The process of liquidation in Australia is one which is often misunderstood and without proper understanding can be devastating for business owners. Getting advice early is important and taking all steps prior to liquidation will minimise the risk and ensure that you are best placed during the process.
From the moment that the company liquidator is appointed, they are there to act in the best interests of creditors. The previous business owners then take a backseat to the process that will happen from there. In deciding to enter into, or having liquidation pressed upon you, it is important to be well informed, understanding what the processes are and what your rights are during the period of liquidation.
Liquidation of a company in Australia can be a tough process for business owners. There is usually an immediate loss of control, not understanding the business has been taken away from them and they are now under the control of the liquidator.
Resources that are there to help business owners impacted by liquidation are minimal and it is often lamented that finding independent advice about the process can be difficult, we are here to help. It is important to remember that a liquidation occurs on companies and not trusts, superannuation funds, sole traders or partnerships; these have different insolvency consequences and a different “liquidation” process.
What is happening?
The liquidation process, in simple terms, is where a liquidator steps in on behalf of creditors, secures the assets and disposes of them to pay creditors. Company liquidators, whilst appointed by the Directors, are not controlled by the Director nor answerable to them, they may seek their input, but they have no obligation to follow their instructions or requests.
There are different types of liquidation?
There are four main types of liquidation, depending upon the circumstances and who is appointing the liquidator. As we said, the area is complicated!
- Creditors voluntary liquidation (CVL); a CVL is an appointment by the Directors and shareholders of the company, identifying that the company is insolvent and from there appointing a liquidator. Usually this occurs under the advice of a third party and but may be with the influence of creditors.
- Members voluntary liquidation (MVL or colloquially Members Vol) is an appointment where the company is solvent but intends to cease operations for whatever reason. This generally occurs under the advice of a professional where there is no longer a need to retain the company.
- Official Liquidator is an appointment where the court is involved in the decision, in that a creditor has petitioned the court to wind up the company. In our other guides we cover the steps that lead to this point, but it is not simply an event that occurs without a substantial lead time.
- A Provisional Liquidator is an appointment for a finite period of time, generally as a result of a Director dispute. These are generally rare with the courts reluctant to be involved in these types of arrangements without certainty.
How do I appoint a liquidator? (Business Owner / Director)
The appointment of company liquidators is a relatively simple process, you contact a liquidator, call a director’s meeting and paperwork is prepared to appoint the liquidator. Simple…
The preparation prior to the appointment of a liquidator, however, is where specialist advice is needed and simply talking to a liquidator without first getting formal advice is fraught with danger. We work closely with businesses who are considering voluntary liquidation, firstly attempting to understand the need for the liquidation of a company and then working through the consequences of appointment.
Once the company liquidators are appointed there is very little that can be done to change the process. Once the liquidator is appointed, they have full control over the business, its direction, the decisions that are made and what will happen from there.
In the period prior to appointment we examine issues such as:
- The financial position of the business
- What will happen during the liquidation process
- Your responsibilities once the company is in liquidation
- Your personal financial position
- Impact of personal guarantees, debts and cross collateralisation
- What will happen with staff and suppliers
- Whether there are alternatives
Whilst the liquidation process in isolation is easy, there is a lot of preparatory work that needs to be undertaken prior to this appointment. We undertake this preparatory work with precision and attention to detail to mitigate any fallout consequences and to ensure that you, as a business owner understand the options available.
How do I appoint a liquidator? (Creditor)
The appointment of company liquidators by a creditor is a more complex process which entails following steps that have clear requirements. This process starts with a notice, referred to as a Creditor Statutory Demand, that gives the company 21 days to pay the outstanding debt.
If a company fails to pay a Creditor Statutory Demand, then the liquidation process commences, with the creditor being able to apply to the court for a liquidator to be appointed to the company. This is a formal court hearing and can take upwards of six week to eight weeks if the company does not dispute the notice.
Prior to commencing this approach to company liquidation, we recommend working through all options available first, as this can be a costly and often inefficient approach to debt collection.
Creditor’s Voluntary Liquidation (CVL)
The decision of the Directors or Shareholders to appoint company liquidators is made through the resolution of the directors to commence the liquidation process. Having met with the liquidator, it can be as quick as 24 hours to have the liquidator appointed.
The liquidation of a company, under this approach, needs to be under liquidation advice as there are significant consequences for the company, its creditors and owners, and undertaking this without the proper advice can have substantial adverse consequences.
Members Voluntary Liquidation
A liquidation of a company that no longer has assets and is solvent is generally solved through a members vol. This approach is undertaken by the directors of the company with the shareholders agreement and generally occurs when the company is no longer of use.
These often occur for companies that have not traded for a number of years, have been dormant or may have been replaced as a trustee company. In order for the liquidation to take place, the company needs to have a clean taxation record, its debts paid and have no further obligations.
The liquidation of a company by the official liquidator is where the liquidator is appointed by the court under a formal procedure. This will have occurred over a period of time and will be a direct result of the court hearing. The appointment process will generally be an order of the court, then immediate contact from the liquidator who will take control of the business, the bank accounts and the operations of the business.
This process is fairly quick in terms of what happens after the court order, it is necessary to comply with the liquidator, as from the time of appointment they are in complete control of the business.
The appointment of a provisional liquidator is from court, by the Directors, shareholders or creditors. This generally occurs in Australia where there is a need to remove Directors from their roles in the company. These applications are rare and occur where there are concerns over the management of the company or that the Directors are not acting in the best interests of the company.
The role of the liquidator in this situation is to preserve and protect the assets of the company. In essence, to not undertake a liquidation of the company but rather to protect the company during the period of the dispute.
