Liquidation, or winding up, is the process of bringing an insolvent company to an end and distributing a business’ assets to creditors.
A business may decide to wind up for a variety of reasons, including insolvency or owners wishing to efficiently bring the company to a close.
The legal definition of liquidation, as defined by the English Dictionary, is:
the process of closing a business, so that its assets can be sold to pay its debts.
If you are considering liquidating your business it is vital that you are knowledgeable about the process, something this article may assist you with!
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The Liquidation Process
The liquidation process, when voluntary, consists of several steps to ensure creditors are properly and fairly paid.
It begins with the decision to liquidate, a choice a business owner or director will make to allow the process of liquidation to take place.
A liquidator is then appointed to oversee the details of the matter; the liquidator must be 100% independent from the business. The liquidator must then publish a notice on the ASIC, or the Australian Security and Investments Commission, website, a site accessible to the public and any individual wishing to view it.
All creditors will then be notified of the liquidation and a meeting may be arranged at the request of either the liquidator or the creditors.
In this meeting, creditors may wish to simply discuss the details and approve the liquidator’s plan for the future. They may also wish to appoint a liquidator to replace the individual previously appointed.
The liquidation will then begin to take place, generally involving the selling of the business and the identification and selling of the company’s assets.
Why should I liquidate?
Choosing to liquidate a business may be a daunting decision to make but it can be beneficial for a variety of reasons.
A significant consideration a business owner may take when considering liquidation is creditors will no longer be consistently attempting to receive debt repayments, avoiding the stresses and potential legal action associated with debts.
If a business remains unliquidated, creditors may sue the company, resulting in a lengthy, expensive court matter that otherwise may have been avoided.
There may be signs that liquidation is a wise idea for your business. Liquidation may be the right move for your business if it:
- Is having trouble rouble paying creditors;
- Is unable to recover from past (or present) financial issues;
- Has a limited amount of assets.
Liquidation may seem like a daunting move to make but depending on the specifics of your situation it may be stress-relieving and all-around the best financial option for you!
What is a liquidator?
A liquidator is a qualified individual who is responsible for overseeing the liquidation process. Depending on the type and nature of the matter, they will have a range of responsibilities including:
- Identifying and selling the company’s assets
- Ensuring funds collected from the sale of assets are distributed fairly between creditors
- Investigating failures of the business
- Publishing a notice on the ASIC published notices site
A liquidator is required to stay on a timeline set out by the legislation relevant to the matter.
They are further required to notify any creditors affected by the matter, informing them of the intention to liquidate. A liquidator is granted significant power over the company’s affairs including filing paperwork, consistently updating authorities, and selling any assets for cash (liquidating them) in order to repay creditors.
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Insolvency
Insolvency is defined as an individual or company that is unable to pay debts owed within agreed due dates.
Liquidation is a common step one will take once becoming insolvent, as to avoid costly court matters by returning some, or maybe even all, of the money owed to creditors.
You may identify your business as insolvent when you notice particular signs, some of which you may not consider as issues! These signs include:
- Insufficient cash flow
- Poor financial/business planning
- Issues recovering debts from debtors.
Types of liquidation
If you are considering liquidation, it is important that you are aware of the different types of ways that it can occur.
There are three distinct types of liquidation, generally achieving the same or similar results but consisting of a different process.
Your awareness of the different types may assist you in assessing which process your business is about to experience!
Solvent Liquidation
Solvent liquidation, or member voluntary liquidation, is the process of the leaders of a business deciding, while the business remains able to repay creditors, to liquidate the company’s assets.
This is a decision that may be made for a variety of reasons, the most significant being bringing the business to an end.
If the business is attempting a clean closure, this may be the most cost-efficient manner to do so.
The process involves the owner of the business recognising its ability to pay all debts within twelve months of the liquidation.
A liquidator is appointed once a declaration of solvency is signed by directors of the company and will begin recognising and liquidating assets, evenly distributing funds between creditors, and informing authorities of the matter details.
Any funds remaining will then be distributed between shareholders.
Insolvent Liquidation
Insolvent liquidation, or creditors’ voluntary liquidation, is the process of a company being unable to repay debts and liquidating assets, generally in an attempt to pay said debts.
They may be favourable if you are looking for a simple way to pay creditors while simultaneously bringing your business to an end.
The process involves a liquidator being assigned once all shareholders have signed appropriate documents and, as in a solvent liquidation, acting on behalf of the company to recognise and distribute assets.
The liquidator will be responsible for the filing of a credit report, publishing appropriate notices, and handling any other specifics of the liquidation.
Compulsory Liquidation
Compulsory liquidation is the process of a creditor taking legal action against a business when they are seemingly unable to repay debts.
A court must enforce an order on the company to wind up for it to be considered “compulsory”.
Once the business has received a court order to liquidate, the process, similar to other forms of liquidation, involves the appointment and action of a liquidator to wind up the company’s affairs.
Effects of liquidation
Depending on your position in the matter, director, creditor, or employee, the effects you experience from liquidation will likely vary.
As an owner or director of the liquidating business, you will be required to coordinate with the liquidator and assist in a range of ways, including the completion of a statement of affairs, detailing specifics about the company.
As a creditor, you will be unable to take any form of legal action against the liquidating company unless you receive explicit consent from either the court or the liquidator. Debts will be returned to individuals at a level of priority, as outlined in the Corporations Act 2001 section 556.
As an employee, you will most likely become unemployed from the business in the process of liquidation as the process is usually undertaken to close the business. You have the right to file under the liquidation for any pay, holiday pay, or any other benefits you were owed by the business.
Key Takeaways
Deciding to enter into liquidation is a big step, so you must enter the ordeal with sufficient knowledge about the topic!
Depending on the details of your matter, you may want to seek legal advice on roads you can take, especially if your liquidation results in a court case!
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