Many companies will face financial issues at some point during their lifetime. In fact, according to data provided by analytics experts Illion, of the 2.1 million small businesses in Australia, 54,992 closed down last year.
A company that cannot pay its debts when they are due is referred to as “insolvent” (which is different from individuals who are declared bankrupt). While this is nothing to be ashamed of, there are steps every business owner should take to minimise their costs and maintain a healthy reputation in the industry.
There are three procedures which are commonly used when dealing with corporate insolvency: receivership, liquidation and voluntary administration. Today, we will be exploring the process of liquidating your business.
What is liquidation?
Liquidation takes place when a company cannot pay its debts. Generally speaking, the process of liquidation involves wrapping up all financial matters, selling off company assets to pay off remaining debts, and dismantling the business structure.
During this time, business directors transfer all authority over to the liquidator. Control of the assets, business proceedings and any other financial issues are handled by the liquidator, with the aim of winding up all affairs and ceasing trading as soon as possible.
Once a business goes into liquidation, any unsecured creditors will be unable to take legal action against the company unless expressly permitted by the Court.
Types of liquidation
It is important to note that there are several types of liquidation, and the type of liquidation you choose will vary depending on the specific circumstances of your business, as well as what you are trying to achieve.
Creditors’ voluntary liquidation
This form of voluntary liquidation is undertaken through a special resolution of the creditors of the business. Choosing this option allows your business to act quickly and minimise the risks of incurring further debt, or trading insolvent.
In order to start this process, the company directors will need to sign paperwork which declares the company is insolvent. Following this, shareholders will be advised of the liquidation. Once they have agreed to appoint a liquidator, the process of liquidation will commence, with the liquidator arranging a meeting of all the company’s creditors.
In this form of liquidation, secured creditors will generally be paid before unsecured creditors.
Members’ voluntary liquidation
A company which is solvent may still choose to liquidate. This may be due to a variety of factors such as the business no longer being a viable commercial enterprise, or the directors choosing to cease trading.
In this instance, a majority of the company directors will need to make a declaration of solvency and lodge this with ASIC. The declaration is a formal statement in which the directors state their belief that the company will be able to pay off all existing debts within 12 months of liquidation commencing.
Company members will be required to pass a special resolution which allows the winding up of the company, after which a liquidator will be appointed.
Unlike other forms of liquidation, this does not necessarily lead to the dissolution of the business. Instead, a court-appoint liquidator takes control of the business while matters are resolved. This process also serves to protect the business assets while an administrator is appointed.
Involuntary liquidation (also known as court-ordered liquidation) occurs when the court appoints a liquidator to wind up the business. Usually, this occurs as a result of an application made by a creditor, however a majority of shareholders or director may also apply.
Why would a business choose to go into liquidation?
There are a number of reasons why a company may voluntarily choose to go into liquidation. In these instances, companies may choose their own liquidator, thereby allowing you greater control and insight into the process. It reduces the likelihood of your business trading insolvent, avoids the chance of you breaching your director’s duties, and stops you (as a director) from being personally liable for any Superannuation of PAYG Withholding owed. As previously mentioned, liquidation also prevents creditors from undertaking or pursuing legal action.
More importantly, choosing to go into liquidation ensures the (partial) goodwill of your employees. If your company is insolvent and employees have not been paid their entitlements, liquidation allows them to apply for the Fair Entitlements Guarantee, under which they may be entitled to receive up to 13 weeks of unpaid pages, unpaid annual leave, redundancy pay, and payment in lieu of notice.
Step to take when dissolving your business
Once you have decided to liquidate your business, there are a number of steps you should take to preserve the goodwill of your employees and the community.
- Arrange a consultation with a liquidation expert to ensure you are making the right decision. Once you have done so, you will need to obtain draft documents and “Consent to Act” from your proposed liquidator.
- Arrange a meeting of the business directors to resolve that the company is insolvent. Directors will need to sign a Summary of Affairs.
- Attempt to have at least 95% of shareholders sign a “Consent to Short Notice” which will allow a meeting of shareholders to be called immediately. If this is not possible, 21 days’ notice is required for the shareholders meeting.
- Hold a General Meeting of shareholders, which passes the resolution to appoint a liquidator.
- Appointment of the liquidator, which involves a meeting of creditors and disposal of the business’ assets.
Liquidating your business can be an immensely stressful task, both emotionally and practically. Ensure you are remaining compliant and enlist the advice of the experienced team at AV Lawyers when dissolving your business. Get in touch with our team today to arrange a free consultation.