What is voluntary administration?

Voluntary administration is the process by which an independent administrator — determined either by the court, by a company’s creditors, or by the directors of the company — is appointed to assess the financial situation of a company in distress, and determine a resolution that can be agreed upon by all parties.

The appointed independent administrator is required to be a registered liquidator with the Australian Securities and Investments Commission (ASIC), and is recommended to be a member of key professional bodies such as the Chartered Accountants Australia & New Zealand (CA ANZ), or the Australian Restructuring Insolvency & Turnaround Association (ARITA).

The administrator’s role is to assess the advantages and disadvantages of the financial resolutions available, and to provide the recommendation that is in the best interest of all stakeholders involved. Depending on the outcome of their extensive investigation, the administrator could recommend the following options:

  • Return the company to the company’s directors;
  • Enter into a Deed of Company Arrangement (DOCA); or
  • Recommend liquidation of the company to pay the company’s creditors.

To read more about voluntary administration, click here.

Why do companies use voluntary administration?

Voluntary administration is an effective tool to allow a company in financial distress to assess accurately whether the company can remain trading or should be liquidated. A company is able to take the necessary time to make this assessment due to the financial moratorium imposed upon creditors, landlords, and other stakeholders (who could otherwise take action against the company for non-payment of dues) when a company enters voluntary administration.

It is also a legal requirement that the director of a company in financial distress takes every possible measure, such as voluntary administration, to avoid trading while insolvent.

What is the voluntary administration process?

  • The process begins when a company makes the decision to put the company into voluntary administration — this needs to be in writing and initiated by a secured creditor, a company director, or by the court.
  • A voluntary administrator is appointed — they secure all assets of the business to assess its financial status.
  • A meeting is held with creditors — this is their opportunity to vote for a replacement administrator and/or create a committee to oversee the admission process.
  • The administrator researches the business’ finances and affairs with any required assistance from the director — information is gathered to create a report with a detailed analysis.
  • A second meeting is called by the administrator, allowing the creditors to vote on the future of the company based on recommendations.
  • The final step is determined by the votes made during the second meeting. This could be returning control of the company to the company directors, a Deed of Company Arrangement (DOCA), or liquidation.

For more information on the process, Australian Debt Solvers has a comprehensive guide in their Voluntary Administration resource here.

How can voluntary administration help a company facing financial troubles?

Voluntary administration can help a company in distress by imposing a moratorium on all trading and debt recovery processes. This allows an external voluntary administrator to review the company and possibly reduce the impact of — or avoid — the following:

  • Severe Director Penalty Notices (DPN) from the Australian Taxation Office (ATO) where the director can become personally accountable to tax liabilities within 21 days.
  • Liquidation, where the company has no choice but to be wound-up and have all assets redistributed to creditors.

Does voluntary administration help protect a director?

Voluntary administration certainly protects a director of a company in financial distress. The director of an ailing company may face severe penalties imposed by the Australian Taxation Office (ATO) through Director Penalty Notices (DPNs) if the company continues to trade whilst insolvent — unless the voluntary administration process has been initiated.

According to the provisions of the DPN, unless the company appoints a voluntary administrator or liquidator to handle the company proceedings, the directors of an insolvent company become personally accountable to the tax liabilities within 21 days.

What happens when a company starts the voluntary administration process?

The initial action that a company takes when starting the voluntary administration process is for an administrator to be appointed. Once the administrator is onboard and control has been transferred from the directors of the company, there are several things they are charged with actioning:

  1. The first creditors meeting must be scheduled, and notice sent to the company’s creditors notifying them of the meeting. Not only does this set the voluntary administration in process, but also serves to make all creditors aware that the company has been placed in a financial moratorium for the course of the administration.
    1. Along with an invitation, the voluntary administrator must include a Claim Form and a Proxy Voting Form.

The Claim Form is a requirement for the creditor to fill in and return to the administrator, it is basically a ‘proof of debt’ that ensures they are eligible to attend the meeting and vote upon the proposed course of action.

The Proxy Voting Form is for those creditors who are unable to attend the creditors meeting, but wishes a proxy to attend and vote on their behalf.

