It is not surprising a great many businesses have not survived the massive changes to the way we shop and trade now. With several people being housebound, often in mandated “lockdowns” to prevent the spread of the virus, for many businesses their trade dramatically slowed or completely stopped.
Many of these struggling, or failed, companies have been through liquidation. This article presents an overview of business liquidation and what it can mean for a company director. We will identify how you may be able to avoid liquidation for your company and we’ll advise you on steps you should take to enable your business to continue trading.
What is liquidation?
The company has been deemed to be insolvent and is no longer viable as a functioning business. This is because:
- Debts aren’t being paid. Often because the company has cash flow problems and doesn’t have funds available and is no longer able to obtain credit;
- Losses are continuing with no indication the situation will, or can, improve.
Liquidation means company assets (stock, vehicles, property, plant, fixtures and fittings) must be sold to raise funds to pay outstanding debts.
How does a company go into liquidation?
- Voluntary Liquidation – triggered by the shareholders of a company or by creditors, after a company has entered voluntary administration;
- Court liquidation – usually as a result of a wind up application to the court from a company creditor. A majority of company shareholders may also make an application.
Liquidation, what happens?
When a company goes into liquidation, a liquidator is appointed. A registered liquidator is a suitably qualified and independent person. The liquidator will take control of the company with the aim of winding up affairs (selling assets) for the benefit of creditors.
The liquidator’s responsibilities include:
- Identify company assets and convert them into cash to cover outstanding debts, including the cost of the liquidation;
- Investigate the company and behaviour of company directors. Determine why the company failed and whether the directors are guilty of trading while insolvent. Ensure no other offences were committed by company directors or employees, including any inappropriate transactions or payments;
- Report to creditors, possibly via a creditors’ meeting, and report back to the Australian Securities and Investments Commission (ASIC);
- Use the proceeds from the sale of the company assets to:
– cover the costs of the liquidation, including the costs of the liquidator;
– if there is any surplus, distribute the remaining proceeds of the sale of company assets to creditors.
What about you, as a company director?
If your company is put into liquidation, the liquidator takes full control of the company and will proceed to identify, and sell, all company assets.
The liquidator must investigate the causes of the company insolvency. This investigation will include a review of the behaviour of company officers and any transfers of assets that should be recovered. As a director, you must assist the liquidator and provide information to them about the company’s property, unusual or suspicious transactions and financial affairs.
Any inappropriate behaviour by directors, such as continuing to trade while insolvent may result in personal liability for the company debts, possibly leading to criminal charges.
You can prevent all of this!
Apart from the financial and potential criminal consequences of company liquidation, the process can have a personal impact. Company directors often feel they have personally failed when their company becomes insolvent. The process of losing control to the liquidator and watching your company being sold off and your employees lose their jobs is stressful.
There is a good chance you can avoid liquidation. Insolvency is almost always due to cash flow difficulties. This leads to financial difficulties which can quickly snowball into insolvency.
You are aware of the signs of financial difficulty, including:
- Cash flow problems
– reduced income, stock not moving, services not required
- ongoing losses
– the financial situation is not improving
- outstanding tax debts
– including unpaid superannuation
- issues obtaining new credit or finance
– Your company is no longer able to refinance
- unpaid creditors outside usual trading terms
– The company can’t settle debt to suppliers or pay employees their wages
- Receiving demands for payment
– Your creditors are demanding payment of outstanding debts
Act NOW to avoid liquidation
It’s common for businesses to suffer financial problems, particularly in the current global difficult trading environment. As soon as you believe your company may have financial difficulties, contact Corporate Lifeline. We have potential solutions available, including company restructuring or a turnaround of your financial affairs.
A company will often have been struggling financially before insolvency. You may spot the early warning signs you are beginning to struggle but ignore the signs. This is a poor business decision. The situation rarely gets better. You must act as soon as you believe your business may have problems. Acting next week or next month may be too late!
At Corporate Lifeline, we are experts at helping struggling companies return to profitable, competitive trading and have rescued hundreds of businesses. Contact us today for free advice and avoid the risk of losing your business and the cost and stress of legal proceedings.