Liquidation in Australia is the process of winding up a business. The business will often have been insolvent and the liquidation process will distribute any business assets to creditors to pay off outstanding debts.
This guide is in three sections. We examine the role of the liquidator and the end-to-end process of liquidation. The guide continues with details of the responsibilities and impact on creditors, employees, directors and shareholders of the company being wound up. Finally, we identify the warning signs of insolvency and actions you should take to prevent your company from going into liquidation.
Note all insolvent companies are regulated by The Australian Securities and Investments Commission (ASIC).
How does a business go into liquidation?
There are three routes to liquidation:
- Voluntary administration – A vote by creditors
The directors have decided to put the company into the hands of an administrator in order to avoid trading when insolvent. The three possible outcomes of Voluntary Administration are:
– Return control to the directors
The company resumes normal trading
– A Deed of Company Arrangement (DOCA)
A plan, and agreement, to repay outstanding debts
- Shareholders vote to liquidate
The shareholders make a decision to wind up the company and appoint a liquidator.
- Court liquidation
A liquidator is appointed by a court following an application by a creditor. ASIC can also apply to the courts for a company to be wound up, as can company directors and shareholders.
Part 1 – The Liquidation Process
A Liquidator is appointed. The liquidator is registered with ASIC and independent. The liquidator will take over control of the company until it is wound up.
The role of the liquidator
The liquidator has a duty to the creditors and conducts an investigation into how the company was managed for ASIC. His role may include the following responsibilities:
- Investigate the finances of the company and review company management. Identify what caused the company to fail and whether the directors were guilty of trading while insolvent.
- Prepare a report for creditors.
- Hold meetings to report back to the creditors.
- Report on finances and business conduct to ASIC.
- Identify company assets and arrange for them to be converted to cash to cover outstanding debts.
- Use proceeds from the sale of company assets to cover the costs of the liquidation and, if there is a surplus, distribute remaining funds to creditors. Most often creditors receive partial repayment of their outstanding debt (a dividend).
- Request the company be deregistered.
The liquidation process
- The liquidator is appointed
- Contact creditors
– The liquidator will contact known creditors, advising of their appointment and advising creditors of their rights.
- Meeting of creditors
The liquidator may arrange a creditors’ meeting to
– Obtain information about the company being wound up
– Inform on progress
– Ask for approval for their own fees or expenses
- Statutory Report
Issued to creditors within three months of the process beginning, the statutory report includes:
– Estimated assets and outstanding debts of the company
– Progress report – actions to date, planned future actions
– Recovery actions – undertaken following “unfair preferences” or “creditor-defeating dispositions”
– Possible causes of the company’s insolvency
– Potential dividends for creditors
- Progress Report to ASIC/Creditors
Reports to ASIC may include suspected irregularities or illegal behaviour
- Sale of assets
Assets have to be disposed of during a liquidation. They are at the top of the list of actions and are sold at auction early in the process.
- Pay dividends to creditors
Funds from the sale of company assets are distributed in the following order:
– Secured creditors – creditors with a “secured interest” like a mortgage
– The costs of liquidation are covered
– Priority Unsecured creditors (Employees)
– Any other unsecured creditors
- Final report
When the liquidator believes the company is fully wound up, an ‘End of administration return’ is submitted to ASIC, detailing the liquidator’s receipts and payments.
- Deregister the company
– Via an order to ASIC. The company is deregistered 3 months after the issue of the final report.
Part 2 – Roles, rights and impacted parties
Who is considered a creditor of the business?
– A creditor is any company or person owed money by the company going into liquidation. This includes employees of the company who may be owed salary, superannuation, sick pay or holiday pay.
– The Australian Tax Office (ATO) is a creditor of most companies that go into liquidation. They are an unsecured creditor, ranking at the bottom of the queue for repayment of debts.
What does a creditor do during the liquidation process?
The liquidator will contact creditors on appointment advising them they have the following rights:
- Provide the liquidator with information relevant to the liquidation underway
- Issue requests for information. Ask to view specific documents and reports.