  1. The voluntary administrator is then required to communicate with all other relevant stakeholders notifying them of the voluntary administration, and include any other information deemed necessary to disclose by the administrator.

What does a voluntary administrator do?

A voluntary administrator is an external company investigator. When a company is in voluntary administration, the administrator is handed over the directors rights (operations, assets, and liabilities) to the company in order to review their finances and recommend a plan — with both the company and creditors in mind.

During this process, the voluntary administrator has strict procedures and time limits they must adhere to.

  • Within the first 8 business days of being appointed, a voluntary administrator must hold a meeting with creditors — allowing them 5 days notice. Votes by the creditors at this meeting can cause the administrator to be replaced, to liaise with a committee made by the creditors, or to resume inspection as normal.
  • An in-depth report needs to be prepared after a thorough investigation into the company’s finances and affairs — recommended solutions to the company’s outcome also need to be included.
  • Within 25 or 30 business days of being appointed, the voluntary administrator must hold a second meeting with the creditors — allowing them 5 days notice. Here the creditors vote on the outcome of the company based on the administrators’ report.
  • The final role of a voluntary administrator is to carry out the result of the vote. These three outcomes for the company could result in returning control of the company to the company directors, a Deed of Company Arrangement (DOCA), or liquidation.

How is a voluntary administrator appointed?

After directors pass the resolution that the company is insolvent (or likely to become insolvent), a voluntary administrator is appointed by the company directors, the creditors, or by the court. Since it is deemed of high importance to everyone involved, the legal framework has been designed to facilitate this process through quick and inexpensive means.

The minimum legal requirement of a voluntary administrator before being appointed, is a registration with the Australian Securities and Investments Commission (ASIC).

Who is a creditor?

A creditor is someone that the company owes money to on account of goods provided, services rendered, or loans extended to the company. These are a few examples of creditors that may be associated with a company, particularly those which are insolvent:

  • A supplier who has provided goods or rendered services — but remains unpaid.
  • A customer who has made payments — but has not received any goods or services.
  • An employee who is owed wages, salaries, or other entitlements by the company.
  • A contingent creditor — a third party is owed money by the company through the success of a legal claim.

Creditors can also be categorised as a secured or unsecured. A secured creditor would hold assets over the amount owed by the company (e.g. part of the company’s mortgage). An unsecured creditor, on the other hand, still has money owing to them, but would not hold any security interest in the company.

What are creditor meetings?

There are two critical creditor meetings held during the process of voluntary administration — both are arranged by the voluntary administrator. The purpose of these meetings is to give creditors the opportunity to exercise their voices in deciding the future of the struggling company, and ultimately implement one.

  1. The first creditors’ meeting must be arranged within the first 8 business days of the company entering voluntary administration (unless an extension has been arranged by the court).

This meeting gives creditors the opportunity to replace the voluntary administrator if they deem it necessary, and/or create a creditor committee that the administrator will be required to keep informed and refer information to.

  1. The second creditors’ meeting must be held within the first 25 or 30 business days of the company entering voluntary administration (unless an extension has been arranged by the court).

This meeting will be based on a detailed report with suggested company outcomes created by the voluntary administrator after a thorough company investigation. Creditors are required to vote for one of these outcomes, and an action towards the company’s future will be determined by the majority vote.

What happens at the first creditors’ meeting?

The first creditors’ meeting is to inform creditors and implement any changes.

It will cover the future courses of action to be taken with the company in voluntary administration, and with all those involved.

  • An estimated statement of affairs copy will be provided.
  • A statement covering the company’s history and failures will be read by a nominated director.
  • Any questions will be answered.

The first creditors’ meeting will also provide creditors with the opportunity to vote for changes in the future course of action. If the majority deem it necessary, they can vote to replace or retain the current administrator, and/or create a committee of inspection to oversee the proceedings of the voluntary administrator.

  • A maximum of five creditors and three shareholders can be nominated if a creditors’ committee of inspection is formed.

What happens at the second creditors’ meeting?

The second creditors’ meeting will outline the company’s investigation overview following the first creditors’ meeting. Solutions will be provided by the administrator, and creditors are given the opportunity to decide the company’s future.

At the meeting, the voluntary administrator will provide all relevant discoveries and information about the company’s affairs and its finances.

