LIQUIDATION - A Guide

Liquidation - what does it mean? The pros and cons of entering liquidation

Not all aspects of the liquidation process are discussed here so contact us for a review of your company’s situation. In short Liquidation is becoming a more dangerous place for Directors and careful consideration should be given to all aspects of your company’s history prior to appointing a Liquidator. For examples of how dangerous liquidation has become I urge you to review the ASIC website’s press releases re the prosecution of Directors.

Follow the link to read more about the dangers of appointing Liquidators as compared to Voluntary Administrators and achieving a successful DOCA. voluntaryadministration.com.au/news-2

There are two ways your company can be placed into liquidation - either voluntarily or by order of the Court.

Creditors Voluntary Winding Up

Creditors Voluntary Liquidation (CVL) is the most commonly used type of liquidation. A CVL is initiated by the directors and shareholders and is the voluntary way to close a company that has unpayable debt. It starts with the directors resolving that the company is insolvent, and the directors call an Extraordinary General Meeting for the shareholders to pass a Special Resolution to wind up the company.

Court Liquidation

A court liquidation is a liquidation ordered by a court, usually on the application of a creditor. They differ from a CVL (above) in that they can be ordered whether the company’s directors agree or not, hence they are involuntary. To start the court liquidation process, a creditor will serve a Statutory Demand on the company to pay a debt pursuant to section 459E of the Corporations Act. Failure to pay the money demanded in a Statutory Demand allows an application to be made to the Court to have the company wound up.

Liquidation Pros & Cons:

PROS

CONS

Can help directors to avoid personal liability by defeating a non lockdown DPN

The business may come to an end unless sold as is.

Closes a company that cannot continue and stops it incurring further debt

All assets of the company must be surrendered for sale

Can trigger the Government Fair Entitlement Scheme (FEG) to pay employees their unpaid entitlements when the company cannot.

The reason the company cannot pay its debts will be investigated

Stops creditors demanding payment

Any wrongdoing will be reported

Can help protect the director and creditors from insolvent trading

Other Options - Voluntary Administration

VA simplified guide - See the link to get a step by step guide to Voluntary Administration (VA) as an alternative to liquidation.

Who and how does winding up a company affect?

The Directors of the company

A liquidation may have an effect on a director’s credit rating. However, a liquidation is not bankruptcy! A company is a separate legal entity to a director and the company’s directors are not automatically liable for a company’s debts.

Entering Liquidation means Directors are exposed to numerous enquiries arising from the Liquidators investigations. These investigations can also be performed under a Public Examination (PE) where under oath in a court any party may be questioned. PE’s in recent years have become a favourite “pastime” for Liquidator’s to gather evidence from directors and anyone close to the Director to make recoveries. Such recoveries are usually from directors or other related parties. In recent times the usual “modus operandi” of Liquidators is to summon everyone in sight to a PE then exert pressure on these parties to settle with them, knowing that any recoveries can be used to pay the Liquidator's fees and legal costs. Basically, if being in a court room being grilled by a barrister makes you feel uneasy think twice before placing your company in liquidation.Follow the link to find out more! Liquidation can be a dangerous place thats why we recommend Voluntary Administration and a successful DOCA

Prior to entering any form of appointment I refer you to SIN Insolvency www.insolvencynewsonline.com.au (aka Sydney Insolvency News). This site provides background on the “goings on” in the Insolvency Industry and makes interesting reading!

The Employees of the company

Liquidation will mean that the company’s employees will most likely lose their employment. It might be a blessing in disguise though because if the company is unable to pay the employee’s entitlements then once it is in liquidation the government steps in to help. Through their Fair Entitlements Guarantee(FEG), an employee of a company that has entered liquidation will be able to claim:

unpaid wages—up to 13 weeks
unpaid annual leave and long service leave
payment in lieu of notice—up to five weeks
redundancy pay—up to four weeks per full year of service

Hence liquidation can be a windfall gain for employees due to the introduction of the FEG scheme.

The Creditors

All creditors will be notified at the start of the liquidation by mail or these days email. They will receive several reports from the liquidator, informing them of the process of the liquidation and the likelihood of them receiving any of the money owed to them.

Secured Creditors are a creditor who hold a valid security interest that is registered on the Personal Property Securities Register (PPSR) – once upon a time called a “Charge”. More often than not secured creditors are banks or finance companies. If there are funds to be distributed to creditors in a liquidation, secured creditors are paid first.