COMPANY LIQUIDATION IN AUSTRALIA 101: CLOSING YOUR BUSINESS WITH PROFESSIONAL ADVICE
What Are the Types of Liquidation in Australia?
Liquidation is the process of closing a company and distributing its assets to settle debts. In Australia, there are three main types of liquidation:
1. Voluntary Liquidation
Voluntary liquidation occurs when a company decides to close itself down. This process can take two forms:
Creditors’ Voluntary Liquidation (CVL): Chosen by companies that cannot pay their debts. Directors appoint a liquidator to manage the closure, ensuring creditors are repaid as far as possible.
Members’ Voluntary Liquidation (MVL): Used by solvent companies that can pay their debts in full. Shareholders appoint a liquidator to distribute remaining assets after debts are settled.
2. Compulsory Liquidation
This occurs through a court order, usually following a creditor’s petition. A court-appointed liquidator manages the process, taking control of the company’s assets.
“Voluntary vs. Compulsory Liquidation: In terms of control, voluntary liquidation gives the company some control, as opposed to compulsory liquidation which is court ordered. Both end with the company's closure, but voluntary liquidation is usually less disruptive, as the company initiates the process.”
What does the liquidation process look like?
How to initiate the liquidation process?
The first step begins with the decision-making process by company directors. Directors must recognize that the company cannot continue its business due to financial difficulties. After this realization, necessary meetings are held to discuss options. Resolutions must be passed to officially initiate the liquidation process.
In Australia, directors also need to consider their obligations under the Corporations Act. They must make sure that the decision to liquidate is in the best interest of creditors.
How long does a liquidation process take?
What Does the Liquidation Process Involve?
Step 1: Decision and Initiation
- Directors assess the company’s financial situation and identify insolvency.
- Meetings are held, and resolutions are passed to initiate liquidation.
Step 2: Appointing a Liquidator
- A liquidator, registered with ASIC, is appointed to oversee the process.
Step 3: Managing Assets and Debts
- The liquidator identifies, values, and sells company assets.
- Proceeds are used to pay off creditors based on the priority of claims.
Step 4: Final Reporting and Closure
- Creditors receive a report outlining the process and financial distributions.
Typical Timeline:
Liquidation can take anywhere from a few months to over a year, depending on the complexity of the company and the speed of asset realisation.
How are creditors informed and their role in the liquidation process?
They are notified of the liquidation via notices from the liquidator. This communication ensures that creditors understand their rights and how the process will impact them.
In the case of Creditors Voluntary Liquidation (CVL), creditors have a greater say. They can attend meetings to discuss the liquidation and vote on key decisions. Creditors’ interests are protected through careful documentation and communication throughout the process.
Liquidation can be complicated, but understanding each step allows stakeholders to navigate it effectively.
What is a Liquidator and what do they do?
A liquidator plays a critical role in managing the closure of a company. Their responsibilities include:
- Selling company assets to generate funds.
- Repaying debts in the legally defined order of priority.
- Reporting to creditors on financial outcomes.
- Investigating company conduct and reporting findings to ASIC.
As for authority in Australia, all liquidators are regulated by the Australian Securities and Investments Commission or ASIC. In Australia, there are less than 648 registered liquidators and 200 bankruptcy trustees. They must follow a code of ethics and meet various standards and rules, including ongoing training and reviews. A liquidator must be registered to be appointed in any type of insolvency case.
Not all insolvency practitioners are created equal and it’s important to know who you are dealing with before you hand over control of your personal financial affairs or your company, its assets, stakeholders and creditors.
What is ASIC and ASIC notices to look out for?
The Australian Securities and Investments Commission (ASIC) plays a crucial role in managing and overseeing liquidations in Australia. Here’s a simplified breakdown of what you need to know.
What is the role of ASIC in liquidation processes?
ASIC makes sure the liquidation process follows the law and protects everyone involved, including creditors and shareholders. Its main roles during liquidation include:
- Licensing and Oversight of Liquidators: ensures only registered, qualified liquidators manage the liquidation process.
- Monitoring Company Conduct: ensures that directors comply with legal obligations when initiating liquidation and report insolvency accurately.
- Investigations and Enforcement: investigates any misconduct or fraud during liquidation.
- Compliance and Reporting: Liquidators must regularly report their actions to ASIC, which then reviews them to ensure proper handling of the process.
- Enforcing Penalties for Non-Compliance: impose fines and/or legal action against directors or liquidators who violate the rules.
Liquidators must be registered with ASIC to handle any liquidation. This ensures that only qualified professionals are responsible for managing the company’s closure.
If a company or its directors don’t follow ASIC’s rules, there can be serious penalties. These may include fines, being banned from running a business, or even criminal charges. That’s why it’s vital to follow ASIC’s regulations carefully. Appointing an ASIC-registered liquidator is not just a legal requirement but ensures the liquidation is handled professionally and in line with Australian laws.