  • An in-depth report will be supplied
  • The administrator will asses and share the company solutions based on three possible outcomes:
    • Placing company control back to company directors — in this case, the company would be deemed viable.
    • A Deed of Company Arrangement (DOCA) will be advised — a DOCA proposal statement will be shared if the administrator advises this course of action.
    • Liquidation — the company will be wound up.

The creditors then vote on one of these recommended solutions to implement, where majority rules.

How do creditors get paid?

Creditor payments in voluntary administration are set out under the Deed of Company Arrangements (DOCA).

Similar to liquidation, the voluntary administrator would call for creditors to furnish proof of debt — claims may be forfeited if creditors fail to submit proof of debt. The administrator then has the right to accept or reject claims based on their validity; if the claim is accepted the administrator will organise to pay a dividend — dividends are allocated to creditors in order of priority.

What’s the effect of the voluntary administration process on stakeholders?

  • Effect on creditors

During the voluntary administration process, a moratorium is placed on creditors. As a result, creditors can’t begin, continue, or enforce legal action on their claims against the company. An exception is if the claim goes through the court first, or if the creditor has consent from the administrator. Another possible exemption — for secured creditors — is the possible opportunity to enforce a security during the decision period (soon after the administrator gives notice to the first appointment).

It is upon the creditors’ influence (vote) to determine the outcome of the company based on the administrator recommendations, however, some outcomes could affect creditors by losing repayments.

  • Effect on landlords

A moratorium is also placed on owners and landlords during voluntary administration. As a result, they cannot evict the company, nor recover their dues (unless the process of eviction or recovery had already begun before the company confided to voluntary administration).

  • Effect on employees

Employee contracts and the employment of contracts during voluntary administration is adopted by the voluntary administrator. The effect on employees is not certain and varies to each company’s situation, unless the company were to fall into liquidation — in which case employment would cease. Those terminated can recover entitlements through the Fair Entitlements Guarantee (FEG).

What are the employee entitlements during voluntary administration?

An employee is considered a creditor to the company since money would be owed in the form of wages, salaries, and/or other entitlements. Employees are considered a special class of unsecured creditors, and their entitlements would be paid in priority over other unsecured creditors. Contractors are not employees and are considered unsecured creditors of the company.

If the administrator continues to trade the business in the process of voluntary administration, the employee is entitled to be paid ongoing salary or wages out of the assets available at the administrator’s disposal. However, employee entitlements that arose prior to the period of administration need not be paid to employees during the period of voluntary administration.

What are the possible outcomes of the voluntary administration process?

There are three possible outcomes as a result of voluntary administration. These are recommended by the voluntary administrator, but the action is decided by the creditors in the final meeting of the process.

  1. The company can be placed back into the directors’ control if the administrator finds the company is solvent after investigation — this can still tarnish the company’s reputation.
  2. A Deed of Company Arrangement (DOCA)could be executed. DOCA is a binding agreement that facilitates the company’s repayment to creditors — some of which may be forgiven. DOCA benefits the company by allowing it to continue operations. Creditors also benefit by receiving more repayments than if the company were to go into liquidation.
  3. A company may be placed into liquidation. This means the company is wound up, and all assets are used to repay creditors by order of priority.

When does voluntary administration end?

Typically, the process of voluntary administration would end when a verdict is made to implement any of these three outcomes:

  • Handing control back to the company directors so they can resume trading.
  • Executing the Deed of Company Arrangement (DOCA).
  • Liquidation - creditors resolving to wind up the company’s operations.

Other circumstances that may bring voluntary administration to an end include:

  • Creditors resolving to end the voluntary administration.
  • A court order to end the voluntary administration.
  • If the second creditors’ meeting is not arranged within the required time frame.
  • If the DOCA is not signed within 21 days of the second creditors’ meeting.
  • If the court appoints a liquidator — effectively terminating the company and voluntary administration.

What is a Deed of Company Arrangement?

A Deed of Company Arrangement (DOCA), is a flexible proposal or deal that allows a company in financial stress to resolve its debts to creditors and stay operational.

