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1. What is liquidation?

Liquidation of a company – also known as winding up – means a liquidator is brought in to sell off and realise assets, pay creditors, and wind up the business in an orderly, cost-effective way.

During the process, the control of business assets, operations, and financial affairs transfers to the liquidator, and bank accounts are frozen and employees might be terminated. Liquidation is not to be confused with bankruptcy, which applies only to individuals.

If it's an insolvent business, the liquidator will investigate what went wrong. In these cases the liquidation process is typically initiated via a court order the company for a creditors' voluntary liquidation. Liquidation might be the only solution for companies that can't pay their debts. In rare cases the liquidator could decide to continue trading the business for a short period if it's in the best interest of the creditors.

Although liquidation is an insolvency procedure, solvent companies can utilise it voluntarily to permanently shut down the business in an orderly manner – via a members' voluntary liquidation. This can be a tax efficient way of distributing pre CAT distribution to shareholders tax free.

2. What happens when a business is liquidated?

When a company is liquidated, the liquidator will realise all company assets to repay creditors. The exact process can vary depending on the type of liquidation, but secured creditors will typically be paid before employees owed entitlements are paid. Then unsecured creditors will be paid before shareholders, if funds are available. The company is then deregistered with ASIC so it's no longer in existence.

Once a company goes into liquidation, unsecured creditors can't commence or continue legal action without a court's permission. The liquidator takes over the company and he/she will investigate and report to creditors about the company's operations. If he/she discovers fraudulent activity or potential offences, the liquidator will submit a report to ASIC. Company directors have an obligation to assist the liquidator by helping them find company property, providing records and books, and offering other types of help.

In a liquidation, once the liquidator makes his/her final report to ASIC, the liquidation is complete and the company will be deregistered.

3. When a company goes into liquidation, who gets paid first?

In a liquidation, secured creditors and employees have highest priority so they're paid first. If there are funds left over, unsecured creditors, including the ATO if there's any outstanding tax debt, are paid. Lastly, shareholders are paid next if funds are available.

For money paid out to employees, the liquidator will pay outstanding wages and super contributions first, before personal injury compensation. Third is leave entitlements and last is redundancy payments. Caps apply to excluded employees (directors or their spouses/relatives). Employees who have unpaid entitlements and wages could receive government compensation through the Fair Entitlements Guarantee (FEG).

4. How long does liquidation of a company take?

While the liquidation process follows specific steps, there's no fixed time frame for how long it might take and no time limit on how quickly the liquidator has to wind up the company. The liquidator will take as long as required to complete all matters. Some liquidations could conclude in as little as three to six months from start to finish; others might take years depending on the size of the company and the complexity of its affairs.

For an average-sized business, the liquidation process could take 12 to 18 month or more. Factors like company structure and dealings before liquidation can impact the time frame.

5. Can a company in liquidation continue to trade?

Yes, a company in liquidation could continue or resume trading. Generally this only occurs if the liquidator thinks continued trading is in the best interests of the creditors. It's most common in cases where the liquidator considers the business to be a going concern or where he/she decides the company should keep trading to complete and sell works in progress.

The liquidator might rehire any terminated employees temporarily to support the return to trading or enhance asset recoveries such as debtors ledgers. However, this is temporary and it doesn't mean the company will return to normal trading.

6. What happens to the stakeholders during liquidation?

If the liquidator decides to continue trading, employees might remain employed for a short period, though in most cases the employees will unfortunately lose their jobs. For payment of outstanding wages and entitlements, employees rank as priority creditors – above unsecured creditors. The government's Fair Entitlements Guarantee may provide some compensation for entitlements for eligible employees.

Secured creditors and employees will be paid first from different types of assets. Unsecured creditors are next in the order of priority, and shareholders are usually paid last, if funds are available. The liquidator isn't obliged to update shareholders during the process and shareholders don't have a right to vote on the progress of the liquidation like creditors do. Unsecured creditors are usually unable to pursue legal action for debt recovery unless they have permission from a court or a liquidator

As for company directors, they are required to cooperate with the liquidator by assisting with information like location of property and records. The liquidators will review the operations and check for any inappropriate dealings, including by directors.

7. Does liquidation affect credit rating?

If you're a director of a company in liquidation, you might already know credit reporting agencies do record directors of businesses that enter liquidation. When a lender conducts a credit record search, the names of any companies liquidated in the last seven years with you as a director will come up. This won't apply if it was a solvent company entering members' voluntary liquidation however.

So, lenders can see that your company was liquidated but, depending on the lender's criteria, it might not be a significant concern, especially if you're applying for personal financial products rather than business loans. A personal bankruptcy and/or criminal or civil penalties relating to insolvent trading would likely have a bigger impact.

