Frequently Asked Questions
WHAT IS A COMPANY LIQUIDATION?
A company liquidation is the legal and orderly process of winding up and bringing to an end the affairs of a company. There are two types of liquidation:
- Creditors’ Voluntary Liquidation, which is initiated by a company’s directors or creditors on a voluntary basis; and
- Compulsory Court Appointed Liquidation.
A liquidation is only necessary for an incorporated company (i.e. a Pty Ltd or Ltd company). If you operated as a sole-trader or partnership, other insolvency services are more appropriate; for example, bankruptcy or a debt agreement.
WHAT IS THE PURPOSE OF A LIQUIDATION?
The purpose of a voluntary liquidation is to legally wind up the affairs of an insolvent company.
The purpose of investigating a company’s financial affairs are to identify:
- If the company made any unfair preferential payments to creditors in the last six months leading up to the liquidation;
- If the company entered into any uncommercial transactions; and
- If the company entered into any unreasonable director related transactions.
WHAT IS THE ROLE OF THE LIQUIDATOR?
The role of the liquidator is to conduct and oversee the entire process of liquidation. Specifically, his/her responsibilities include:
- Acting in an independent and unbiased manner
- Winding up the affairs of the company in a cost effective and expeditious manner
- Realising and distributing the assets of the company
- Distributing any surplus monies to the company’s creditors
- Investigating the affairs of the company and reporting any wrongdoings such as potential claims for preferential payments and insolvent trading
- Reporting these findings to creditors and the Australian Securities and Investments Commission (ASIC)
- Finalising the liquidation following clearance from ASIC
WHO APPOINTS A LIQUIDATOR TO AN INSOLVENT COMPANY?
The parties that can appoint a liquidator will depend on the type of liquidation being carried out.
Compulsory Court Wind-Up
A compulsory wind up is ordered by a Court, usually initiated by a creditor who is owed more than the statutory minimum debt. It can also be initiated by the Australian Securities and Investments Commission (ASIC).
Under both scenarios, the creditor or ASIC will nominate the liquidator. If there has been no nomination by the creditor or ASIC, the court will nominate a liquidator from its panel of liquidators.
Creditors’ Voluntary Liquidation
A voluntary liquidation is initiated by the company itself. In such cases, the directors and shareholders can nominate and appoint a liquidator of their choosing.
f your company has been placed into a creditors’ voluntary liquidation, the licensed and experienced liquidators at Australian Company Liquidations can help. We are registered and insured as per the requirements of ASIC, so you can rest assured knowing your case is being handled lawfully.
WHEN DO I NEED TO APPOINT A LIQUIDATOR?
A company liquidation is necessary when the company is unable to pay all of its creditors in full because it does not have sufficient assets. Other reasons to appoint a liquidator may include:
- A dispute with your other directors and/or shareholders and effective decisions cannot be made (i.e. you need a Provisional Liquidator appointed)
- The company has made significant taxable gains and you want to distribute these taxable gains prior to the company being deregistered (i.e. you need a solvent liquidation or a members’ voluntary liquidation).
WHAT ARE THE BENEFITS OF VOLUNTARY LIQUIDATION?
There are many benefits of voluntary liquidation; for example:
- Removing personal liability for directors. If your company is insolvent and you do not take the appropriate steps to place your company into liquidation, you may become personally liable for those company debts.
- Appointing a registered liquidator will ensure the affairs of the company are dealt with in an appropriate and orderly manner and by a suitably independent and qualified person.
- On a personal level, directors often find that placing their company into liquidation is like the release of a pressure valve. Once the company is in liquidation, the director is free to move on with his/her life after what has often been a long and stressful battle to keep the company afloat. All enquiries from the commencement date of liquidation will be directed to the liquidator who becomes the sole point of contact for all affected parties
WHEN SHOULD I PLACE MY COMPANY INTO LIQUIDATION?
The decision to place your company into liquidation should not be taken lightly.
Firstly, you need to make a thorough assessment as to whether or not it is insolvent (note: it is insolvent if your company is unable to pay its bills as they fall due).
As a general rule, if your company is unable to pay all creditors 100 cents in the dollar, then a liquidator should be appointed.
HOW DO YOU PUT A COMPANY INTO LIQUIDATION?
In short, a liquidation is the process of winding up a company’s affairs and appointing a liquidator to the company. There are two ways a company can be placed into liquidation; either on a voluntary or involuntary basis.