ASIC Liquidation Notices
ASIC also publishes important notices related to liquidation. These notices keep everyone informed about a company’s liquidation process. Common types of notices include:
- Appointment Notices: Let the public know when a liquidator is officially appointed.
- Meeting Notices: Inform creditors and shareholders about important meetings during the liquidation.
- Winding-Up Notices: Announce that a company is being closed and its assets sold off.
Keeping an eye out for these notices help creditors and other stakeholders stay up-to-date on what’s happening with the liquidation, giving them a chance to be involved in key decisions.
What happens to asset during liquidation?
During liquidation, a liquidator is chosen and has to manage the sale of the assets to settle debts. Their goal is to maximize the amount recovered so that they can repay their creditors and shareholders. Valuation experts are often appointed to determine how much various assets are worth, especially real estate and unique technologies or brands.
The liquidator then sells the remaining assets, in order of priority:
- Secured assets - These are assets like property pledged as collateral against debt. Secured creditors have the first claim over secured assets. They are sold first and proceeds are paid out to secured creditors.
- Tangible assets - Physical assets like property, plant, equipment, inventory etc. are sold next. Proceeds realized are used to pay wages owed to employees and repay unsecured creditors.
- Intangible assets - Intellectual property, brands, licenses, patents etc. are sold last. These tend to have lower realizable value due to the distressed status of the company.
- Cash & cash equivalents - Any cash or liquid assets remaining in the company's accounts are used to pay immediate costs related to liquidation like valuers' fees, legal charges etc.
As for authority in Australia, all liquidators are regulated by the Australian Securities and Investments Commission or ASIC. In Australia, there are less than 648 registered liquidators and 200 bankruptcy trustees. They must follow a code of ethics and meet various standards and rules, including ongoing training and reviews. A liquidator must be registered to be appointed in any type of insolvency case.
After payment of liquidation costs, proceeds are distributed in order of priority:
- Secured creditors
- Preferential creditors like employees, taxes
- Unsecured creditors
- Shareholders
If there are any assets left over after paying off debts they are given to shareholders.
There are various valuation methods for liquidated assets. The choice of valuation method can significantly impact the proceeds from the liquidation, making it a key decision of the whole process.
How does the liquidation process follow legal and financial implications?
Legal Implications:
- Compliance with Legal Frameworks: This includes filing necessary documents, notifying creditors, and following court procedures if applicable.
- Appointment of a Liquidator: A licensed insolvency practitioner is typically appointed to oversee the liquidation process. Their role includes valuing and selling assets, settling liabilities, and distributing any remaining funds to shareholders.
- Creditor Rights: Creditors have the right to be informed about the liquidation process and to receive payments in a legally defined order. Secured creditors are paid first, followed by unsecured creditors, and finally shareholders.
Financial Implications:
- Asset Valuation and Sale: Accurate valuation of assets is crucial to ensure fair market prices are achieved. This can be challenging due to market fluctuations and the subjective nature of valuations.
- Distribution of Proceeds: The proceeds from asset sales must be distributed according to the priority of claims. This requires careful financial management to ensure all debts are settled appropriately.
- Costs of Liquidation: The process itself has costs, including legal fees, liquidator fees, and other administrative expenses. These costs can significantly reduce the amount available for distribution to creditors and shareholders.
What are the Tax Implications of Liquidation?
Final Tax Returns: The company must file final tax returns and settle any outstanding tax liabilities before the liquidation process can be Companies must file final tax returns and settle outstanding liabilities.
Asset sales may trigger Capital Gains Tax (CGT).
Seeking professional advice can help manage tax reliefs and deductions.
Seek advice from legal and tax professionals to navigate the complexities of asset liquidation. They can provide guidance on compliance with legal and tax requirements, helping to avoid potential legal issues and optimize the liquidation process.
Conclusion: Making the right decision
Liquidation becomes a necessary consideration when a business can no longer sustain itself financially. This typically means the business is unable to pay its debts on time or its liabilities outweigh its assets. Before reaching this point, many businesses explore other options like restructuring or refinancing. However, persistent cash flow issues, declining sales, and escalating financial obligations often signal liquidation. It’s important to minimize further losses and ensure creditors receive as much repayment as possible.
This information is for guidance only, is indicative and should not be taken to be advice or relied upon for action for legal process.
In call cases, should you have any queries or wish to discuss your own circumstances, find your trusted insolvency practitioners with Insolvency Australia's directory. For expert guidance on choosing the right liquidator for your business, visit Insolvency Australia’s guide to selecting a practitioner.
In call cases, should you have any queries or wish to discuss your own circumstances, find your trusted insolvency practitioners with Insolvency Australia's directory. For expert guidance on choosing the right liquidator for your business, visit Insolvency Australia’s guide to selecting a practitioner.