Note: liquidation is different to bankruptcy, as bankruptcy applies only to individuals and liquidation is a specific winding-up process for insolvent (and sometimes solvent) companies.

8. Why should a company go into liquidation?

For solvent businesses, liquidation (members' voluntary liquidation) offers an orderly way to realise assets and wind up a company before permanently ceasing trading it can also be a tax effective way of distributing pre cat asset recovery to shareholders tax free. If the company has been dormant, liquidation allows it to be deregistered.

For insolvent businesses, it could be a way to avoid insolvent trading. Given directors have a duty to prevent insolvent trading, entering liquidation could be the right option if the company has no prospects for returning to viability and solvency. So liquidation can prevent the company incurring further debt and reduce the risk of directors facing the serious penalties associated with insolvent trading.

Additionally, liquidation brings in an outside expert (the liquidator) for an independent review of the company's operations. Creditors and other stakeholders can find out what's going on and get back all or some of their debt. Outstanding debts are written off and the stress of running a business in financial strife will be eliminated. Note: in some cases businesses won't choose to go into liquidation, but be ordered by a court to do so.

9. What is a provisional liquidation?

A provisional liquidation is a specific type of emergency insolvency process designed to protect the company's assets. It can start when a court decides to appoint a provisional liquidator or appoints one in response to an application from creditors, shareholders, or other stakeholders. In terms of timing, provisional liquidations tend to occur (if they do) in between the lodgement of a wind-up application and the court hearing for the application.

Usually a provisional liquidation arises if creditors are concerned the debtor company is hiding assets or making them unavailable, or if the shareholders are worried about directors acting recklessly or not in the best interests of the company. Sometimes provisional liquidations happen because the directors are involved in a dispute or if the company is insolvent and needs protection until the formal liquidator is appointed.

The provisional liquidator has similar powers to a regular liquidator during a liquidation. His/her responsibilities include preserving and protecting the company's assets. once he/she takes charge, the company directors no longer control the company.

10. What is a liquidator?

Liquidators are external experts responsible for managing the winding up of a company by realising assets and distributing the proceeds. The liquidator will typically also investigate the affairs of the business and report to ASIC if there's evidence of misconduct. Liquidators can be appointed for solvent or insolvent businesses. To be registered as a liquidator, you must be registered with ASIC and typically a practising accountant.

Once a liquidator has been appointed, he/she takes over the business and the directors relinquish their control. He/she will then sell off/realise assets and distribute the proceeds to secured creditors/employees, unsecured creditors, and shareholders, in that order.

Unlike administrators, liquidators aren't concerned with assessing and recommending alternatives like the possibility of returning to trading. His/her task is to wind up the company. The liquidator has a duty to act honestly and impartially with care and skill and to avoid conflicts of interest.

11. What is the director’s role with a liquidator?

Company directors have an obligation to cooperate with the liquidator. This could include providing records, offering information about the location of assets and company accounts, and attending meetings to help the liquidator give creditors necessary information about the company and liquidation process. The director should answer any queries from the liquidator and meet with him/her to discuss them if necessary. Directors must not obstruct the liquidator's work.

Once the liquidator has been appointed, the director needs to provide the liquidator with a Report on Company Activities and Property (ROCAP) within five working days (creditors' voluntary winding up) or 14 days (court-ordered liquidation). The ROCAP is a written report on the business, property, and financial circumstances of the company which is lodged with ASIC.

12. What is the process of a business liquidation?

If it's a solvent company, the process is a members' voluntary liquidation and will start with the directors making a declaration of solvency. Once the right forms have been lodged with ASIC, a notice of the meeting is sent to members so they can consider the wind-up before passing a special resolution to liquidate the company. The liquidator can then be appointed and start the wind-up process.

If it's an insolvent company, it might start with a court order by the liquidator's appointment. The liquidator then takes control of the company, sells/realises the assets, and distributes the proceeds to creditors, and shareholders where funds are sufficient.

The liquidator will also investigate the company's affairs and look for inappropriate dealings. He/she might hold creditors' meetings to keep the creditors updated on the process.

Following this, the liquidator submits final lodgement with ASIC and the company is formally dissolved and deregistered. Note: liquidators aren't obligated to do any work beyond a statutory level if there's insufficient company assets to cover his/her costs before creditors and others are paid.

13. What are the tax obligations of a business liquidation?

If your company is in liquidation and has outstanding tax debt, the ATO is considered an unsecured creditor and the company's unpaid tax will be treated as such.

