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If a company is facing financial difficulty, its shareholders, creditors or the court can put the company into liquidation. During a liquidation, a company’s affairs are wound up in an orderly and equitable way. The process involves:
What is a liquidator?A liquidator is an independent and suitably qualified person who takes control of the company. This role is to ensure that the affairs can be wound up in an orderly and fair way for the benefit of ALL creditors. The Australian Securities and Investments Commission administers a register of all suitably qualified liquidators. What is the liquidator’s role?The liquidator has a legislated duty to all the company’s creditors. The liquidator’s role is to:
What are the different types of liquidation?There are four types of liquidation:
Are you or your company facing an uncertain financial future? David Clout leads a team of highly regarded experts in insolvency. They are experienced negotiators and strategic thinkers. David is a registered Liquidator and Bankruptcy Trustee, he is qualified to accept a range of insolvency appointments. Call +61 7 3129 3316 to arrange a consultation. Ongoing losses, increasing debt, trouble obtaining finance, and overdue taxes are all signs that a company may be at risk of insolvency. Legally, Directors are required to prevent insolvent trading but many of the signs are overlooked until it is too late. Debt reaches an insurmountable level, and the company is forced into liquidation. As a Director, it is essential to understand the fundamentals of insolvency along with your rights and responsibilities. This guide provides detailed information on the fundamentals of insolvency and the liquidation process. Receivership, Administration, and LiquidationTo completely understand company liquidation, it is necessary to know the difference between receivership, administration, and liquidation. Receivership is where a receiver is appointed by a secured creditor, most often a bank, to sell the charged assets and repay what is owed. Most notably, it does not necessarily mean that the company will wind up. This is also the case with administration which involves providing an administrator with the time required to accurately determine the financial position of a company, and most suitable course of action to be taken. Liquidation differs from receivership and administration as it means the end of the road for a company. When a company enters liquidation, any assets are sold off and the proceeds distributed with accordance to legal requirements. In terms of who gets paid first when a company goes into liquidation, the cost of liquidation must be covered followed by secured creditors, priority unsecured creditors such as employees, and unsecured creditors. The company stops trading and ultimately ceases to exist. Why do companies go into voluntary liquidation?Creditors’ Voluntary Liquidation (CVL) is the most common type of liquidation. This is where the shareholders of a company that is trading insolvent, or facing insolvency, commence a voluntary liquidation. This might be the best option for an insolvent company for numerous reasons including:
Contrary to the thoughts of many, liquidation is not limited to companies that are under financial distress and cannot repay their debts. Many companies go into what is called Members’ Voluntary Liquidation (MVL). This is where a solvent company elects to shut down its operations. This can happen for one of many reasons including:
Are Directors personally liable for company debts?
What happens to Directors of liquidated company?Liquidation can be a difficult process for the parties involved and that includes Directors. The burden of blame is often placed on them for any business failures, and like employees, they are generally left unemployed. Nevertheless, it is important to remember that a company is a separate legal entity to its Directors. Provided that you are not personally liable for any of the reasons listed above, there will be limited ramifications, if any at all.
This further emphasises the importance of being aware of your Directors’ duties, and any avenues such as the safe harbour provisions that can protect Directors from being held personally liable for insolvent trading. Can Directors put a company into liquidation?Directors can certainly put a company into liquidation, and in many circumstances, it is their duty to do so. One of the major Directors’ duties is to prevent insolvent trading. If a Director has identified the presence of indicators of insolvency, they must act accordingly. This may include exploring options such as voluntary administration, and potential liquidation. The consequences of failing to do so may result in civil penalties, compensation proceedings, and criminal charges. As noted above, liquidation is not limited to companies who are experiencing financial distress. Directors of solvent companies may also place them into liquidation. This is known as a members’ voluntary liquidation. During the process, company assets are sold and distributed with all creditors paid prior to the company being wound up. There are a handful of basic steps when voluntarily winding up a solvent company. They are:
Australian Debt Solvers are insolvency specialists who offer a range of liquidation services. Our team of experts can help assess your financial situation and specify the most suitable course of action. Contact Us today for a free consultation. |