The Simple Guide to Liquidation

What is Company Liquidation?

As a company director, it can be overwhelming to deal with a struggling business. The terms that are used by advisors can be confusing, especially if you have not come across them before and many people are unaware that there are multiple types of liquidation that can be executed in different ways. Here, we explain the ins and outs, who is involved, and the different types of liquidation in Australia.

Liquidation, often referred to as business bankruptcy, is a formal way to wind up a registered company. If a company has an ACN number or Pty Ltd (short for Proprietary Limited) at the end of its name, it is likely a registered company in Australia. In the event that you run a business as a Sole Trader, you cannot wind it up with a liquidation. Instead, as you are personally liable for your business and debts, a Personal Insolvency Agreement, Bankruptcy or a Debt Agreement could be the correct solution for you.

Who is Involved in a Company Liquidation?

There are generally three types of stakeholder involved in a company liquidation in Australia:

1. the Company Director,

2. the Creditors, and

3. the Liquidator.

Here is a quick explanation of these in relation to the liquidation process:

Company Director

Must act in good faith and exercise reasonable care and diligence. You must not use your position to gain an advantage for yourself, and you must prevent and avoid insolvent trading.

Creditors

In regards to company liquidation, there are unsecured creditors and secured creditors. Secured creditors have a “security interest” over the assets of a company. This is common with lenders when they provide a loan. Unsecured creditors usually come about by supplying goods or services to the company without taking any security over company assets.

Liquidators

A liquidator’s primary function is to sell a company’s assets and pursue any legal claims in order to obtain funds to pay the company’s creditors. They will also distribute any surplus amongst the company’s members. They are also required to investigate the director’s conduct and the cause of the company’s demise, and report on this to the Australian Securities and Investments Commission (ASIC).

Types of Liquidation

We have summarised the types of Liquidation available if your company becomes insolvent, or to wind down its affairs. These include Voluntary Liquidation (Creditors Voluntary Liquidation and Members Voluntary Liquidation), Court Liquidation and Provisional Liquidation.

Voluntary Liquidation

A Voluntary Liquidation is a self-imposed wind-up and dissolution of a company. The company’s directors and shareholders must agree on the state of the business. A Voluntary Liquidation takes one of two forms albeit depending on the solvency of the company. Solvent companies require a Members Voluntary Liquidation (MVL). Insolvent companies require a Creditors Voluntary Liquidation (CVL).

Members Voluntary Liquidation

A Members Voluntary Liquidation (MVL) is a formal way to wind up a solvent company. To undertake an MVL the company is required to be able to pay its debts and have all tax lodgements up to date. If the company is unable to pay its debts, a Creditors Voluntary Liquidation is the only form of Voluntary Liquidation available.

Creditors Voluntary Liquidation

If your company is insolvent (cannot pay its debts when they fall due) a Creditors Voluntary Liquidation (CVL) may be suitable. Although the name states “Creditors”, do not be fooled – a CVL is still initiated by the shareholders of a company. This is an admission that the business is no longer sustainable and is insolvent.

Court Liquidation

A Court Liquidation in Australia requires a creditor of the company to apply to the court, with hopes of forcing the company into liquidation. If the creditor’s debt is not disputed, the creditor can serve a Statutory Demand on the company to pay a debt pursuant to section 459E of the Corporations Act 2001. Alternatively, if the debt is genuinely disputed, the creditor will have to first apply to Court to obtain judgement. If the company fails to pay the money demanded in the Statutory Demand the creditor can then make an application to the Court to have the company wound up.

Provisional Liquidation

In urgent cases involving assets that may be at risk, an applicant can apply to the Courts and request a Provisional Liquidator to be appointed to protect a company’s assets. This provisional liquidation essentially safeguards the assets between the filing of the application and the Court hearing for a winding up application.

If you need assistance with your company, or would like to avoid insolvency or liquidation, get in touch for an initial chat. We'll be able to guide you on your available options based on your current situation.