The wind up process will include:
- The appointment of a liquidator (whether the liquidation was on a voluntary or involuntary basis will determine if the liquidator is appointed internally or externally)
- The liquidator identifying and realising the company’s assets
- Selling the assets
- The liquidator reporting these results and their investigative findings of the company’s financial affairs to creditors
- The liquidator holding several meetings with creditors
WHAT IS THE PROCESS OF LIQUIDATION?
Once you decide to liquidate your company, you have two choices for the wind up process:
- A Creditors’ Voluntary Liquidation, where you voluntarily place the company into liquidation; or
- A Court Appointed Liquidation, where you can wait for a creditor to wind it up through the courts.
Under a Creditors’ Voluntary Liquidation, you have the choice to appoint a liquidator of your own choosing. If you do not want to initiate the liquidation on a voluntary basis, the courts or petitioning creditor will appoint the liquidator for you.
The appointed liquidator in either cases will oversee the orderly wind up of the company’s affairs. The liquidator will sell off the company’s assets then distribute the proceeds to creditors in accordance with the Corporations Act.
HOW LONG DOES A LIQUIDATION TAKE TO COMPLETE?
The length of time required for a liquidation will depend on a number of factors, including:
- The nature of the company’s structure
- The dealings the company entered into prior to liquidation
- Whether any litigation will be necessary.
If no litigation is necessary, the average-sized company liquidation should be finalised within 12 to 18 months.
WILL THE LIQUIDATOR CALL ANY MEETINGS OF CREDITORS AND WILL I HAVE TO ATTEND?
The liquidator will be required to hold the first meeting with creditors within 11 days of appointment. Thereafter, the liquidator is required to hold a creditors meeting every year during the liquidation process, unless they issue a report to the Australian Securities and Investments Commission.
Prior to the finalisation of the liquidation, the liquidator must also hold a final meeting with all creditors and members.
As a director of a company that has entered a Creditors’ Voluntary Liquidation, you will not be required to attend any meetings unless requested by the liquidator through a written notice under Section 530A(2)(c) of the Corporations Act.
WHAT WILL BE MY OBLIGATIONS TO THE LIQUIDATOR?
If you are a director of a company and it goes into liquidation, you have obligations to the appointed liquidator. These obligations include, but may not be restricted to:
- Attending the first meeting of creditors;
- Providing a Report as to Affairs to the liquidator;
- Providing the company’s books and records to the liquidator;
- Attending to any request from the liquidator.
HOW WILL LIQUIDATION AFFECT MY COMPANY?
The appointment of a liquidator will have significant consequences on your company and employees. These may include the following:
- Company directors and employees will not be able to make any decisions on behalf of the company — only the appointed liquidator can make decisions
- In most situations, the company will cease normal trading activities immediately
- Liquidators will often freeze the company’s bank account, terminate employment contracts and identify and secure the company’s assets.
IF I LIQUIDATE MY COMPANY WILL I GET BANNED AS A DIRECTOR?
Generally speaking, if you have not been involved in two or more company collapses within the last 7 years then it is unlikely that the Australian Securities Investment Commission (ASIC) will impose a director banning order against you.
However, in more serious cases, ASIC has imposed a director banning order after the director’s involvement in the first company collapse. This occurred in the case of HIH Insurance which collapsed in the early 2000s. ASIC imposed a director banning order through the court and it was found that the directors had breached their duties as directors in that they had:
- Failed to exercise due care and diligence;
- Failed to exercise good faith;
- Improperly used their position as a director (i.e. abused their powers); and
- Improperly used information they had obtained as a director.
Want to establish whether you may be at risk of receiving a director banning order?
CAN I BECOME PERSONALLY LIABLE FOR COMPANY DEBT?
As a company director, you can only become personally liable for company debts under the following circumstances:
- You have provided a personal guarantee to an individual creditor (or trade supplier); or
- The Court declares that you continue to incur debts whilst the company was insolvent; or
- You did not complete and lodge your Business Activity Statements with the ATO within 3 months of their due dates.
WILL THE COMPANY LIQUIDATION AFFECT MY PERSONAL CREDIT RATING?
If your company has been placed into liquidation, this event will be recorded on ASIC’s database. Anyone who pays for a personal name search will be able to see this record. However, once the liquidation has been completed, the listing will be removed.
If you need to refinance your personal assets or are seeking additional personal finance and your new financier is concerned about the liquidation, you can ask the liquidator to issue a letter stating whether or not they have any objections to you obtaining additional personal finance.
WHAT IS THE EFFECT OF THE LIQUIDATION ON UNSECURED CREDITORS?
