Author
Mitch BallChief of Insolvency Operations & ASIC Registered Liquidator
(02) 9220 7117
When a business gets into trouble, it has several insolvency options. Whether you’re an advisor to a company in financial strife or in charge of such a business, the liquidation of a company is one possible outcome. However, many people are surprised to discover that even profitable, thriving businesses may choose to enter liquidation. But why would they?
We’ve broken down what liquidation is in business, what it involves, and why you might choose it.
What Is Liquidation in Businesses?
Liquidation is the process of winding up a company by selling its assets to repay debts and formally closing the business. A registered liquidator is appointed to take full control of the company’s operations, finances, and assets, to end trading and resolve affairs as efficiently as possible.
If the company is insolvent, the liquidator may also investigate what went wrong.
Liquidation applies only to companies. It’s often confused with bankruptcy, which applies to individuals, including sole traders and partnerships.
The Business Liquidation Process
The liquidation process differs depending on each individual situation.
A company enters liquidation when it is struggling to pay debts. This is known as involuntary liquidation, usually initiated through a court order following an application by a creditor. However, directors or a majority of shareholders can also apply to the court.
Alternatively, a business may choose to wind up operations voluntarily, called voluntary liquidation. This occurs through a resolution of members or creditors. It often follows voluntary administration or a Deed of Company Arrangement (DOCA), where it’s decided the business is no longer viable. The decision to liquidate may arise after early signs of insolvency, such as:
- Receiving a Director Penalty Notice (DPN)
- Cash flow issues
- Mounting or overdue debt
Once a company enters business liquidation, unsecured creditors cannot begin or continue legal action without court approval. Company directors lose control, bank accounts are frozen, and any ongoing trading is managed solely by the liquidator.
The duration of liquidation varies, but each type must follow strict legal procedures and compliance requirements.
Outcomes of Liquidation for Business Employees
During business liquidation, once a liquidator is appointed, company directors lose all legal authority. The liquidator may choose to terminate all employees immediately. However, if continuing to trade temporarily is in the best interest of the creditors - typically to facilitate a business sale - employees may remain in their roles or be rehired.
In most cases, employees lose their jobs. If there aren’t enough assets to cover outstanding entitlements, they may miss out on payments such as wages, leave, or redundancy.
However, employees affected by liquidation may be eligible to claim unpaid entitlements through the Fair Entitlements Guarantee (FEG), which is a government scheme that covers:
- Up to 13 weeks of unpaid wages
- Annual leave
- Long service leave
- Redundancy pay
- Payment in lieu of notice
What is a director's responsibility in liquidation?
Liquidation can be a difficult process for directors who might be unsure of their responsibilities. Directors are responsible for ensuring the business is not trading insolvent. If there are any signs of insolvency, directors must act quickly to ensure they are not personally liable.
Directors of a solvent company can also enter liquidation through a Members’ Voluntary Liquidation (MVL).
When it comes to winding up a company, directors must make a declaration of solvency and lodge it with ASIC. It is the director’s responsibility in liquidation to then appoint a liquidator to begin the process.
What Is a Wind-Up Notice?
A wind-up notice is issued by a creditor (often the ATO) to test whether your company is insolvent. This usually occurs after a statutory demand has gone unpaid for 21 days. It includes a court date and if you don’t act, the court may order your business to be liquidated, with a liquidator appointed to sell assets and repay creditors.
Do I Have to Stop Trading Immediately?
Receiving a wind-up notice doesn’t mean you must stop trading right away. You can continue operating if you're able to pay the debt or arrange a payment plan. However, trading while insolvent can lead to personal liability for directors and serious legal penalties. Always seek legal advice before continuing.
What Are My Options?
After receiving a wind-up notice, you can:
- Do nothing – your company will likely be wound up in court.
- Pay the debt in full or enter a payment plan – the notice can be withdrawn or dismissed.
- Enter voluntary administration – an administrator works with creditors via a Deed of Company Arrangement (DOCA), allowing the business to continue if viable.
Act quickly and seek professional advice to protect your business and avoid further penalties.
Why Choose Liquidation for Your Business?
The main reasons include control, lower costs, and freedom from the stress of insolvent trading.
Liquidation in business is the only way to wind down operations and shut down a company in an orderly way. It ensures assets are distributed among creditors and helps minimise the impact of insolvent trading. It also gives shareholders, creditors and directors the opportunity to have an independent expert investigate and manage the liquidation.
Are You Ready to Talk Business Liquidation?
For struggling businesses, choosing to liquidate is the best way to ensure assets are fairly distributed to creditors by an external expert and in an orderly way.
At Mackay Goodwin, we have a team of certified and experienced liquidators to assist your business during this difficult time. If you’re thinking of liquidating your business, contact our expert team, and our specialists will readily assist you.
FAQs
What is the difference between voluntary and involuntary liquidation?
Liquidation is the process of winding up the company’s affairs, selling assets and distributing them accordingly to repay creditors.
There are two types of liquidation, voluntary and involuntary.
Voluntary Liquidation
There are two main types of voluntary liquidation:
- Creditors’ Voluntary Liquidation: CVL, which occurs when the business is insolvent and must cease trading. During a CVL, the Director(s) appoint a liquidator to continue the process of liquidation.
- Members’ Voluntary Liquidation: MVL is a process used to close a solvent company. It is initiated by the company’s shareholders when the business has no outstanding debts and can pay all liabilities in full within 12 months.
Another option is Simplified Liquidation, designed for winding up small, insolvent companies in Australia. The Simplified Liquidation process aims to reduce the time and cost of liquidation. The company must meet eligibility criteria, such as owing less than $1 million in total liabilities and having up-to-date tax lodgements.
Involuntary Liquidation
Involuntary liquidation, also known as court liquidation, occurs when a creditor applies to the court for a winding-up order to force the company into liquidation. If the application is deemed successful by the courts, they will appoint a liquidator on the directors' behalf.
Who gets paid first when a company goes into liquidation?
If a company enters liquidation, the main objective is to sell its assets and pay creditors. Payments follow a set order of priority:
- Secured creditors are paid first.
- The costs of liquidation are covered.
- Priority unsecured creditors, such as employees.
- Any remaining funds go to unsecured creditors.
If there are no surplus funds, unsecured creditors may receive little or nothing.
A secured creditor is defined as one who holds a valid security interest on the registered Personal Property Securities Register, also known as a “charge”. A secured creditor is often a bank or finance company.
An unsecured creditor is one who has no collateral or security over the company’s assets, which is why they are secondary when it comes to payment in liquidation. An unsecured creditor could be a trading partners that supply goods and services to the business.
What Other Options Are Available Apart from Company Liquidation?
Before considering business liquidation, exploring options like a small business restructure or company restructure, where feasible, can provide pathways to recover and maintain your company’s financial viability. Restructuring involves reorganising your company’s financial and operational aspects to better manage debt obligations and improve overall efficiency. This strategic move can significantly reduce financial strain and potentially prevent the need for liquidation for businesses.
Engaging early in restructuring processes can help directors avoid personal liability and give the business a fresh start. Corporate restructuring specifically allows businesses to renegotiate terms with creditors, including lowering debt amounts or extending payment terms. This helps manage cash flow while preserving core business functions and stakeholder relationships.
By taking proactive steps through restructuring, your business may not only avoid business liquidation but also emerge stronger and more resilient.
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