If your company is in liquidation and you’re a director, you can’t walk away. You have an obligation to help the liquidator and remain engaged, but you are no longer running the company and you can’t make decisions. This can be a confronting position.
If your company is in liquidation the process varies considerably depending on whether the liquidation is a members (shareholders) voluntary liquidation or a creditors liquidation.
What does it mean to liquidate a company?
When a company can’t pay its debts, it may need to be restructured—this could mean securing new capital or reducing its debt to a manageable level. If restructuring isn’t viable, the company may be wound up, meaning it is dismantled, with its assets sold to repay debts before any remaining funds are distributed to shareholders.
A company can be wound up voluntarily, which may involve entering administration. This process includes appointing an administrator to assess the company’s financial situation and report their findings to creditors. At the second creditors’ meeting in a voluntary administration, creditors will vote on one of three options:
- Return control of the company to its directors
- Appoint a liquidator
- Enter into a Deed of Company Arrangement (DOCA)
A company can also be wound up by court order, which places it into liquidation. In this case, a liquidator is appointed to take control of the company, sell off its assets, and distribute the proceeds to creditors.
Why do people liquidate a company?
A company director might liquidate a company for a number of reasons including:
- The company is insolvent (it cannot pay its debts when they fall due)
- The shareholders agree it is in the company’s best interest.
- It is tax effective.
Liquidation is not the only option to close a company. You have six different ways a company can be closed.
What are the different types of liquidation?
Australia’s three main types of liquidation are creditors’ voluntary liquidation (CVL), members’ voluntary liquidation (MVL), and court-ordered liquidation. A less common form is provisional liquidation, which occurs when the court appoints a temporary liquidator to protect company assets before making a final decision.
Creditors’ Voluntary Liquidation (CVL)
A creditors’ voluntary liquidation happens when an insolvent company cannot pay its debts, and its shareholders decide to wind it up. A liquidator is appointed to oversee the process, ensuring legal compliance and acting independently in the interests of creditors.
Members’ Voluntary Liquidation (MVL)
A members’ voluntary liquidation is used when a company is solvent, but the shareholders choose to close it for other reasons. The directors must first declare solvency, confirming the company can meet its obligations. The shareholders then vote on the proposal; if approved, a liquidator is appointed to finalise the company’s affairs.
Court-Ordered Liquidation
A court-ordered liquidation occurs when the court orders a company to be wound up. This usually happens after a creditor, director, or shareholder applies for liquidation, often following a statutory demand from a creditor seeking unpaid debts. If the company fails to pay or negotiate a settlement, the creditor can ask the court to wind it up. A court-appointed liquidator then takes control and manages the process.
What happens if the debts cannot be repaid?
When a company enters liquidation, its assets are sold, and the proceeds are used to repay debts. And sometimes the assets are not enough to repay company debts.
Company directors are not personally responsible for any outstanding debts the company cannot pay. However, directors can be personally liable in certain circumstances, including:
- Personal guarantees – If a director has personally guaranteed a company debt, they are legally responsible for repaying i
- Insolvent trading – If a director allows the company to continue trading while insolvent, they may be held personally liable for its debts. Insolvent trading is also a criminal offence in Australia.
- Tax debts include GST and PAYGW, where a director’s penalty notice has been issued.
- Unpaid employees’ superannuation.
If you are a director of a company in liquidation, seeking advice as soon as possible is essential.
What is the order of payment?
Under Section 556 of the Corporations Act 2001 (Cth), payments in a court-ordered liquidation follow this order of priority:
- Liquidator’s fees and expenses – Costs of managing the liquidation process.
- Petitioning creditor’s expenses – Costs incurred by the creditor who initiated the winding-up process.
- Priority employee entitlements—This includes wages, superannuation, and leave entitlements, as Section 561 of the Act outlines.
- Secured creditors – Lenders or creditors with security over company assets.
- Non-priority employee entitlements – Any remaining employee claims not covered as priority payments.
- Shareholders – As company owners, shareholders are last in line and will only receive a distribution if all other debts have been paid in full.
This structured approach ensures that employees and secured creditors are prioritised before any funds are returned to shareholders.
What happens as a director during liquidation
Once your company is liquidated, your powers as a director stop. Your role is reduced to assisting the liquidator during the process. The liquidator will classically sell off assets in an orderly manner.
Ordinarily, a former director will not be paid to assist the liquidator.
Your credit rating
When a company goes into liquidation, credit rating agencies may record this, along with the names of the company directors. If someone searches a director’s name with a credit rating agency, they can access information about companies that have been liquidated in the past seven years.
However, if you’re applying for personal credit, these details will unlikely affect your application. Unlike personal bankruptcy, a company is a separate legal entity, meaning directors are not automatically responsible for its debts.
If you were a company director that went into members’ voluntary liquidation (MVL), your credit rating won’t be impacted.
Sometimes the ATO can report your non-payment to a credit rating agency.
Can a director start a new company after liquidation?
Yes, company directors can start a new business after liquidation. However, several important factors must be considered before doing so.
The Australian Securities and Investments Commission (ASIC) closely monitors directors of liquidated companies. Suppose you have been a director of two or more companies that entered liquidation within the past seven years. In that case, ASIC can disqualify you from acting as a director.
That said, starting a new business after liquidation is not prohibited. Before proceeding, just ensure you understand the risks, legal obligations, and financial challenges involved.
Can I protect my assets before liquidation?
If you intentionally do something before a liquidation to damage a creditor’s claim to assets and improve your position, the liquidator can reverse that action. And if you have paid some creditors before you paid others (so you paid a trusted supplier before the ATO) the liquidator can force that preferential payment back from the supplier.
If you have engaged in long-term asset protection advice, that structuring can segregate assets away from you and protect your position.
Can Westcourt liquidate my company?
No. We are specialist tax and business advisors to family businesses—not liquidators. We have great relationships with liquidators and can help you get the starting point with a liquidator correct. We also understand the benefits of liquidating a company with a high tax debt and the tax advantages of accessing special tax concessions.
If your business is encountering a problem, talk to us. We are judgment-free and can sometimes see a way out. We can also help you position with a compassionate and not overly expensive liquidator.
