When a company runs into financial trouble and cannot pay off its debts, it can become insolvent. There are many strategies available to directors, from turnaround and restructuring to a sale of business and assets.
However, when these solutions cannot be reached, liquidation is the last resort. According to the Australian Securities and Investments Commission (ASIC) there were 9,848 companies nationwide which underwent a corporate insolvency appointment during the 2015-16 financial year.
Over 7,500 of these were liquidations and for a lot of company directors, this process can be unclear. Let's start with the essentials – who is your liquidator, and what do they do?
Who is your liquidator?
A liquidator is an individual registered by ASIC under the Corporations Act. Registered liquidators generally assume control of the finances, affairs and other property of a body corporate when it becomes insolvent and enters liquidation.
Liquidators generally assume control of the finances, affairs and other property of a body corporate.
As a company shareholder, you can appoint a liquidator yourself, to handover control and responsibility for managing your company's situation. In other cases, a creditor will apply to court for a liquidation order(also known as a winding up order), and the appointed liquidator will contact you shortly after their appointment.
This is how they are appointed – but what about the action they can take?
What a liquidator does
Once appointed, the liquidator's primary goal is to collect and sell your assets so that creditors get whatever money they can from what they were owed. This can be a long process, and will often involve some combination of the following:
- Taking stock of the company's assets, securing and realising them (where it is commercially warranted and viable).
- Contact creditors on your behalf, communicate with them about their returns (secured creditors may instead appoint a receiver).
- Reviewing the financial records of your company and investigating the directors' conduct and reporting offences to ASIC.
- Determining what (if any) kind of recovery action can be taken, including claims for loan accounts, insolvent trading, uncommercial transactions, unfair preferences, breaches of directors' duties and other amounts.
- If money will be returned to employees and creditors, facilitating this through a dividend.
- Reporting and registering all steps with ASIC, and deregistering the company once its affairs are finalised.
Essentially, the liquidator will handle the closure of all of your affairs. It means you lose a lot of agency to close your business how you want to, which is why pre-insolvency advice may be valuable to you. Alternatively by setting up a turnaround and restructuring plan, you may be able to avoid much of the financial pain that comes with the liquidation process.
Who pays a liquidator?
Normally, a liquidator will be paid out of your company's assets or recoveries.
Normally, a liquidator will be paid out of your company's assets or recoveries. If there are not enough funds in your company to cover the costs of a liquidator, then they will usually ask you for an upfront payment to meet their costs.
How can you avoid liquidation?
Clearly, the liquidation process is not great for company directors. Your business is closed, employees terminated, assets sold and you may become personally liable for company debts leading to your bankruptcy.
It is generally considered a last resort option by the professionals at Cactus Consulting, but there are many alternatives to liquidation – the key is accepting there are problems you tackling the problem early and being . Financial dispute resolution, informal arrangements and even voluntary administration can be preferable options, depending on the situation of your company.
To find out how your business could potentially avoid liquidation, or simply to shore up your finances in anticipation of a rainy day, speak to the professionals at Cactus Consulting. We have years of experience providing tailored pre-insolvency advice.