- Request a meeting of creditors
– a. If not deemed to be reasonable, the liquidator may decline the request and explain why it is deemed not reasonable
- Appoint a reviewing liquidator
– a. To review the liquidator’s fees and expenses
- Direct the liquidator
– a. As with meeting requests, the liquidator may not comply with directions and should set out why the directions were seen as not reasonable.
- Replace the liquidator
– a. Via a vote at a creditors meeting
- Lodge a complaint with the court or ASIC regarding the conduct of the liquidator
Employees of the company may be owed salary and superannuation plus annual leave. They are Priority Unsecured Creditors and are paid before other unsecured creditors are considered.
Part of the role of the liquidator is to investigate what caused the company to fail and the behaviour of company directors. He will send the directors a questionnaire and ask for financial records and accounts of the company.
Duties of the Directors
The liquidator will investigate the financial affairs of the company being liquidated. He may focus on the behaviour of company directors and, in particular, whether they failed in the following duties:
- Keep financial records
A company must have adequate records to explain the company’s transactions, financial performance and position.
- Prevent creditor-defeating dispositions
Directors may not dispose of company assets or property, often for less than market value, to prevent the assets or property from being available for the benefit of creditors during the liquidation process. This includes “Unfair preferences” where payments were made to the benefit of some creditors over others.
Phoenix activity may include such dispositions. This involves the creation of a new company for the transfer of assets or to continue trading when the original company is insolvent. This is illegal.
- Prevent the company from trading when insolvent
Directors must be constantly aware of the financial situation of the company. If a company is unable to pay its debts then it is deemed insolvent and should cease trading. If a director incurs new debt knowing the company is insolvent then they may have committed a criminal offence.
What are the consequences of liquidation for directors?
There are consequences for directors when a liquidator is appointed to wind up their company:
- Company management
When the company enters liquidation the directors lose control of their company. It will be managed by the liquidator until it is deregistered.
- Attend meetings of the creditors or court
Directors may be required to attend a meeting of the creditors or court to provide explanations and information about the company finances, affairs and performance. If summoned to court, the director will be questioned under oath.
- Assist the liquidator
Directors are obliged to assist the liquidator. This may involve identifying company property and assets and returning or providing access to assets. Providing or granting access to company records and books. Responding to queries.
Directors should not prevent or obstruct the liquidator from their own duties and responsibilities.
- Disqualification by ASIC
ASIC can bar a person from acting as a director of a company for up to five years if they have been involved with more than one company that has been wound up, with creditors receiving less than 50% of their outstanding debt, in the last seven years.
Shareholders may be offered funds, to cover all, or some, of the value of their shares after all creditors have been paid in full.
If a company shareholder is also a creditor they may receive a payment towards their outstanding debt.
Part 3 – The warning signs of insolvency
Is there an alternative to putting my company into liquidation?
Yes, of course. The best option is to prevent your company from becoming insolvent in the first place!
There are some early warning signs your company is having financial difficulties:
- Continuing financial losses
If financial losses have continued for several months this is an obvious sign your company is heading towards insolvency unless you act to improve the situation.
- Rejected credit application
You are unable to get credit or extend existing credit. This suggests the lender regards your company as at high risk of being unable to repay the debt.
- Requests for payment/outside trading terms
You are receiving demands for payment from creditors or you are outside the agreed trading terms. If you are ignoring 30-day payment terms you should expect to receive demands.
- Decreasing sales
When sales are lower than planned or expected this will lead to financial difficulties. A review of the market may identify an opportunity to diversify.
- Unpaid tax/super
Your business may feel making payments to suppliers or paying staff wages is a more effective use of cash than funding superannuation or settling tax liabilities. Eventually, the ATO will add fines and late-payment fees to the outstanding debt.
If you recognise any of these early warning signs then you should seek financial advice today. It’s likely, with good, and timely, advice your business could avoid insolvency.
Corporate Lifeline for professional help and advice
Corporate Lifeline will assess the finances of your company. We are able to guide and assist company directors with strategies to help resolve financial difficulties.
– attempt to identify opportunities to increase revenue.
– look at how to reduce expenses and costs
– Consider renegotiating your current finance arrangements
– suggest strategies to recover outstanding debts
Avoid liquidation and even insolvency. Contact us today. We can help you to save your company.