A DOCA must be approved by at least 50% of creditors before going ahead. It outlines the name of the administrator, the properties that would be used to repay creditors, the debts to be cleared, and the order in which funds would be used to repay creditors (employees commonly have first priority).

Agreeing to a DOCA could be seen as a second chance for a company’s survival. For creditors, it can be seen as maximising returns as a result of avoiding liquidation.

To learn more about DOCA, click here.

What does voluntary administration cost?

Voluntary administration is designed to be easy to use and realistically inexpensive. However, there is no definitive answer to what voluntary administration may cost due to the uncertain nature of the business, the scale of operations, and its complexity.

For large companies, voluntary administration is relatively inexpensive when considering the possible outcome of liquidation.

Does voluntary administration affect a director’s credit rating?

Credit agencies do keep a record of companies and company directors’ who enter voluntary administration. So, a director’s credit rating will be affected. However, it is more likely to influence future business loans rather than personal loans.

The voluntary administration process may not be viewed as unfavourably as a director presiding over liquidation or initiating bankruptcy proceedings. Furthermore, the law affords a degree of protection to directors on account of initiating the administration process.

What is the difference between voluntary administration and a receivership?

In the case of voluntary administration, the administrator is appointed and becomes responsible for the outcome of the company and all creditors. The voluntary administrator acts with the intent of maximising the benefits of everyone involved.

A company in receivership, on the other hand, is not initiated by the company or its directors, but by one of the secured creditors of the company or banks that the company owes money to. The receiver is not interested in maximising the benefits of all parties involved, but, would act with the intent of recovering the assets of just the secured creditors or the banks that they represent.

What is the difference between voluntary administration and liquidation?

Voluntary administration is the last chance of company survival before liquidation, in which case the company is forced to wind up.

  • Voluntary administration

A company in financial strife will go into voluntary administration with the hopes to find a positive outcome where operations and trading can continue. The process of voluntary administration begins when an external administrator is appointed to investigate the company. This includes and is not limited to, evaluating the positive and negative company affairs, examining company financial records, and recommending future courses of action to creditors.

  • Liquidation

A possible negative outcome of voluntary administration is the inability to prevent the company from being insolvent, and ultimately having to put the company into liquidation. The process of liquidation is to finalise all the affairs of the company and wind up its operations. This includes serving the creditors best interests in order of priority, while attempting to settle as much debt as possible.

What is the difference between voluntary and involuntary administration?

Voluntary administration is an internally initiated process, where the directors of the company decide to place the company into administration through board resolutions.

Involuntary administration tends to be externally initiated by a court of law, or as desired by the creditors of the company in an effort to recover the money owed to them. In the case of involuntary administration, secured creditors may file a “winding-up” application. This initiates proceedings against an insolvent company with an aim of liquidating its assets.

Business restructuring can involve every function in the business, from operations to finance, and a restructure might involve a single department or the entire organisation. If you're considering a business restructure, understanding the hows and whys can help with your planning and implementation.

These top questions and answers can help you get started.

The different types of restructuring

Restructuring can refer to business restructure, operational restructure and financial restructure. These terms can sometimes overlap.

What is a business restructure?

Business restructure involves changing any element of your business, whether it's legal, ownership, operational, financial, or another structure. The aim of any business restructure is to make the business more organised and profitable.

Business restructuring requires a detailed plan as there are usually drastic changes.Restructuring may involve cutting staff.

What is an operational restructure?

Operational restructures focus on improving the day-to-day processes of the business to boost earnings. With an operational restructure, you might address specific functions such as customer-facing departments, administration, sales, and marketing to optimise operational efficiency, and in turn improve the bottom line.

For large organisations, an operational restructure could involve shaking up entire divisions to streamline operations.

What is a financial restructure?

Financial restructures target the capital structure of the business with the aim of correcting problems or efficiencies. These problems could include debt and costs that are overwhelming your business or even threatening its survival.

Changing the capital structure could involve, for example, converting some debt to equity, shifting debt, shifting equity to new owners, or refinancing to lower interest payments. The ideal outcome of a financial restructure would be to strengthen the company's balance sheet.

What other words are used for business restructure?

