Time, money and effort go into building a company. And the same is true when it’s time to wind up that company. If you’re considering winding up your business, liquidating assets or entering administration, you should first know the different types of liquidation and how much they could cost.
1. Winding up a solvent company – Members Voluntary Liquidation
Companies that are solvent and have combined assets worth more than $1000 cannot deregister. Instead, business must be ‘wound up’. There’s a number of reasons why a business mind be wound up while solvent, which we’ll look at below.
First, here is the process that company directors must take to wind up a solvent company.
- First, company directors must make a Declaration of Solvency using Form 520 from the ASIC website. This declaration means the company can pay off outstanding debts within 12 months if winding up.
- At least 75% of company members must vote in agreement to a special resolution to wind up the company. Members must be given 21 days notice to vote on the resolution, after which a liquidator should be appointed.
You’ll also need the following forms:
- Notice of the special resolution must be published on ASIC’s Published Notices website by the day following appointment of a liquidator.
- The liquidator begins wind up process, including lodgement of a detailed list of payments and receipts with ASIC.
- After the liquidator finishes the winding up process, they must lodge the following forms with ASIC:
2. Why wind up a solvent business?
There are a number of reasons businesses that are solvent are wound up. Often, it is the smarter choice to wind up a business that has a collapse in it’s future rather than wait for that future to hit.
For example, changing demands, technology and competition can mean some businesses won’t be viable in the future.
A pattern of diminishing returns and increased debts may be a sign that the business should be wound up. By winding up your business while it’s still solvent, you can ensure debts are paid off, creditors are kept happy, and there’s less stress for members and/or shareholders of the business.
3. Winding up an insolvent business – Creditors Voluntary Liquidation
When a business is no longer solvent, a business can enter into creditors voluntary liquidation. A registered liquidator is appointed once the Directors and Shareholders agree to the course of action.
Creditors Voluntary Liquidation is similar to Members Voluntary Liquidation. You’ll appoint a liquidator who will prepare the appointed documents for directors to sign. Once this is completed, you’ll need to call a meeting of shareholders to advise them of the course of action.
Shareholders must agree to the appointment of a liquidator for the voluntary liquidation to commence.
4. Court appointed protections – Provisional Liquidation
Provisional Liquidation doesn’t necessarily liquidate the company. Instead it, places the company under the care and supervision of an outside party until the situation is resolved.
The three primary reasons for a court appointed Provisional Liquidation:
- Hidden assets from Debtor company – For creditors who believe the debtor company is hiding assets, a court appointed provisional liquidation can help prevent assets from disappearing while the wind up application is heard.
- Reckless behaviour of directors – For company shareholders who believe the directors are behaving recklessly, unprofessionally or in a self-benefitting manner, a court appointed provisional liquidation can be beneficial until the situation can be resolved.
- Company dispute – If there is conflict between directors over the company’s insolvency then a provisional liquidation can help the company find relief.
How much does company liquidation cost?
The cost of hiring a liquidator will largely depend on the size of your business and the number of assets to be included. The number of company creditors can also factor into the cost of administration.
While it may be tempting to save money and try and take on some of the work in liquidation yourself, it’s better to recognise that specialists are there for a reason. When it’s time to liquidate the assets of your company, let the professionals handle it.
Most companies offer free consultations to help you decide if hiring them is the right course of action. Depending on the size and complexity of your company, this consultation could take anywhere from 5 minutes to an hour.
The average cost of liquidating a small company is around $4,000-$8,000. However the quoted cost will largely depend on the size of the company, number of assets and number of creditors. If a company has no assets then the liquidator may ask the directors for the amount to be paid into a Trust Account to cover minimum costs of the liquidation process.
Who benefits from liquidation?
At a glance, liquidation seems geared to benefit creditors, as assets are liquidated to recoup costs to creditors. But that doesn’t mean liquidation won’t help company directors as well. By being proactive in winding up a business, you maintain good relationships with your creditors, and do the best by your employees and business partners.