What is Liquidation in Australia?
Liquidation is the process of concluding a company’s affairs, primarily when it is insolvent or nearing insolvency. This involves selling the company’s assets to repay debts to creditors, employees, and shareholders. The liquidation process can be initiated by the Court, company members, or creditors, and is carried out by a Registered Liquidator. Once the assets are liquidated and debts settled, the company is deregistered with ASIC, effectively ending its existence.
Court Liquidation of a Company
Court liquidation of a company is when an insolvent company is wound up, its assets are sold and it is deregistered with ASIC.
The sale of assets generates money that is used to repay outstanding debts to creditors, employees and shareholders.
The liquidation of a company is enacted by a Registered Liquidator that specialises in winding up insolvent companies.
What Does it Mean to Liquidate Money?
Liquidating money means converting assets into cash. This is typically done by selling assets such as real estate, vehicles, inventory, machinery and equipment.
When a company fails, assets are liquidated and the money is used to repay outstanding debts to creditors.
In the case of winding up a business, we would say “liquidating assets,” not “liquidating money.”
Is a Company Dissolved After Liquidation
Yes, a company that is wound up in Liquidation is formally dissolved at the end of the process.
In Australia, this is referred to as “deregistration.” Once the Liquidator has sold assets, distributed money to creditors and completed investigations, the company is deregistered with ASIC and ceases to exist.
Court Liquidation vs Creditors’ Voluntary Liquidation
There are two main types of liquidation in Australia: Court Liquidation and Creditors’ Voluntary Liquidation (CVL).
In both cases, a Registered Liquidator is appointed for the purpose of winding up an insolvent company.
The main difference between the two processes is how they are initiated:
- Court Liquidation. In a Court Liquidation, the Liquidator is appointed by the Court, usually at the request of a creditor due to unpaid debts. A creditor can apply to have a company wound up if they are owed $2,000 or more.
- Creditors’ Voluntary Liquidation. A CVL is initiated voluntarily by resolution of the directors or shareholders of the company. This is usually in response to insolvency, disputes or ongoing financial concerns.
Court Liquidation and CVL are administered by registered, independent Liquidators.
Both processes result in the business being wound up and deregistered with ASIC, at which point the company ceases to exist.
Liquidation should be considered a last resort. Companies are encouraged to seek professional advice about alternative solutions wherever possible, such as Administration or Restructuring.
What is the Role of the Liquidator?
The Liquidator is an independent professional who is appointed to wind up the affairs of an insolvent company.
The Liquidator is responsible for selling the company’s assets, using those funds to pay off debts, and investigating the business’ financial situation.
During liquidation, the Liquidator takes control of the insolvent company and becomes responsible for managing its day-to-day affairs and assets.
They will also:
- Notify creditors of the liquidation
- Gather, protect and sell company assets
- Investigate the company’s affairs (such as unfair preferences, voidable transactions and claims against the business or its officers)
- Investigate the reason for the company’s failure
- Distribute money collected from the sale of assets to the creditors
Registered Liquidators have a responsibility to the creditors and to ASIC. All findings are reported to the creditors.
Any misconduct is reported to ASIC, which may result in civil or criminal proceedings being brought against the company and/or its officers.
What Happens After the Liquidator is Appointed?
After the Liquidator is appointed, they take immediate control of the company’s assets and day-to-day affairs.
The Liquidator begins by sending out a notice to all known creditors. The notice gives creditors an opportunity to provide proof of outstanding debts.
The Liquidator will consider each claim. If your claim is accepted, you have a right to attend creditors meetings and vote on all creditors matters (either personally or by proxy).
During this time the Liquidator will begin to investigate the company’s financial affairs and gather, protect and sell its assets.
Throughout this process, the Liquidator may call a creditor’s meeting at any time.
Creditors meetings are typically held when the creditors:
- Need to approve a matter
- Want to ask questions about the liquidation
- Want to provide information about the company
The Liquidator must also hold a meeting if the creditors pass a reasonable resolution requiring them to do so. Since creditors meetings are time consuming and costly, Liquidators typically try to minimise requests to call a meeting.
That Company Owes Me Money, Will I Get it Back From the Liquidator?
There is no simple answer to this question. It’s common for unsecured creditors to receive little or no dividend from liquidation.
Whether you receive any money depends on the nature of the debt you are owed:
- Liquidators costs are paid first to ensure there is a professional available to manage the process
- Secured debts (i.e. debts held by creditors with security interest over an asset) Secured Creditors receive payment if they hold a security interest over the company’s assets. Once Liquidator costs have been covered, Secured Creditors are next in line in the priority of payments.
- Unsecured debts are paid based on where the claim falls in the order of distributions (outlined below).
Money gathered during liquidation is distributed in the following order:
- The Liquidator’s fees, costs and expenses are paid
- Secured Creditors
- Outstanding employee wages and superannuation
- Outstanding employee leave entitlements (such as annual leave)
- Employee retrenchment pay
- Unsecured debts
Each category must be paid in full before the next category can receive a payment.
If there is insufficient funds to pay a category in full, creditors are paid on a pro-rata basis, and the following categories are paid nothing.
The Liquidator is Talking About Unfair Preferences, What Does that Mean?
The term “unfair preferences” refers to transactions that favour one creditor over the others. The Corporations Act enables Liquidators to recover these types of payments.
Under Section 588FA of the Corporations Act, a transaction is an unfair preference if:
- The company and the creditor are parties to the transaction, and
- The transaction results in the unsecured creditor receiving more than they would have received during liquidation, and
- The payment was received by the creditor while the company was insolvent, or the payment caused the company to become insolvent.
The Liquidator can apply to the court to “set aside” or recover unfair preference payments.
If the court approves the order, these payments become available for distribution to creditors as part of the normal winding up process.
Liquidators are empowered to recover unfair preference payments that were made in the 6 months preceding the liquidation.
This 6-month window is extended to 4 years if the transaction involves a related entity (e.g. a partner company, the director’s family).
You should contact an adviser or your lawyer if your business receives an unfair preference claim during liquidation.
Example of Liquidation
Company X has been successfully trading and turning a profit for 5 years.
However, a new competitor has entered the market in the past year, causing Company X to struggle financially.
Company X reaches a point where it is unable to pay its debts to suppliers on time.
The Directors of Company X audit the business’ finances and determine that it has become insolvent. They opt to enter Creditors’ Voluntary Liquidation and wind up the business.
Company X owns commercial property and manufacturing equipment which are worth $3 million.
The company currently owes $1 million to employees, and $1.5 million to suppliers. Entering liquidation and selling the company assets will allow Company X to repay its creditors.
This is a simplified example. In reality, assets typically need to be liquidated on short notice, which may mean that they are sold below market value.
In this case, Company X has $3 million worth of assets, but they may be insufficient to cover the $2.5 million of debts.
Is Your Business Experiencing Financial Difficulties? Contact SV Partners Today
When your company is suffering from financial strain, proper management is the best way to turnaround the business and avoid insolvency.
For some companies though, insolvency is unavoidable, and you may find yourself facing liquidation proceedings. At SV Partners we offer a range of advisory services, including financial stress advice and administering the process of Court Liquidation and CVL.
If your company has received a statutory demand or is in danger of becoming insolvent, it’s important to seek professional advice as soon as possible. To arrange a confidential consultation with SV Partners, call 1800 246 801 or contact us online.
