- A Deed of Company Arrangement is approved, setting out an arrangement to repay all or part of the outstanding debts.
- The company is put into liquidation.
There are a number of reasons why this decision may have been made:
- Shareholders or company owners/directors have had enough of running the business. It may be they are fed up with struggling and see this as their only option.
- A small business owner wanting to retire may decide to wind up his company via a liquidator, seeing this as the least complicated option.
- Company directors/owners have decided this is the only way to avoid illegally trading while the business is insolvent.
Liquidation – The Stakeholders
The liquidator’s role is to manage the process. Essentially the liquidator will sell company assets to repay the creditors and then wind up the company.
Anybody owed money by the company.
Employees are creditors if there are outstanding wages or superannuation payments.
Shareholders are eligible to receive funds for the value of their shares.
Directors no longer control the company but must cooperate and assist the liquidator as requested.
The Liquidation process
A typical end-to-end company liquidation may include the following steps:
- A Liquidator is appointed – by the court or by the person or persons who decided to put the company into liquidation.
- The liquidator will contact all known creditors to:
- a. advise of their appointment
- b. Inform creditors of their rights and the next steps to be followed
- The liquidator may require one, or more, of the company directors to assist him to:
- a. produce or locate company financial records
- b. identify all company assets
- c. understand how the company performed and traded
- The liquidator may arrange a meeting for the creditors to:
- a. Report on progress to date and the next planned steps
- b. Obtain more information about the company
- c. ask the creditors to approve fees to cover the liquidation
- The liquidator must produce a report for creditors. The statutory report should be issued within three months of the liquidator being appointed and contains information about:
- a. inquiries conducted by the liquidator and likely future inquiries
- b. inquiries conducted by the liquidator and likely future inquiries
- c. The cause of the company’s failure
- d. Expected dividends (payments made to settle all, or part, of the creditors’ outstanding debts)
- The liquidator will investigate the failure of the company. In particular, he will look for any evidence of offences committed by the company directors, including:
- a. Inappropriate payments or transactions, favouring one creditor in particular
- b. evidence of trading while insolvent.
- Company assets will be sold, usually by auction.
- The liquidator will distribute the proceeds from the sale of the company assets to creditors, after covering liquidation costs.
- A final report will be prepared to confirm the company has been wound up and all possible dividends have been paid to creditors. The ‘End of Administration return’ will be submitted to ASIC and includes the liquidator’s financial records.
- The company will be deregistered, by ASIC, 3 months after the ‘End of Administration return’ has been issued.
Who gets paid first?
Creditors are paid dividends (all, or part, of their outstanding debt) in a set order during the liquidation process. The liquidator will distribute funds from the sale of company assets in the following order:
The costs of conducting the liquidation are covered
“Secured creditors” are normally banks or financial institutions who have a “secured interest”, like a mortgage for company property.
Employees have a special designation, as “Priority Unsecured creditors”. Dividends are intended to cover unpaid wages, holiday and sick pay plus superannuation
Any other creditors
Often, this category includes suppliers of goods and services, including utilities
If funds remain when all creditors have been paid, shareholders may receive a dividend against the value of their shares
What’s the aim of the process?
The liquidation process is entirely aimed at providing the best possible outcome for company creditors.
What happens to company directors?
There is no consideration made for company directors unless they are found to have committed an offence. Directors can be barred from running a company for up to five years if they are involved in multiple failed companies.
How do stakeholders know what is happening?
Creditors will be contacted by the liquidator initially and may be called to attend a meeting of creditors. Otherwise, the statutory report informs creditors of progress and likely financial outcomes.
Who makes decisions?
The liquidator follows the standard process throughout. Creditors can:
- ask to view particular reports or documents
- request a creditors’ meeting
- issue directions to the liquidator
The liquidator may not comply with requests or directions but should explain why they were deemed to be “not reasonable”.
What happens when the business has been wound up?
When company assets have been sold and all available funds used as dividends for outstanding debts, the company has been “wound up”. The remaining steps of the liquidation process are:
End of Administration Report
The “End of administration return” must be issued to ASIC within one month of the liquidation process. The report will detail the liquidator’s receipts and payments and the outcome of the administrative action.
Deregister the company
The company will be deregistered by ASIC 3 months after production of the End of administration return. When a company has been deregistered:
- It no longer exists, legally
- Any legal actions against the company must stop
- No legal proceedings may be started
Can my small business avoid going into liquidation?
Any business owner can ease financial difficulties by seeking professional advice and assistance early.
Rolling a rock Downhill!
The financial state of your company is like a rock at the top of a slope. When the rock first starts to move, it is possible to stop it, but as it gains speed and momentum, the only outcome will be a crash at the bottom of the slope.
When you first realise you are having financial difficulties you should get some expert financial assistance, as soon as possible. The longer you leave it, the worse the financial situation will become. If you are struggling to pay bills because your income is exceeded by your costs and expenses, the situation is unlikely to rectify itself and your business may well become insolvent.
Company owners and directors must be constantly aware of their financial situation, a monthly review isn’t sufficient. Be wary of the red flags of financial problems:
- trading and cashflow problems
- Your stock isn’t moving or your services are not required. This results in cash flow issues, where your income will be less than your costs.
- Unable to pay debts
- this is a major indicator of insolvency and includes
- unpaid tax debts and superannuation
- employees wages
- creditors not being paid within agreed trading terms
- demands for payment
- demands from creditors for you to settle outstanding debts may begin formally but will soon escalate to legal letters and court proceedings
- unable to obtain credit
- your usual lenders are not willing to provide more funds
Any of these indicate the first steps towards insolvency. You should seek financial advice immediately. If you act in a timely manner, your business can almost certainly be saved and returned to normal, profitable trading.
Professional help and advice
At Corporate Lifeline, we are experts at helping struggling companies return to profitable, competitive trading and have rescued hundreds of businesses. Our services are varied: from debt relief, restructuring, and services designed to help your business get back on track.
The team here at Corporate Lifeline will provide expert advice, giving your business has the best chance possible to succeed.
In many cases, businesses suffering from financial hardship can be saved and go on to operate successfully with some help and guidance from our teams. Need a lifeline for your business?
Contact Corporate Lifeline today.