The appointment of a liquidator will have significant effects on unsecured creditors, including losing the ability to recover any outstanding money from the company. Other ways a liquidation may affect unsecured creditors may include:
- Preferential payments. If any unsecured creditor has received a payment which the liquidator considers to be “preferential” then the liquidator may attempt to “claw it back”.
- Goods secured by PPSR charge. If any creditor holds security over goods which has been registered under the Personal Property Securities Register, then that creditor may be able to recover these goods from the liquidator.
- Court action. Once a company has been wound up (either on a voluntary or compulsory basis) a creditor is unable to commence any fresh litigation against the company or continue any existing litigation.
DOES LIQUIDATION AFFECT SECURED CREDITORS' RIGHTS?
Under normal circumstances, a liquidation does not affect the rights of a secured creditor. Instead, a secured creditor usually relies on their security for the repayment of their debt. If after selling the asset there is a shortfall, they will become an unsecured creditor for the shortfall amount and participate for that amount.
A secured creditor can choose to surrender their security and prove in the liquidation for their entire claim, but this would be most unusual as they would then rank equally with unsecured creditors.
A secured creditor needs to be very careful when they vote at a meeting of creditors in a liquidation. For the purposes of voting, a secured creditor should only claim and vote for the anticipated shortfall in their security (if any). In their proof of debt they must disclose:
- the particulars of their security;
- the date when it was given; and
- estimate the value of the security and any anticipated shortfall.
If the secured creditor fails to follow these strict rules as set out in Regulation 5.6.24 of the Corporations Act, then it must be taken that the secured creditors has surrendered their security (unless a court rules otherwise).
If you would like to understand the effect of liquidation on secured creditors we would always recommend that you obtain independent legal advice.
CAN A COMPANY TRADE WHILST IN LIQUIDATION?
A liquidator may decide to trade-on a company if they believe that the company may be sold as a going concern and a sale would provide creditors with a better return.
To justify the decision to trade-on, the liquidator should do an assessment to confirm that the value of the business as a going concern would exceed the value of the assets if they were sold individually.
In doing this assessment, the liquidator should also assess the likelihood of incurring any trading losses whilst the business is sold or whether any other significant costs will be incurred in preparing the business for sale. If it is likely that trading losses will be incurred, then the liquidator should notionally deduct these from the expected sale price of the business and compare the net expected result and compare that to the break-up value of the assets. This analysis is critical because any trading losses incurred in the process could erode the benefit of a sale. The liquidator has a duty of care to the company and to the creditors, so in order to discharge that duty a liquidator must act in the creditor’s best interests.
If the liquidator needs to trade the business for longer than 3 months (in order to sell it as a going concern) then court approval would be required.
IN WHAT ORDER WILL FUNDS GET PAID IN A COMPANY LIQUIDATION?
The Corporations Act (Section 556) sets out a strict order in which funds are to be disbursed in a company liquidation:
- Any expenses incurred by the liquidator in obtaining and realising the company’s assets
- The petitioning creditor’s costs if the company was wound up by the Court
- Any expenses incurred by a Voluntary Administrator if the company was placed into voluntary administration prior to liquidation
- Any costs incurred to prepare a report if the company was wound up by the Court
- Any costs incurred in preparing a report for the liquidator if the company was wound up by a resolution of the creditors following a voluntary administration
- If ASIC orders an audit of the liquidator’s six monthly receipts and payments then the costs of that audit
- The expenses incurred by the liquidator while winding up the company
- The liquidator’s fees
- The costs incurred by a committee of inspection
- Employee wages and superannuation
- Any personal injury compensation
- Employee leave of absence
- Any redundancy payments to employees.
WILL THE EMPLOYEES GET PAID IF I LIQUIDATE MY COMPANY?
The Commonwealth Government set up a scheme known as the Fair Entitlements Guarantee (FEG) to pay employee entitlements in the event of a company collapse. The FEG scheme will pay for the following entitlements if the employee’s termination resulted from the company collapse:
- Unpaid and underpaid wages (up to thirteen weeks);
- Unpaid annual leave;
- Unpaid long service leave;
- Unpaid pay in lieu of notice (up to five weeks);
- Unpaid capped redundancy pay (up to four weeks per year of service).
Employees should be aware that the scheme will not pay out entitlements if they resign following the appointment of a liquidator.
If you would like to discuss how the FEG scheme may be applied for your company liquidation, please call FEG hotline directly on 1300 135 040.