Business restructuring is sometimes referred to as corporate restructuring, organisational restructuring, financial restructuring, or operational restructuring. While each term has a slightly different meaning and typically has different goals, some of them overlap and business restructuring tends to encompass all alternative terms used.

For example, you can have a business restructure that involves major operational changes and no major financial changes. Alternatively, you could have a business restructure with legal or ownership adjustments, but no major operational or financial restructuring.

Why and when is business restructuring important/ necessary?

Changing consumer trends and a highly-competitive globalised environment mean companies can no longer afford to be complacent. Organisations might undertake business restructuring proactively to innovate, or they might pursue it tactically in reaction to new challenges. For example, sometimes a change in legal structure is designed to facilitate growth, change the business model, or to protect assets.

Drivers of business restructuring can be categorised also as internal or external. For example, in terms of internal drivers, your business might restructure because profit is lower than expected, due to low revenues, or low margins. You could pursue restructuring because your operating costs are out of control, your cash flow is poor, or your productivity is below market standards. High labour costs and poor internal communication could be other reasons.

External drivers include new consumer trends, disruptive innovations, and shrinking market share due to increased competition. Businesses struggling financially might consider restructuring as necessary to avoid formal insolvency processes like voluntary administration.

What are the common goals of a business restructure?

The key goal of a business restructure is returning the business to profitability, or boosting profitability.

Profitability can be achieved in a range of ways. For example, the restructure could make your business more dynamic and innovative, increase cash flow and improve working capital levels, or reduce financial pressures.

Operational, financial, and human resource efficiencies can also improve profitability.

Do you need a business plan for your restructure?

There are often challenges during a business restructure, such as resistance from employees, so it's essential to have a clear plan. By updating your business plan, you ensure you'll be working with a document that reflects your new structure, goals, and vision.

A business plan or formalised restructuring plan will also help you stay focused and measure outcomes. Your new plan should include everything from why you're restructuring to staff changes, the steps for each stage, and a staff-communication strategy.

Do you need to apply for a new ABN during a business restructure?

If your business restructure involves a change in your legal structure, you will need to apply for a new ABN. For example, if you're changing from a partnership to a company structure, you'll need a new ABN.

Are there likely to be changes to your tax obligations during a business restructure?

Different legal structures are subject to different tax payment and reporting rules, so your tax obligations could change if you change your legal structure. For example, if you're changing from a company structure to a trust structure, your tax obligations will change.

Who do you have to contact during a business restructure? Eg ASIC? ATO? Etc.

If your business restructure involves a change in your legal structure, you might need to get in touch with various agencies for licensing, trademark, business name, and company-registration purposes. Contact the Australian Business Register about changes to your registered business details, and let the ATO know about the relevant changes as well.

Use the Business Registration Service to register a new business name. Lodge paperwork directly with the ASIC or apply with a private service provider if you're registering a new company.

What are your legal obligations during a business restructure?

Ensure you're complying with any changing tax-reporting and tax-payment obligations during your business restructure, and get tax advice if you're unclear about how the rules are changing. Additionally, formalise any changes to the legal structure by contacting the applicable agencies. If you're adding new stakeholders, such as partners to a partnership, ensure you have appropriate agreements drawn up.

Organisational restructuring can involve layoffs, so you'll want to make sure you're formalising redundancies according to legal requirements. For example, employees might need to be given sufficient notice periods and severance packages. Treat employees fairly by using objective selection criteria, and refer back to the business plan to show why the redundancies are necessary for the business.

What do you do after a restructure is completed?

High employee turnover (due to perceived uncertainty), lack of leadership, and talent gaps are some of the likely challenges post-restructure. To meet these challenges, your leadership team needs to move quickly on talent decisions to stabilise your organisation and ensure operations regain momentum. Communication is another critical activity, and your leaders should commit to transparency.

Additionally, offer a support structure for the organisation's leaders as they settle into new roles. Establish collaborative networks and support systems to prevent isolation. Another critical post-restructure activity to is encourage risk-taking and allow team members to fail and learn fast.

Ensure you're building a growth leadership capacity so your talent needs are aligned with your growth-revival targets. Finally, implement an employee-management plan to tackle morale, culture, and engagement. This can lead to higher motivation and productivity, especially if there has been redundancies.

