Liquidation is just one of several paths available if your business is facing financial difficulties. Because there are various options available it is important that you get the right business liquidation advice to make the best possible decision for your company.
To assist in making the right decision regarding your business here are answers to twelve of the most frequently asked questions about liquidation …
1. What is liquidation?
Liquidation is the winding up of a company’s affairs by a third party (a liquidator).
The liquidator’s role is to collect and sell the company’s assets, investigate and pursue any legal claims available, report any offences committed to ASIC and, if sufficient funds are recovered, pay a dividend to creditors.
Before a liquidator is appointed, there are various alternatives directors may wish to consider. These include:
- Refinancing debts
- Contributing further funds to the company
- Turnaround or restructuring strategies
- Negotiating settlements with creditors
- Voluntary administration
As there may be serious consequences involved with placing a company in liquidation, it is important that you obtain advice from a qualified professional (such as those at Pearce & Heers) regarding the options available if your business is in financial difficulty.
2. How do I know my company is insolvent?
Your company is considered insolvent if it is unable to pay its debts as and when they fall due.
To assist you assess your company’s solvency we have prepared a simple, easy to complete checklist which will provide an indication of whether your company may be insolvent.
3. What should I do if my company is insolvent?
As a director, you have a duty to act in the best interests of your company at all times. If you believe your company is insolvent and you continue trading, when there is little or no prospect of paying your debts, you may be held personally liable for the unpaid debts incurred during the period of insolvency. You may also be committing an offence which may be prosecuted by ASIC.
Accordingly, it is important that if you suspect that your company may be insolvent, you should seek professional advice immediately.
4. How is liquidator appointed?
There are two ways:
A company’s shareholders must resolve to appoint a liquidator (who the directors’ can nominate), often by signing a one-page resolution to make the appointment. This type of appointment can generally be made quickly and easily.
Alternatively, a creditor who is owed more than $2,000 can apply to court to have a liquidator appointed to a company, as can certain other interested parties, such as the ASIC. If a creditor or another party applies to court to appoint a liquidator, they will chose who the liquidator is.
5. How is a liquidator paid?
If your company has available assets with a sufficient value to cover some or all of the costs of liquidation, then there will be no upfront costs to appoint a liquidator. The liquidator is entitled to be paid from the company’s assets, subject to creditor approval.
However, if your company has little or no assets, a liquidator will generally require funds to be made available to pay the costs of acting as liquidator.
6. What happens during liquidation?
If your company is placed in liquidation, the liquidator will:
- Take control of, and sell or realise, the company’s assets;
- Examine the events and circumstances leading up to the liquidation of the company;
- Determine whether the company traded whilst insolvent;
- Pursue any recovery claims that are commercially warranted to pursue;
- Report any identified offences which have been committed by those associated with the company to the ASIC;
- Report to creditors on the company’s assets and liabilities, the reasons for the company’s failure, the results of the liquidator’s investigations and the prospect of a return to them;
- Distribute the company’s property in accordance with the priorities for payment set out in the Corporations Act 2001, including (if sufficient funds are available) paying a dividend to creditors.
7. Why voluntarily appoint a liquidator to a company?
There are a number of potential benefits of appointing a liquidator to a company, including:
- Avoiding personal liability of a director under a director penalty notice;
- Possibly limiting or reducing the directors’ exposure to insolvent trading;
- Possibly limiting or reducing the directors’ liability for certain offences under the Corporations Act 2001;
- Arranging for the payment of employee entitlements (if the company cannot pay them), as employee entitlements (other than superannuation) are generally paid by the Federal Government in a liquidation;
- Arranging a more orderly winding up of the company’s affairs rather than leaving it to creditors to take action to liquidate the company;
- Avoiding the company being placed in liquidation by the ATO or another creditor.
8. What are my duties as a director after company liquidation?
If your company is placed in liquidation, it will be your duty to assist the liquidator during the process.
You must also complete a Report as to Affairs and Summary of Affairs (setting out the company’s assets and liabilities) and promptly provide the liquidator with all of the books and records of the company.
9. What is insolvent trading?
Insolvent trading is the continued trading of a company that is unable to pay its due and payable debts.
If your company trades after it becomes insolvent, you and the other directors can be held personally liable for insolvent trading if the company is placed in liquidation.
The liquidator may pursue legal action against you and the other directors for the total of the company’s unpaid debts that were incurred after the company became insolvent up to the time it entered liquidation.
Read more about insolvent trading here.
10. What is a director penalty notice?
The ATO can recover unpaid PAYG Tax and superannuation from a director personally by issuing the director with a director penalty notice. Often directors of companies with debts for PAYG Tax and superannuation will liquidate their company’s to avoid getting or becoming personally liable under a director penalty notice.
Read about ATO director penalty notices here .
11. As a director, am I liable for my company’s unpaid debts?
You are generally not liable for a company’s debts, unless you (possibly among other matters):
- Have personally guaranteed them;
- Are liable to the ATO under a director penalty notice;
- Are liable for insolvent trading;
- Have a loan account for funds you withdrew from the company;
- Are subject to certain personal liabilities to the QBCC (Queensland Building and Construction Commission), or under a Deed of Covenant & Assurance executed at the request of the QBCC or the QBCC’s home warranty insurance scheme.
12. If my company is placed in liquidation, am I banned from being a director of other companies?
If you have not been the director of any other companies that have been wound up in insolvency in the last seven years, you will generally (subject to certain exceptions) not be disqualified from being a director of other companies if your present company enters liquidation.
However, it is common for the ASIC to seek to disqualify any person from acting as a director for up to five years, if that person has been the director of two or more companies that have been placed in insolvent liquidation in the last seven years.
This generally does not apply to directors of a group of companies which are placed in liquidation at or about the same time. It does also not apply to directors of companies that have been wound up by way of a (solvent) members’ voluntary liquidation.
What to do now if your company may be insolvent
If you are a director of a company that may be insolvent, please give us a call to have your questions answered in a no-cost confidential discussion.