What Does It Mean When a Company Goes Into Liquidation?
Find out what happens to a company after it becomes insolvent.
If your company has become insolvent and unable to pay its outstanding debts, your company will fall into liquidation. Liquidation refers to the ‘winding up’ of a company by ascertaining the liabilities and apportioning assets of the business to dissolve the company entirely. This is different from administration where the company would formulate a plan to repay the debts to escape insolvency. Liquidation includes the formal legal manner of determining how to pay these debts, deregistration and effect on third parties. Here is some insight for when a company goes into liquidation.
Liquidation can occur voluntarily, through consensus of the shareholders to dissolve the company. This involves no court order and will typically happen when the company’s leaders decide that the company has no further reason to operate. Moreover, a company must cease trading and appoint a liquidator to deal with the company assets. A benefit of voluntary liquidation is that the company may choose who to appoint as the liquidator. Accordingly, this liquidator will sell off the company’s assets and distribute funds to creditors as described in the Corporations Act.
Liquidation can also occur involuntarily where a creditor can petition to the court to wind up your company. A court-appointed liquidator will then determine how to deal with the assets and the result may be less favourable than that of a liquidator in a voluntary administration. Furthermore, this unplanned liquidation may have disruptive effects on the remaining operation of the company. However, creditors will remain as the primary focus of the liquidation. Creditors are paid out as much as possible of the company assets and any surplus funds will then be paid to shareholders.
A key point is that creditors cannot take legal action against the company in liquidation. This is because once a liquidator has apportioned the company assets they will direct ASIC to remove the company from the Register. This will result in the company ceasing to be a corporate legal entity.
Role of a Liquidator
Liquidators must approve your proof of debt before apportioning assets to your claim. Although even if approved, there are inhibitory factors that may affect payment:
- The company may not have sufficient assets to pay you;
- The order of payment of parties may affect your payment;
- Whether your debt is secured or not. Secured debts tend to sit outside of the liquidation.
The liquidator also has the ability to claw back certain transactions that may have led to the liquidation. These transactions could also include payments made knowing the company would fall into liquidation. The liquidator can seek a court order to claw back these transactions and use them to distribute the assets fairly.
Effect on Third Parties
Liquidation has effects on multiple third parties such as shareholders, employees, unsecured creditors, etc. Employees lose their jobs and may also miss out on severance packages or entitlements due to limited funds. However, employees may look to the Fair Entitlements Guarantee for assistance with their loss of job due to liquidation. Unsecured creditors will only be paid out after secured creditors as they have no legal interest in the company’s assets. Shareholders rank last and are unlikely to receive a dividend due to the liquidation unless they also have a claim as a creditor. If you need help identifying your position during insolvency consult an insolvency lawyer.
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Jakub is a legal intern at Lawpath as part of the content team. He is currently studying a Bachelor of Laws at Macquarie University. His main interest is on the integration of legal and technological services.