If your business is in financial trouble, you might be considering liquidation. Liquidation is typically considered once receivership and voluntary administrative have been deemed to be an ineffective solution.
If you are considering liquidation for your business, it’s important that you fully understand what liquidation is, and what it means for your shareholders, employees and other parties involved.
What is business liquidation?
Liquidation typically happens when a company is unable to pay its debts (or if members want to end operations). The process includes a number of steps, including wrapping-up all financial affairs, formally dismantling the structure of the company and ensuring that you investigate what went wrong. The company’s assets are then sold in order to pay off as much of the business debt as possible.
Liquidation is not the same as bankruptcy, as bankruptcy applies to individuals, while liquidation applies to companies.
Liquidation has to include the dismantling of a company’s structure- just selling off assets is not enough! If the assets are sold off, but the legal dismantling is not completed, then its unsecured creditors can instigate legal action against the company.
What does it mean when a company goes into liquidation?
The company is dissolved during the liquidation process. This means that control of all assets and financial affairs must be transferred to the liquidator.
Directors no longer have authority and bank accounts are typically frozen. This also means that all employee contracts are terminated.
It is the liquidator’s responsibility to ensure that all affairs are wound-up as quickly and cost-efficiently as possible!
Why should you consider liquidation?
- The cost to the community is reduced
- It enables a check and balance on directors as well as shareholders. The independent investigation into the company gives an opportunity for creditors to receive compensation
- A dormant company can typically be deregistered, which is a less ideal option
Benefits of Liquidation
- Cost effective. While there are costs involved with liquidating a company, they are typically reasonable, as the majority of costs are paid off by the selling of assets.
- Higher level of control. If you enter into a liquidation voluntarily, you’re in control of the outcome and can prepare for it better
- Reduction of outstanding debts. Once the process is complete, you should not owe anymore money, providing the assets were enough to pay off the creditors
- Less stress. Managing a company that’s struggling financially can be a huge burden and stress. This is greatly reduced once the company has been liquidated.
Issues with Liquidation
- Loss of all assets. Any and all assets will be sold permanently, meaning you no longer have any claim to them
- You’ll be under scrutiny. The liquidator is required to investigate the business thoroughly, and you’ll need to provide access to all your information.
- You’re held accountable for any precious financial issues or mistakes, as they will be reported to the ASIC.
- Your employees will lose their jobs, and your shareholders will likely lose money in the process
What are the consequences of business liquidation?
Many different parties will be affected by the liquidation process. Secured creditors and unsecured creditors alike will be impacted by this decision.
While liquidation typically protects you from potential recourse from your creditors, there is still a chance that you’ll need to reach an agreement with them.
When this happens, you have the option to go through the court system (and other typical debt-recourse processes).
Alternatively, you have the option of instigating mediation, where you have the ability to discuss options with the creditors in question.
The team of legal and technical experts at Immediation are here to help guide you through the mediation process and reach the best possible outcome. You can do it 100% online or opt to use a managed service where the Immediation personnel do everything for you, from start to finish.
Mediation is a good first-step in the dispute resolution process. It’s Immediation’s goal to help you sustain your business relationships, while resolving the matter quickly and professionally.
Want to know more, or enquire about your business dispute? Simply fill out the form on the contact page and they’ll be in touch.
References:
https://australiandebtsolvers.com.au/research-centre/a-guide-to-liquidation/