What is liquidation?

Put simply in Australia, liquidation is a process of bringing a company’s operations to an end and finalising its affairs. The process involves the realisation of the company’s available assets and the distribution of those funds to creditors of the company. The Liquidator is also required to carry out certain investigations into the affairs of the company which may lead to additional recovery of funds for the benefit of the company’s creditors.

Different types of liquidation

In Australia – there are four types of liquidations:

  • Creditors Voluntary Liquidation
  • Members Voluntary Liquidation
  • Official Liquidation
  • Provisional Liquidation

What is a Creditors Voluntary Liquidation?

A Creditors Voluntary Liquidation is a Liquidation initiated by the company. It is the most common type of insolvency appointment and is a procedure in which the company’s directors choose to voluntarily bring the business to an end by appointing a Liquidator to liquidate its assets and distribute the funds to its creditors.

The Creditors Voluntary Liquidation process starts with the directors resolving that the company is insolvent and unable to pay its debts. An extraordinary general meeting of the company’s shareholders is then convened to pass a special resolution to wind up the company and appoint a Liquidator.

What is a Members Voluntary Liquidation?

A Members Voluntary Liquidation is also a liquidation initiated by the company, however, is only available to solvent companies. The primary reason for a Members Voluntary Liquidation is to return capital to shareholders in a tax effective manner and finalise the company’s affairs. The process is initiated by the directors of the company resolving that the company is solvent and able to pay its debts within 12 months. The directors then convene an extraordinary meeting of the shareholders to pass the special resolution to wind up the company and appoint a liquidator.

What is an Official Liquidation?

An Official Liquidation, also referred to as a Court Liquidation, commences as a result of an Order from the Court appointing a Liquidator. The Order is made after an application to the Court, typically by a creditor of the Company who has exhausted all available debt recovery options. An Official Liquidation differs from a Creditors Voluntary Liquidation in that the directors do not choose whether a Liquidator is appointed or not, rather, the Court makes the decision and typically appoints the Liquidator of the creditor’s choosing. The Court Liquidation process typically commences as a result of a creditor serving a Statutory Demand on the Company to pay an outstanding debt. Failure to pay the debt demanded in the Statutory Demand gives rise to a presumption that the company is insolvent and allows the creditor to make an application to the Court to have the company wound up.

What is aprovisional liquidation?

A Provision Liquidator is appointed by the Court upon an application being made by the company, its directors or its creditors immediately after an application to wind up the company is filed with the Court but before it is heard. The primary role of the Provisional Liquidator is to take control of the Company and preserve its assets until the Court can hear the application to wind up the company. Unlike a Creditors Voluntary Liquidator or Official Liquidator, a Provisional Liquidator does not assess claims against the company or try to distribute the company’s assets to creditors. In most instances, applications for a Provisional Liquidator involves some type of allegation of fraud or other misconduct relating to the company’s affairs.

Which type of liquidation do I need?

If you are a director and you are considering liquidating your company, then the type of liquidation will depend on whether the company is solvent or insolvent. If the company is solvent then you will need a Members Voluntary Liquidation. If the company is insolvent and unable to pay its debts as and when due, then you will need a Creditors Voluntary Liquidation. Typically a director does not have the ability to appoint an Official Liquidator or Provisional Liquidator as these types of liquidations are imposed by the Court and usually on an application made by an unpaid creditor.

Does a liquidation affect the director’s credit rating?

Yes, a liquidation does have an effect on the director’s credit rating. Credit reporting agencies and the Australian Securities and Investments Commission keep track of companies that are placed into liquidation. As such, although a “black mark” will not appear on your individual credit report, a notation that you had been appointed as a director of a previously failed company will appear. This may raise queries with potential future financiers when attempting to obtain credit, however, depending upon your individual financial circumstances it will typically not stop you from obtaining finance.

Am I liable for personal guarantees once my company has been placed into liquidation?

A personal guarantee is a specific agreement between a director or other party and a particular creditor. The guarantee is usually provided to secure the creditors position by enabling that creditor to pursue the director personally for the company’s debt in the event that the company is unable to pay the debt in full. As the personal guarantee is an agreement between the individual and the creditor, the liquidation process will not stop that creditor from enforcing any personal guarantees. If extensive personal guarantees have been provided, then consideration should be made to appointing a Voluntary Administrator as personal guarantees are not enforceable whilst a company is subject to Voluntary Administration.

Am I able to be a director of another company if I place my company into liquidation?

Yes. Liquidating a company does not stop you from retaining directorships in other entities or starting a new company. The Corporations Act does however give the Australian Securities and Investments Commission the power to disqualify an individual from being a director of a company for a period of up to five years if they have been a director of two or more failed companies that have been placed into liquidation within the last seven years. This power is typically exercised in the event that certain offences and/or breaches of duties have been committed by the director, resulting in the company being placed into liquidation.

How long does the liquidation process take?

From the appointment of the Liquidator, no set time period for a liquidation. The timing will vary depending upon the assets available for realisation and the realisation process and the extent of the investigations required to be carried out by the liquidator into the company’s affairs.

The fixed low cost ESolvency liquidation process will typically be completed within three to six months.

Will my creditors find out about the liquidation?

Yes. A Liquidator is required under the Corporations Act to notify creditors in certain circumstances and to convene necessary meetings of creditors. As such, in the event that your company is placed into liquidation, any creditor who has a claim against the company, including employees owed entitlements, will be notified of the liquidation.

What happens to the company’s bank account once the Liquidator is appointed?

The Liquidator will notify the company’s bank to immediately close all accounts held and direct balance of those funds to be deposited into a nominated account maintained by the Liquidator for the benefit of the Company’s creditors.

What happens to employee entitlements in the event that the company is placed into liquidation?

Employee entitlements are afforded a priority under the Corporations Act to be paid ahead of ordinary unsecured creditors. In the event that there are insufficient funds available in the liquidation to enable payment of the employee entitlements in full or in part, then employees may be eligible to participate and submit a claim in the Fair Entitlement Guarantee Scheme.

Importantly, the FEG Scheme does not cover outstanding superannuation entitlements.