Company Liquidation Procedure- the process
No word strikes more painfully into the heart of a business owner than ‘liquidation’. But winding up a business doesn’t have to be a disaster, and can instead be a controlled exit for investors, creditors and business owners ready for the next opportunity.
Be sure to read our article on pre-liquidation advice. Going down this path is not always necessary, and there are other options apart from dissolving your business (such as voluntary administration).
What is liquidation?
Liquidation is what occurs when a firm is unable to pay its debts or when the owners of the firm wish to end operations. A business can be wholly solvent and trading financially well, and still choose to liquidate. An example might be if the owning firm decides to discontinue a subsidiary business.
There are two types of liquidation:
● Voluntary liquidation – When a firm in voluntary administration decides to shut down to pay back creditors or the operators choose to discontinue the business. Additionally, shareholders might choose to terminate the company’s operations and sell off all the assets.
● Involuntary liquidation – This is when a liquidator is assigned to a company by a court to shut it down and reimburse creditors. This may be due to outstanding debts, but has on occasion occurred at the request of shareholders.
Keep in mind that under Australian law, a business only terminates through liquidation. Merging a business into another or selling off all assets to pay debts does not end the company’s existence and director fiduciary duty still applies.
Who are the main stakeholders in a liquidation?
There are several key stakeholders in any liquidation, be it voluntary or involuntary.
The first is the liquidator. This is a third-party firm that goes over the assets and liability of a firm. They draw up a list of all the creditors and what they are owed, and if there is a debt dispute, decide who gets paid from the remaining funds. They get paid first before other creditors during this process.
Next are the secured creditors. These are the owners, directors, employees and creditors who have security on assets in the firm. The former have contracts with the business that stipulate wages, holiday/sick pay, and redundancies (paid out in that order although there is a limit for directors, you can read about it here – (link to Redundancies article)). The latter have preferred payments due to having security on the assets. You can read about preferred payments here, and why it can be hazardous for some businesses.
Next are the unsecured creditors. These are other creditors without security assets (such as a service provider who has not been paid) and contractors. Contractors are similar to employees but have all the securities of the role rolled into their payment. Unlike employees, however, they are not the priority of the liquidator.
What is the liquidation procedure in Australia?
The first stage in the liquidation process is to appoint a liquidator. This might be a professional liquidation firm, an accounting office or a law firm. It is best to select a firm that is fair and has the experience to ensure your business and personal reputation remains unblemished. The last thing you want to do at this time is hinder your next opportunity thanks to a poor choice.
Once a liquidator is appointed, and handed over access, the directors will lose all authority, and the liquidator will take charge. They may choose to freeze bank accounts, secure assets, and terminate employees. However, a liquidator has the interests of the creditors at heart and may decide to continue to trade until any debts are satisfied. This also means that employees will have more notice and can better prepare for redundancy. Selling the business to another firm at this time is also an option.
But this won’t last forever; a liquidator has a mission to wind-up the company as soon as the creditors are reimbursed.
Liquidation may be a solution for some firms facing the end of their business life cycle, but this final solution comes with several drawbacks for business owners. Not only will they lose all assets, but the business owner will also be investigated by the liquidator to ensure that the business practice was solvent and that they did everything they could to save the business.
Lastly, your role in the company is finished, and from here, you no longer have any say. This may be the most painful touch point, especially for those who put plenty of passion into their venture.
If you are potentially facing liquidation, be sure to have an expert on your side from the beginning. Contact us for professional, sound advice.
