What Is Company Liquidation?
Company liquidation is an insolvency procedure designed to wind up companies with debts that exceed liabilities. In other words, liquidation is a process which legally dissolves companies with debts that are greater than their ability to pay them.
Company liquidation’s orderly winding up of company affairs involves realising the company’s assets, ceasing or selling operations, distributing the realisation’s proceeds among creditors and distributing any surplus among shareholders. There are three types of liquidation – Creditors’ Voluntary Liquidation (CVL), Members’ Voluntary Liquidation (MVL) and Court Liquidation.
When And Why Should I Liquidate?
Company liquidation is sometimes associated with failing companies but there are in fact several reasons to liquidate a company. For example, a director might need to liquidate their company because it can no longer borrow money or obtain credit to continue operating.
Alternatively, company members may agree to commence company liquidation voluntarily even though the company is solvent – perhaps the company is no longer economically viable because of rising operating costs, or the company may simply be dormant and requires de-registration.
Ideally, company liquidation should be considered as soon as it comes to your attention that your company is insolvent. If you don’t then you are risking a breach of Insolvent Trading laws, which is a criminal offence.
Company directors can benefit from liquidation in the following ways:
- Company liquidation removes the stress of debt harassment and the threat of legal action from creditors. While a company is being liquidated, the liquidator take control of the company liquidation commences the company’s creditors will cease pursuing payment from the Director and instead deal exclusively with the appointed liquidator. This takes the stress of constant harassment and threats of legal action off your shoulders and allows you to move on with your life.
- A Director Penalty Notice (DPN) issued against the company Director will be rescinded if the company is placed into Company Liquidation within 21 days of the date of issue (provided it is not a “lock-down” DPN: speak with one of our consultants for more information or visit our page explaining DPNs by clicking here).
- Any potential for criminal prosecution due to breaches of Insolvent Trading laws will be averted.
- Once the Company Liquidation is complete, the Director will be free to move on to more prosperous future business ventures.
What Causes A Company To Liquidate?
Based on decades of experience dealing with insolvency cases across a number of different industries, Insolvency Advisory Accountants has identified the top 10 reasons for seeking low cost company liquidation services:
- Unmanageable company and business tax debts;
- Cash flow problems;
- High rents;
- PAYG overdue;
- Inability to uphold taxation payment plans;
- Debtors not paying on time – causing cash flow problems;
- Inability to meet payment plans;
- Inability to uphold Director’s guarantees;
- Inability to uphold personal guarantees to suppliers; and
- Receipt of a Directors Penalty Notice.
If any of these issues affect your business, the best course of action is to contact Insolvency Advisory Accountants to find out more about company liquidation and the low-cost services available.
What Are The Different Types Of Company Liquidation?
Company liquidation is typically broken into three different types: Creditors’ Voluntary Liquidation (CVL), Members’ Voluntary Liquidation (MVL) and Court Liquidation.
Creditors’ Voluntary Liquidation
Also known as CVL, this process is a type of liquidation that begins when company shareholders voluntarily agree to liquidate a company or when creditors agree to proceed with liquidation if the outcome is an option resulting from voluntary administration processes. Creditors’ Voluntary Liquidation is outcome reserved for insolvent companies.
Creditors’ Voluntary Liquidation is particularly significant for insolvent companies because it is a course of action that prevent insolvent trading. When a company is insolvent, continuing to trade is illegal under the Corporations Act 2001 (Cth).
Members’ Voluntary Liquidation
Members’ Voluntary Liquidation, or MVL, is a result of company members collectively agreeing to to dissolve a company. Members’ Voluntary Liquidation is a process for solvent companies, and does not always stem from debts or financial hardship. Perhaps a company has simply reached the end of its usefulness or the directors and members have agreed to go their separate ways. Members’ voluntary liquidation appointments are commonly made as part of the simplification of a group of companies to save on administration costs or to obtain tax benefits when distributing past profits to shareholders.
Court Liquidation commences as a result of a court order and typically comes at the request of creditors who have deemed a company to be insolvent. Creditors may move for Court Liquidation if they have concerns or priorities regarding a company’s ability to pay back debt, however they cannot simply demand the courts get involved without verifying the company is insolvent.
Court Liquidation involves a court-appointed liquidator to administer the process. The Liquidator will thoroughly research the company’s financial affairs, and distribute assets appropriately. They will also ascertain whether or not illegal or improper activities have taken place.
How Do I Commence Company Liquidation?
Company liquidation commences after a qualified liquidator appointed to the insolvent company officially lodges the case with ASIC. It is important to speak to a financial professional about the situation before any irreversible decision can be made.
What Does The Liquidator Do?
During the company liquidation process the liquidator has a duty to all of the company’s creditors. The liquidator’s role is to:
- Collect, protect and realise the company’s assets;
- Investigate and report to creditors about the company’s affairs, including any unfair preferences that may be recoverable, any uncommercial transactions that may be set aside and any possible claims against the company’s officers;
- Enquire into the failure of the company as well as any possible offences by people involved with the company and then report to ASIC accordingly;
- Distribute the proceeds of realisation after payment of the costs of the liquidation and subject to the rights of any secured creditor (first to priority creditors, including employees, and then to unsecured creditors); and
- Apply for deregistration of the company upon completion of the liquidation.
Except for lodging documents and reports required under the Corporations Act 2001 (Cth), a liquidator is not required to do any work during the liquidation process unless there are enough assets to pay their costs.
If the company is without sufficient assets, one or more creditors may agree to reimburse a liquidator’s costs and expenses of taking action to recover further assets for the benefit of creditors.
If any additional assets are recovered, the liquidator or particular creditor can apply to the court for the creditor to be compensated for the risk involved in funding the liquidator’s recovery action throughout the liquidation process.
Who Gets Paid First And When?
Generally, the order in which funds are distributed is:
- Costs and expenses of the Company Liquidation, including liquidators’ fees.
- Outstanding employee wages and superannuation.
- Outstanding employee leave of absence (including annual leave, sick leave—where applicable—and long service leave).
- Employee retrenchment pay.
- Unsecured creditors.
Each category is paid in full before the next category is paid. If there are insufficient funds to pay a category in full, the available funds are paid on a pro rata basis (and the next category or categories will be paid nothing).
How Much Will Liquidating My Company Cost Me?
The cost of company liquidation can vary between cases as it is difficult to determine how large or complex the process will be, depending on the insolvent company.
What Happens After A Company Liquidation?
Liquidations effectively end when the liquidator has realised and distributed all the company’s available property and made their report to ASIC.
In a creditors’ voluntary liquidation, the liquidator must hold a final joint-meeting of the creditors and members to give an account of how the company liquidation has been conducted and of how company property has been disposed. After the final meeting is held, the company is automatically deregistered by ASIC three months after a notice of the holding of the meeting is lodged.
In a court liquidation, the liquidator is not required to hold a final meeting of creditors. After the liquidator decides that the company’s affairs are fully wound up, they may:
- Seek an order for release from the court;
- Seek an order for release and that ASIC deregister the company; or
- If there are insufficient assets to obtain a court order for the company’s deregistration, request that ASIC deregister the company.
A company ceases to exist after it has been deregistered.