What liquidation do I need to undertake?
Depending upon the circumstances, this will depend upon which liquidator is appointed. It is not necessarily a clear decision, and some decisions will be forced upon the company regardless of the wishes of the Directors or owners.
The advice that you will receive prior to a voluntary liquidation will depend upon not just the position of the business but also the wider implications, including how it will impact your personal position, your employees and your suppliers, attempting to find a solution that will ensure that all parties interests are considered.
If you have only spoken with a liquidator and your only discussion has been regarding voluntary liquidation, you need to speak to someone independent. We look at the position as to how it will impact you and what the options are. These options may not just be voluntary liquidation but may be negotiation, a trade out, a re-finance or capitalisation or trade sale. It is not enough to just explore the voluntary liquidation process.
So why would I liquidate?
In Australia there are obligations on Directors of companies to not trade whilst insolvent. This is a difficult measure, but generally this means that if you think that things are going wrong that you need to take steps to bring the company to an end.
If trading is no longer able to sustain the business, if debts continue to be rising or if there is no realistic prospect of the business being able to trade out then it may be necessary to undertake a liquidation process. The overarching obligation is to make sure that creditors are protected and wherever you continue to trade and run up additional debts, you are not acting in the best interests of the business and may expose yourself to additional risk.
At other times the decision to liquidate may be the best option when considering all other options. We have assisted business owners that have retained failing businesses on a warped assumption that things may turn around, they know deep down that things are not going to change, and the liquidation will manifest what has been avoided. In providing liquidation advice, we attempt to explore all options, but for many businesses liquidation may be the only option that is available.
How To Liquidate A Company. What is the process?
In simplest terms, the liquidation process is:
- Lodgment of formal documentation with ASIC, commencing the liquidation process.
- The liquidator will then advise the statutory organisation, financial institutions and creditors of the business of their appointment.
- The Director will be required to provide a questionnaire about the company and provide all books and records to the liquidator.
- The assets of the company are collected and sold; the business may continue for a short period of time if it is to be sold.
- A creditor report is prepared and meetings are held.
- The books and records are reviewed and a report issued to ASIC.
- At the end of the process the surplus assets are distributed to creditors and a dividend is declared.
What will a liquidation do to my credit rating?
As a director, any liquidations will arrive on your credit rating and depending upon your bank or financial institution this may have an adverse effect. There is an increasing impact of this on the ability of the Director to borrow, especially if there are personal guarantees that are attached to the company.
As credit becomes harder to obtain in Australia, it becomes more likely that being a director of a company in liquidation will have an adverse effect.
Will a liquidation protect me from personal guarantees?
Put simply, no. In Australia, a voluntary liquidation or an official liquidation does not stop the enforcement of a personal guarantee, you will still be responsible for any personal guarantees which may include any shortfalls that occur after a liquidation process.
It is important to seek independent advice prior to the liquidation process, to ensure that you are able to manage any potential guarantees, that you are able to mitigate these wherever possible and have a plan in place to deal with these before you decide that liquidation is going to be the best approach.
Will being a Director of a company in liquidation stop me being a Director of other companies?
Generally you will be able to remain a Director of a company after liquidation but if there is a constant history of entities falling over with you as a common director, then there is a risk that you will be banned from being a Director for a period of time. Equally, if there have been untoward or acts then to deliberately defeat creditors, an application may also be made to remove you as a Director.
Will liquidation mean the end of creditor calls?
Theoretically the creditors will only deal with the liquidator, practically you are still going to be the centre of attention for creditors seeking payment. It can be a tough time and you may feel substantial pressure to make arrangements with creditors despite the liquidation process commencing.
Undertaking a liquidation process without firstly getting liquidation advice can mean that you are not only still getting the calls, but unable to access information and updates as the liquidator is in control of the overall process.
Who is a liquidator?
A liquidator in Australia is regulated, supervised by ASIC and generally a member of one of the industry bodies. They are independent from the party that appoints them, and acts in the best interests of the creditors.
What can the liquidator investigate?
Remembering that the liquidator acts as though they are the Director of the company, they have wide investigative powers in order to determine what has happened in the company and what assets belonging to the company can be recovered. It is important to remember that a liquidator is impartial, and despite being appointed by a Director will not ignore related party transactions, nor turn a blind eye to conduct that has been detrimental to the company.
How long will a liquidation take to conclude?
There are no rules as to how long a liquidation can take, and estimating this is always fraught with danger. In Australia there have been liquidations that have run for over 30 years, and in our experience, it is rare for a liquidation to take less than a year.
How much will a liquidation cost?
Much like the time there is no strict price list for a liquidation, and it is rare that a liquidator will give a firm quote other than for very specific transactions. The information that they are relying on is rarely complete, and whilst they may have an indication, it is often that they face a complete barrage of new information after appointment.
What is a phoenix and why are you recommending against it?
A phoenix company is one that takes on similar or exact actions of a company that has been placed into liquidation. Usually the doors are shut, and the following day re-opened in a new company, nothing has changed.
This is a common occurrence in the building industry in Australia and the damage for subcontractors can be devastating. We pride ourselves on refusing to deal with businesses that are proposing a phoenix transaction. If you have been recommended an approach that involves some form of phoenix, we recommend getting in touch with us as soon as possible. We have helped many business owners that were in the process of taking this step without understanding the severe consequences of doing this.
The team at C&D Restructure and Taxation Advisory are here to help. As part of the Vault Group we can offer the full suite of financial products and advice to help you navigate the business landscape. Schedule a meeting here via Calendly or give us a call on 1300 1 VAULT (1300 182 858)