Taking the first step

Mackay Goodwin is a leading specialist restructure and turnaround consultancy. Our financial experts can assist with sound, professional advice to help you recover from your distressed situation, before it’s too late. If you’re thinking of restructuring your business and you have a question that has not been answered here, contact our expert team and they’ll be able to provide you with an answer. Call us now on 1300 750 599.

Whether you're a company director or advisor to a company facing the prospect of liquidation, you'll need to think about a number of things. And by better understanding liquidation and its associated requirements, you might be able to achieve a better liquidation outcome for the creditors and other stakeholders.

What is liquidation?

Business liquidation means an external expert, the liquidator, winds up the financial affairs of the company by selling off assets and paying the business's creditors. With liquidation, the company's structure is completely dismantled as cheaply as possible by the liquidator, who also investigates what might have gone wrong with the business.

While liquidation is an insolvency procedure, it's not only for insolvent companies. With a members' voluntary liquidation, solvent companies can be shut down and deregistered. If it's an insolvent company, the liquidation is likely brought about by a court order or a creditors' decision to cease trading.

Keep in mind that liquidation applies only to businesses that operate through a company structure. Whether or not insolvency is an issue, liquidation offers theonly way to wind up a company and close it down permanently.

What other words are used for business liquidation?

Voluntary administration and receivership are two other insolvency procedures that can sometimes be confused with liquidation. Liquidation always results in the business shutting down permanently, while voluntary administration and receivership could see the business return to trading.

A fourth concept sometimes confused with liquidation is bankruptcy.

  • Voluntary administration – Voluntary administration involves appointing an administrator to investigate and restructure the business.
  • Receivership – Receivership means a secured creditor appoints a receiver to come into your business and sell assets so the creditor can be repaid.
  • Bankruptcy – Bankruptcy applies to individuals only, never companies, and it can happen when when a person applies to be declared or is declared bankrupt by a court.

Winding up – The terms winding up or to be wound up are correctly used as substitute terms for liquidation.

Why and when is business liquidation necessary?

Business liquidation can be voluntary or involuntary. A solvent business could choose to wind down through a members' voluntary liquidation. This offers an orderly way to dispose of the company's assets, shut down operations, and deregister the company. It offers full control and a low-cost way to write off debts.

Business liquidation could also be involuntary. Typically, this happens when a court orders the liquidation, and this could in turn arise from a creditor applying to the court to have the company liquidated. In this case, the company might have too much debt to recover from other insolvency processes like administration or a Deed of Company Arrangement.

What is the process for a business liquidation?

To wind up a solvent company, the company directors make a declaration of solvency and lodge the appropriate forms with ASIC. A notice of meeting needs to be sent to members so they can consider the wind up. The company members then pass a special resolution to wind up the company, at the meeting. After this, the liquidator then starts winding up the company.

For an insolvent company, the court makes an order for the business to be liquidated. The liquidator then takes over the company. He or she can sell the assets and pay creditors in order of priority. If there are surplus funds, these can be paid to the shareholders. After this, the company is formally dissolved and deregistered.

Do you need an external liquidator when closing down your business?

If your company doesn't meet the requirement for voluntary deregistration (a company with assets worth $1,000 or more can't be deregistered on request), you might need to opt for liquidation. The liquidator by definition is an independent (and qualified) party who can take control of the company to help wind up its affairs for the benefit of creditors. For this reason, you'll need to have an external liquidator to close down your business if you can't voluntarily deregister it to shut it down.

The liquidator needs to be a registered liquidator. They must be free of bias, and they must not have or have had a close personal or business relationship with anyone involved in the insolvency. Also, they must not have any personal or private interests in conflict with their duties as a liquidator.

If you receive a wind-up notice, does this mean you have to liquidate?

If your company has received a wind-up notice, the situation is dire, but it doesn't mean you're being ordered to liquidate right away. The wind-up notice will contain a court date. If you do nothing, your company will be wound up on the given date. Creditors, including the ATO, have the right to serve a Section 459E wind-up notice if you owe them more than $2,000.

