What does it mean when a company goes into liquidation?

What does it mean when a company goes into liquidation?

When a company is facing insolvency or extreme financial difficulty, company liquidation is the process of closing the business, selling the assets and paying as much debt to creditors as possible. In Australia, there are two paths to liquidation for insolvent companies.

Creditor’s voluntary liquidation occurs when creditors vote for liquidation after a voluntary administration or terminated deed of company agreement. Court liquidation usually happens after a creditor has applies to the court to appoint a liquidator to wind up the company. Regardless of the path taken, the result is the same.

What does liquidation mean for company directors?

During liquidation, the primary role of directors is to fully co-operate with the liquidator. They must provide all information about the company, its books and its assets to the liquidators and attend a creditor’s meeting, if requested to, to make the information available to them as well. Directors must also produce a written report for the liquidator within 14 days for involuntary liquidation and 7 days for voluntary liquidation.

Liquidators will be looking closely at whether directors knew the company was trading while insolvent. They will also be looking for inappropriate dealings. The consequences of any transgressions for directors can be severe, up to and including criminal proceedings.

What happens to shareholders when companies go into liquidation?

Shareholders are the last in line when a company goes into liquidation and only receive a return once creditors and the liquidator have been paid. There is no requirement for the liquidator to keep them informed of anything. Shareholders have no right to vote on how the process is conducted.

What happens to employees?

Employees will lose their jobs if their employer goes into liquidation. If there are not enough assets to cover debts, they may also miss out on some of their entitlements. The Federal Government runs the Fair Entitlements Guarantee Scheme. This provides minimum payments in terms of unpaid wages, annual and long service leave, payment in lieu of notice and redundancy pay.

If your company needs to be liquidated, please contact Australian Company Liquidations on 1800 175 497. We are registered company liquidators who offer a free 24/7 insolvency hotline for Australian directors seeking expert advice.

What Happens to Proceeds When a Company Enters Liquidation?

What Happens to Proceeds When a Company Enters Liquidation?

For creditors and the liquidator, one of the key concerns is what will happen to the money and the order of priority the debt is paid. If you are a creditor of a company entering into liquidation, you will be monitoring the process to ensure that you are receiving all payments owed. If you are a director, you will be aware that the liquidator can assist you distribute the proceeds.

Liquidation: Solvent and Insolvent Companies

There are three types of liquidations: court ordered, creditors’ voluntary and members’ voluntary. The first two apply to insolvent companies while the latter is the type of liquidation solvent companies tend to choose.

Solvent companies are generally able to make good its debt obligations, however this is not the case for insolvent companies. Under these circumstances, shareholders, suppliers, lenders and other creditors will be concerned about the order in which debts are repaid, if at all.

The order in which debt repayments are made depends on whether the creditor is secured or unsecured, with secured creditors receiving priority. The priority of payment is:
1. Liquidation costs
2. Secured creditors
3. Priority unsecured creditors, i.e. employees
4. Unsecured creditors

Secured Creditors

Secured creditors is defined in section 12 of the Personal Property Securities Act 2009 and refers to those who have a security interest, such as a mortgage or charge, over some or all of the company’s assets.

Secured creditors have different rights to unsecured creditors in terms of debt defaults, and are allowed, for example, to legally appoint an independent receiver to sell some or all of the charged assets to repay the debt.

Unsecured Creditors

Unsecured creditors have no security over the company’s assets and could be trading partners that supply goods or services to the business. It may also include the ATO where there is outstanding tax debt.

If there are sufficient funds remaining after the payment of secured and priority creditors, unsecured creditors can get paid in the form of dividends.

During these uncertain times, stay informed on the latest updates by subscribing to our newsletter. If your business is struggling from the impact of the pandemic or is looking for more information on company liquidations, please contact Australian Company Liquidations on 1800 731 155. We are registered company liquidators who offer a FREE 24/7 insolvency hotline for Australian directors seeking expert advice.