What Is business liquidation?
Liquidation refers to the formal process of winding up a company’s affairs. It involves selling the company’s assets to repay creditors, ceasing operations, and ultimately dissolving the company. If the business is insolvent, the liquidator also investigates the causes of financial failure.
It’s important to distinguish liquidation from bankruptcy. Liquidation applies to companies, while bankruptcy is specific to individuals, including sole traders and partners in partnerships.
Once a company enters liquidation, a liquidator is appointed to take full control of its operations, financial matters, and assets. The liquidator’s role is to ensure the business’s closure is managed efficiently and in compliance with the law. Unlike selling a business, which transfers ownership, liquidation marks the permanent dissolution of the company.
The business liquidation process
Liquidation occurs in two primary forms:
- Voluntary Liquidation
- Directors or shareholders decide to liquidate the company through a resolution.
- This often follows voluntary administration or the implementation of a Deed of Company Arrangement (DOCA).
- Voluntary liquidation might be prompted by early signs of insolvency, such as mounting debts, cash flow issues, or receiving a Director Penalty Notice (DPN).
- Involuntary Liquidation
- Initiated by a court order, typically following an application from a creditor.
- This happens when a company is unable to pay its debts as they fall due.
During the liquidation process:
- Directors lose their authority over the company.
- The company’s bank accounts are frozen.
- Trading may continue temporarily, but only at the discretion of the liquidator.
The length of the process depends on the company’s specific circumstances and the type of liquidation. Strict rules and procedures ensure that creditors are treated fairly and the company’s closure is handled responsibly.
Why choose liquidation?
Liquidation is often the most practical way to wind down a company that is no longer viable. Key benefits include:
- Orderly Dissolution: Liquidation ensures assets are sold and distributed to creditors in a structured way.
- Independent Oversight: A liquidator acts as an impartial party to manage the process and investigate the company’s affairs.
- Protection Against Insolvent Trading: Once in liquidation, directors are no longer personally liable for insolvent trading.
For profitable businesses, liquidation might be chosen for reasons unrelated to financial distress. For instance:
- A sole-owner business might liquidate if the owner retires and selling the business isn’t viable.
- To prevent hostile takeovers, owners might opt to liquidate rather than relinquish control.
Business liquidation vs. voluntary administration
While liquidation results in the permanent closure of a company, voluntary administration is designed to explore restructuring and recovery options. During voluntary administration, an external administrator assesses the company’s financial situation and may propose a DOCA to return the business to solvency.
In contrast, liquidation represents the final step for a company, where operations cease, assets are sold, and the business is dissolved.
Impact on employees
Liquidation often results in the termination of employees, as the company ceases operations. In some cases, the liquidator may temporarily retain staff if trading continues for asset realisation purposes.
Employees owed wages, annual leave, or other entitlements are considered priority creditors. However, if company assets are insufficient, employees can claim unpaid entitlements through the Fair Entitlements Guarantee (FEG) scheme. This government program covers wages, leave, redundancy pay, and notice periods for eligible employees affected by liquidation.
AVA Advisory provides expert guidance and support to help small business owners and directors set their businesses up for success.
