One of the harsh realities of starting your own company is that it may not survive. In fact, the Small Business Association (SBA) believes that approximately 30% of new businesses fail during the first two years of being open and 50% during the first five years.
If a company is unable to pay its debts as and when they fall due, it is deemed insolvent. There are two ways in which a company may be wound up and terminate its existence: voluntary liquidation and court liquidation.
Voluntary liquidation – members and creditors
Like the name suggests, this process is voluntary, and is a decision made by the company’s directors. An administrator takes control of the business to wind up its financial affairs. There are two types of voluntary liquidation:
- Members voluntary liquidation: could occur if a company is still able to pay its bills but directors are choosing to stop trading
- Creditors voluntary liquidation: could allow your business to act quickly, minimise the risk of serious consequences, and avoid incurring further debt. Once the shareholders agree to appoint a liquidator, a chosen liquidator will then take care of the rest.
Once a company has demonstrated it is insolvent, a liquidator may then be appointed by the Court. A court liquidation allows for a systematic approach to winding up a company and bringing its affairs to an end. This may be the preferred option if the directors and shareholders of the company are in dispute about the best approach.
During a Court liquidation, these are the actions you can expect to see occur:
- Once all company assets are realised, investigations are complete and distributions to creditors are made, the liquidator will apply to ASIC to deregister the company
- Creditors will no longer have any claim against the company and the company will no longer exist
- Secured creditors are still able to exercise their rights
- Certain transactions can be recovered by a liquidator for the benefit of all creditors
- Insolvent trading actions can be taken against the directors for recovery of funds for the benefit of creditors
How are the funds from liquidation allocated?
The type of liquidation that occurs will determine how and in which order the funds from the company’s assets are paid. Examples of this are:
- Voluntary members’ liquidation: when a solvent company resolves to wind up voluntarily, all its debts are normally covered.
- Voluntary creditors’ liquidation: when the company is insolvent, and the liquidation is requested by its creditors, priority of debt repayment to creditors depends on whether they are secured or unsecured creditors, with secured creditors having priority over unsecured.
- Court-ordered liquidation: enforced liquidation by the courts follows a strict payment priority, with the liquidator’s costs being covered first, followed by secured creditors, then employees, and finally unsecured creditors.
How long does it take to liquidate a company?
A liquidator will wind up the affairs of the company as quickly and commercially as possible. It depends on the complexities of a business; however, this work will be officially completed once:
- The company is dissolved by Court order on application of the liquidator;
- The company is removed from the register of companies by ASIC at the liquidator’s request; or
- The winding up is stayed or set aside by the Court.
If you are unsure about liquidating your company, the best option for you or the impacts it might have, get in touch with insolvency experts.