When a business is in severe financial difficulty and it seems as though there is no chance of maintaining solvency (where the company’s assets exceed its liabilities), sometimes the only remaining option is to break the company down and re-distribute its assets. This process is known as liquidation.
Liquidation is a last resort for a business. Under a liquidation, the company ceases trade and operations, is deregistered and its assets are sold off to repay its creditors. Often, a liquidation is entered into involuntarily - the business owner holds off until the creditor takes them to court and the magistrate orders the liquidation - but a liquidation can be voluntary. Directors might apply to save themselves the time and expense that goes with a court case.
HOW DOES LIQUIDATION WORK?
There are actually three different types of liquidation and the process is different for each type.
Members’ voluntary liquidation
This is for companies who wish to cease trading and do not want to sell the company. It is also known as ‘winding up’ a business and is not suitable for companies that are facing insolvency as the company must be able to pay its debts in entirety within 12 months of winding up the company. Once the majority of a company’s members have signed a solvency declaration, members are given a 21 day notice period. Following this notice period, a majority vote is taken to continue and the liquidation process can begin. This type of liquidation is suited to companies facing an uncertain future and wish to avoid financial trouble.
Creditors’ voluntary liquidation
This type of liquidation is used when members of a company decide that a company is, or will become, insolvent. It involves a similar process to members’ voluntary liquidation, where a special resolution of the members of the company is made and the 21 days notice period begins. Members will then vote and a majority agreement will see the appointment of a registered liquidator. This method of liquidation is for companies who are facing insolvency and wish to disband the company and its assets.
Court appointed liquidation
This form of liquidation is for companies and assets that are deemed at risk from third parties or directors of a company it can be initiated by a creditor who is seeking payment. Although it sounds scary, it is actually a safe way to secure the company from further loss and financial damage whilst the situation is assessed. If the court decides that the company should be liquidated, the court will appoint a liquidator.
WHAT HAPPENS NEXT?
If you decide that liquidation is the right choice for your company, here's what you can expect from the liquidation process.
- A liquidator is appointed to you
The liquidator locates and safeguards your company assets
They realise (or value) those assets
They investigate your company’s financial situation
They report their findings to your creditors and ASIC
Offences will be reported for ASIC to follow up on
(a process that may or may not affect the liquidation)
The liquidators distribute the revenue realised from the assets to your creditors
Any funds remaining are distributed to your shareholders
Your company is deregistered.
A liquidation is a straight-forward process and not half as daunting as it sounds. Whilst it does spell the end of a company, it can also mark the lifting of an incredible burden on business owners and creditors alike - however it is only one possible solution to your company's debt.
Need help to figure out your best option?
If you're considering liquidation for your company, or would like to know what other options are open to you, book in a free consultation with the My Business Path team to talk through your options.