Liquidation can be an option for companies experiencing financial difficulty, and it may be the last resort for companies that need to be wound up. In Australia, liquidation applies only to companies, and there are a few types of liquidation – each with different first steps.

If your company is entering liquidation or you’re considering winding up your company through voluntary administration, there are some steps you need to follow to ensure full compliance.

What is liquidation?

Liquidation is concerned with the winding up of a company’s affairs. It involves ceasing operations, selling assets and distributing the proceeds to creditors and shareholders. In Australia, there are three main types of liquidation when it comes to companies: court-ordered liquidation, creditors’ voluntary administration, and members’ voluntary administration. Each of these have slightly different first steps.

Why liquidation?

For some companies, the ultimate goal is to achieve growth and eventually exit through a lucrative sale. For other companies, the competition in the marketplace can prove to be too much or other considerations may arise, and so the ultimate choice may be to liquidate as an exit strategy.

For example, you might have no heirs or other viable succession alternatives, so liquidation may be a voluntary option that you undertake to dispose of your business. You might have found that it’s difficult to sell off your business because it’s in a specialised industry or due to some other reason.

In other cases, you might be liquidating due to a court order, because you can no longer meet obligations to your creditors, or because members have decided to stop trading for some other reason. Whatever the drivers behind liquidation, there are often strict procedures to follow to ensure you’re complying with the laws and regulations.

Steps involved in liquidating your business

The steps involved in liquidating your business vary depending on your structure. For example, if you’re operating as a sole trader, you’ll follow different steps than if you were operating as a company. Sole traders having difficulty paying off creditors could declare bankruptcy, which involves the liquidation of their business assets.

As a sole trader, you should probably talk to your lawyer and accountant before you do anything. Your bankruptcy might involve reviewing all your business debts and documenting them, before inventorying all your business assets in detail. At some stage, you might work with an appraiser so you can realise your assets at a good value. For businesses operating under a company structure, the process can be even more involved.

Court-ordered liquidation

A court-initiated liquidation might start with an application made by creditors to the court for the company to be liquidated so that the creditors can be paid. The court then appoints an official liquidator to take control of the company’s affairs.

Creditors’ voluntary administration

In a creditors’ voluntary administration, the parties that the company owes money to vote to have the company liquidated. After this, there is usually a period of time where an administrator takes charge of the company with the goal of salvaging the company’s profitability or viability. A creditor may then apply to wind up the company, and at this stage, a liquidator could be appointed to take charge of the company.

Members’ voluntary administration

A members’ voluntary administration usually happens when the company can still meet its financial obligations but the directors have chosen to discontinue trade for various reasons. It can be a cost-effective way to wind up the company and distribute proceeds to creditors and shareholders.

The company directors make a declaration of solvency before the company members pass a special resolution. Once an administrator or liquidator has been appointed, he or she will take charge of the company’s affairs and assets.

After liquidator’s appointment

Liquidation and the process of appointing a liquidator can be an involved process with strict compliance and legal requirements. Once the liquidator has been appointed, he or she displaces the role of the company directors and has full control over the company’s affairs. However, the liquidator’s duty is first and foremost towards the creditors rather than to the shareholders. The liquidator will collect and realise the company’s assets, and investigate the company’s affairs and report findings to creditors as is fit.

If the liquidator uncovers evidence of offences being committed in the company, he or she will report this to ASIC and may ask for extra funds from ASIC to investigate further. During the liquidation stage, the liquidator is allowed to call creditors’ meetings to keep creditors up to date with the process, obtain feedback about their preferences, or get approval for liquidator’s fees. Creditors are allowed to vote during these meetings to pass resolutions.

Once the assets have been realised, the liquidator will distribute the proceeds by first paying off the costs of the liquidation and secured creditors. The priority creditors will then be paid, along with employees. Finally, the liquidator will ensure any remaining funds are paid to unsecured creditors and then shareholders. After this, the liquidator applies for company deregistration.