What is liquidation?
When companies experience financial difficulty they may face an application by a creditor to wind-up the company, or alternatively the company may appoint a liquidator itself to wind up its affairs. However, this is a last resort for companies.
Before a liquidator is appointed, there are various alternatives directors may consider to determine the best course of action for their company. Often directors would like to continue operating the company or its business, or continue using its assets. Or perhaps they are concerned about the impact of liquidation on them personally. We can guide you through the options available to assist you to determine the right course of action for your company.
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. This generally means that if your company is behind in supplier payments, has outstanding and overdue ATO or superannuation debts or owes other amounts it cannot pay, it may be insolvent.
As a director, what should I do if I suspect my company is insolvent?
As a company director you have a fiduciary duty to act in the best interests of your company at all times. If you believe or suspect that your company is insolvent and do not take proactive steps to ensure that the company does not incur any further debts, when there is little or no prospect that these debts will be paid, then you may be held personally liable for the damage caused to the company as a result of insolvent trading.
If you suspect that your company may be insolvent, you should seek advice immediately. We can discuss your company’s circumstances with you and give you further information to determine whether your company is insolvent.
What options are available to my company?
Various options may be available to deal with a company in financial difficulty depending on your circumstances. These generally include:
- Do nothing
- Refinancing by directors or external parties
- Turnaround or restructuring strategies
- Sale of business and/or assets for fair value
- Voluntary administration and deed of company arrangement
Failing to take appropriate action may result in directors being exposed to liabilities or committing serious offences. If youâre company is experiencing financial difficulties or you are concerned that it may be insolvent, you can discuss your companyâs circumstances with us and get assistance to determine whether it is appropriate for you to take action under one of the above options. The key to the best outcomes is acting early.
How so I appoint a liquidator?
Shareholders can resolve to appoint a liquidator to their company, often by signing a Resolution for the liquidatorâs appointment. This can generally be done in a prompt and timely manner.
A creditor who is owed over $2,000 (and certain other parties) can apply to Court to have a liquidator appointed to a company.
How much does it cost to put my company into liquidation?
If your company has available assets of a sufficient value to cover some or all of the costs of liquidation, then it is likely that there will be no up-front costs to the directors or shareholders to appoint a liquidator to the company.
If your company has little or no assets, then a liquidator will generally require funds be made available to pay the costs of acting as liquidator of the company.
What will happen if my company is placed into liquidation?
- If your company is placed in liquidation, then an independent person (the liquidator) is appointed to the company. The liquidator will:
- Take control of the company’s assets.
- Examine the events and circumstances preceding the winding up of the company.
- Examine the company’s financial position in order to determine whether the company traded whilst insolvent.
- Report to creditors regarding the results of the liquidator’s investigations and the prospect of a return to them.
- Providing for a fair and equitable distribution of the company’s property between creditors.
What are the benefits of appointing a liquidator to a company?
There are a number of benefits appointing a liquidator to a company may have, including:
- It is a way in which a director can avoid personal liability under a Director Penalty Notice issued by the ATO.
- It may limit or reduce the directors’ exposure to insolvent trading.
- It may limit or reduce the directors’ liability for certain offences under the Corporations Act 2001.
- It results in an independent person being appointed to the company, who will conduct an orderly winding up of the company’s affairs.
- It avoids the company being placed in liquidation by the ATO or another creditor.
What are my responsibilities as a director once my company is placed in liquidation?
If your company is placed in liquidation, as a director you will have duty to assist the liquidator during the liquidation process. You must also complete a Report as to Affairs form (setting out the companyâs assets and liabilities) and promptly provide the liquidator with all of the books and records of the company.
What is insolvent trading?
Insolvent trading is the continued trading of a company which is unable to pay its due and payable debts. If a company trades after it becomes insolvent, you and any 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 companyâs unpaid debts that were incurred after the company became insolvent up to the time it enters liquidation.
What is a director penalty notice?
As a director, am I liable for my company’s unpaid debts?
Directors are generally not liable for a company’s debts, unless:
- Debts which you have personally guaranteed.
- Your liability to the ATO under a director penalty notice.
- Your liability for insolvent trading.
- You have a loan account for funds you withdrew from the company.
- 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
If my company is placed in liquidation am I excluded from being a director of other companies?
A director of a company which is placed in liquidation, who has not been the director of any other companies which have been wound up in insolvency in the last seven years, will generally (subject to certain exceptions), not be disqualified from being a director of further companies.
However, it is common for the ASIC to seek to disqualify a person from acting as a director for up to five years, if that person has been the director of two or more companies which have been placed in insolvent liquidation in the last seven years.
This does not apply to directors of companies which have been wound up by way of a (solvent) members voluntary liquidation.
Want to find out more about liquidation?
Why not pick up the phone and get in touch to have your questions answered in a no-cost confidential discussion.