If you don't want your company to be liquidated, you can pay the amount owed in full and ask for the wind-up proceedings to be dismissed. Alternatively, you could go into voluntary administration and have an external administrator work through a Deed of Company Arrangement. This means you'll have a deal or offer for the creditors and your company could continue to trade. Thirdly, and again, if you leave it as it is, your business will be wound up or liquidated.

What are your tax obligations if you are going into business liquidation?

The ATO could be a creditor of your company, and if so, any debt you owe to them will be treated like debt owed to other unsecured creditors. Other than this, your company needs to be aware of other tax implications both at the company and shareholder level. For example, if you're selling assets to pay debts, the proceeds are typically treated as ordinary taxable income or capital gains.

If shareholders receive distributions of surplus assets in the event of a winding up, they could be taxed under either the deemed dividends or capital gains tax provisions. For shareholders, a capital gains tax event could also be triggered when the liquidator makes final or interim distributions and/or when the company is deregistered.

Commercial debt forgiveness provisions could apply if your company's obligation to repay debt is cancelled because it's being wound up. Tax issues can get complex during liquidation, so always get tax advice from experts and make sure you're fully compliant.

Who do you have to contact during a business liquidation?

Once the liquidation starts, the liquidator will contact the relevant parties according to the applicable rules and requirements. The liquidator will send information to creditors about their rights in the liquidation and prepare a statutory report for creditors. The statutory reports provides information about the liquidation, including assets and liabilities of the company. The liquidator can also provide any other reports they thinks fit, or reports requested by creditors.

They also need to notify creditors of their appointment. With this notice the liquidator needs to include information about the creditors' rights. If it's a creditors’ voluntary liquidation, the liquidator needs to provide a summary of the company’s affairs and a listing of the names, addresses, and estimated amounts owed to creditors.

The liquidation comes to an end when the liquidator makes their final report to ASIC. If it's a court liquidation, the liquidator might seek an order for release from the court and ask ASIC to deregister the company.

Since employees are typically terminated, the company should notify employees as soon as possible and let them know how they can be compensated for unpaid entitlements through the Fair Entitlements Guarantee.

What are your legal obligations during a business liquidation?

Once liquidation begins, company directors are required to cede control to the liquidator, who takes over the company. The liquidator's obligation is to liquidate the company and release assets to pay creditors.

Company directors might have ongoing obligations even after the company has been deregistered. These could include personal liability as a director for company debts. Shareholders, however, aren't potentially liable for the company's debts.

Directors also need to avoid illegal phoenix activity, which means intentionally transferring of assets from an indebted company to a new company to avoid paying creditors, tax or employee entitlements.

How does business liquidation impact employees?

If the liquidator allows the business to continue trading in the interim, some employees might stay on for a while. However, in a liquidation employees will usually lose their jobs and they might lose out on entitlements. However, government schemes like the Fair Entitlements Guarantee (FEG) provides a safety-net provision for employees, potentially allowing them to claim for unpaid wages, unpaid annual leave, payment in lieu of notice, and other entitlements. Company directors, their spouses and relatives could also claim under the FEG but limits apply.

If funds are available from liquidation, employees have the right to be paid to cover their entitlements.

What do you do after a liquidation is completed?

Once the liquidation is complete, company directors can no longer act in their former roles because the company no longer exists. However, they won't be barred from starting a new company or acting as a director of other companies as long as you haven't been restricted. As a director, you won't be automatically disqualified or banned because of the liquidation, and creditors won't be demanding outstanding debt. However, if you're applying for a business loan, banks could take into account you were a director of a liquidated company.

However, you could continue to be held liable in some situations. For example, directors could be held liable for losses incurred due to insolvent trading or caused by breach of directors' duties. These duties can include duty of care and duty to keep accurate books and records.

So liquidation represents the end of life of a company. Whether voluntary or partly involuntary, the choice to enter liquidation should be considered very carefully if you have other options available. The process comes with strict time-frame, compliance, and reporting obligations, and having an external liquidator is required by law. Company directors and their advisor, such as accountants, should be aware of the potential tax implications, impact on employees, and notification and post-liquidation duties.

Contact Mackay Goodwin today

If you’re thinking of liquidating your business and you have a question that has not been answered here, contact our expert team and they’ll be able to provide you with an answer. Call us now on 1300 750 599.