Keep in mind your company might need to consider the ATO's rules relating to commercial debt forgiveness if you end up having debt cancelled because of the liquidation. For example, you could have your prior income year revenue losses, net capital losses from earlier years, and other items reduced as a result.

Also, directors could be held personally liable for tax debt where it involves outstanding pay as you go withholding or superannuation guarantee charge amounts where the required lodgements have not been made within the timeframes.

14. What are the legal obligations of a business liquidation?

Once a liquidator has been appointed, the company directors need to hand over control to the liquidator. The liquidator needs to observe his/her duties to act in the interests of the creditors to sell off and realise the company’s assets and pay the proceeds to creditors.

As for company directors, they should assist the liquidator and not obstruct his/her work. Directors should provide the liquidator with information about records and business operations, and any other relevant details. As a company director, your obligation is to assist with the liquidator's queries.

Directors can be personally liable for company debts, including some tax debts, even after liquidation is complete and the company has been deregistered. The relevant tax debts are outstanding pay as you go withholding and superannuation guarantee charge. While this is not specifically an obligation arising during the liquidation, it's something that's relevant to consider ahead of time for any director to a company that's in liquidation.

15. What happens after a business liquidation?

Once the assets have been sold or realised and the proceeds distributed, the liquidator submits final lodgements to ASIC and the company will be deregistered. The company is then completely dissolved and permanently shut down. Outstanding debts can be written off as far as the company is concerned, but directors might be personally liable for some DPN expenses as well as any insolvent trading findings. If the director gave personal guarantees for company debt, he/she could also be liable.

In the aftermath of a liquidator, some creditors might have recovered all, some, or none of their outstanding debt. Employees will have lost their jobs and possibly some of their entitlements. If the realisation of assets yielded sufficient funds, employees might have recovered some of these lost entitlements. Employees could receive compensation through the government's Fair Entitlements Guarantee.

16. Are directors liable for a company's unpaid debts?

While companies are considered separate legal entities, situations exist where company directors could be held personally liable for unpaid debts and liabilities. This liability can extend to after your company is shut down and deregistered.

Insolvent trading is probably the best example of personal liability of directors. The duty to prevent insolvent trading means you could be found personally liable for any losses incurred after your company has become insolvent. In addition, you could be subject to civil and criminal penalties.

Directors can also be personally liable for unpaid pay as you go withholding and superannuation guarantee charge amounts where there are director penalty exposures. If your company incurs liabilities when acting as a trustee, you could also be personally liable for these in some situations.

Also, if you have a personal guarantee over a business loan or other interest for your company, you could end up having to pay the debt amount (or lose your home or other property used as security) if the company defaults on the debt.

17. Do I have to get a registered liquidator to liquidate?

Yes, your liquidator has to be a registered liquidator under the Corporations Act 2001, through ASIC's Register of Liquidators and with a Registered Liquidator Number.

In addition, they need to be free of bias and not have or have had a close personal or business relationship with anyone involved in the insolvency. Your liquidator cannot have any interest, personal or private, in conflict with their duties.

Liquidators can't be a debtor or creditor of the company, and they can't be auditors, officers, or employees of the company.

Speak with the expert liquidators at TPH Advisory today to discuss your business’ needs.

18. Who pays the cost of the liquidator?

Generally the liquidator's fees are paid out of the proceeds from the company's assets before any payments are made to creditors. Sometimes liquidators will arrange for a third party such as a director to cover shortfalls if the company doesn't have sufficient assets. Liquidators are also entitled to reimbursement for out-of-pocket expenses incurred while carrying out their duties.

The liquidator's fees can't be paid until the creditors, a committee of inspection (a committee formed to assist the liquidator in a liquidation), or a court approves it. The liquidator might prepare a report detailing how the costs were calculated when seeking approval. Liquidator's fees can be challenged in a court after they've been paid.

19. Can I sell my assets before a liquidation?

It's not illegal for companies to sell their assets before a liquidation, but you should seek expert advice before doing so if your company is insolvent or potentially insolvent.

The sale should be at market value, ideally based on an independent valuation. Proceeds of the sale should be deposited into your company's bank account, not a creditor's bank account or a personal account.

Additionally, be careful when selling assets to a related party. Such a sale should always be conducted at arm’s length, or you could be at risk of illegal phoenix activity, which is when directors transfer assets of a company to a new company without paying market value and getting the former company into debt before liquidation. This is an (unlawful) strategy sometimes used to defeat creditors and their claims.

If you're contemplating sale of assets or going ahead with such a sale before liquidation, make you seek advice. It could be best to wait until the liquidator has been appointed and allow him/her to dispose of the assets rather than selling them yourself when you know the company is going to enter liquidation.