💡Key Insight
- Winding up a company refers to the complete process of ending a company’s business affairs, which includes settling debts, selling assets, distributing any surplus, and formally deregistering the company so it ceases to exist.
- Liquidation is a specific part of that winding up process focused primarily on selling the company’s assets and using the proceeds to pay creditors before any remaining funds are distributed to shareholders.
- While liquidation only occurs when a company is ceasing to operate and generally involves appointing a liquidator to realise assets, winding up can include other closure steps and is the overarching legal procedure for formally closing a company under Australian corporate law.
- Understanding the difference between winding up and liquidation helps business owners choose the appropriate closure path and comply with legal requirements, especially when dealing with solvent closures, insolvency, or creditor actions.
When a company closes down, there are many things that need to be taken care of, such ending all business activities and selling company stock and assets. This process is referred to as ‘winding up’ the business. As a subset of winding up, liquidation is the process where assets are sold.
Put simply, liquidation only happens for companies that are ceasing to operate. Whether these companies are solvent or insolvent, winding up a company will almost always involve liquidation. In this article, we’ll discuss what the difference between winding up and liquidation is.
Winding up a company
Winding up a company means to end all business affairs in order to permanently close a company. This process involves many things, such as selling off stock, distributing the remaining assets, and paying off any outstanding debts. A solvent company which has assets worth less than $1,000 does not need to be wound up. To cease operating, it simply needs to be deregistered through ASIC. However, if a company has assets worth more than $1,000 or is insolvent, then it must be wound up.
Voluntary winding up
Directors can wind up a solvent company voluntarily if they vote to do so. To do this, directors of the company must declare that the company is solvent. After this, members must pass a vote with a 75% majority to wind up the company.
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Involuntary winding up
It is illegal for a company to continue trading when it is insolvent, meaning that action must be taken as soon as possible. Further, a company can be involuntarily wound up by the Court to repay creditors if the debt is in excess of $2,000.
A creditor of the company can apply to have the indebted company wound up. To do this, the creditor must file a statutory demand and effect personal service on the registered address of the company. The creditor also needs to provide an affidavit setting out the details of debt. If the company does not dispute or repay the debt within 21 days, then the creditor can file a winding up application resulting in the company being ‘presumed insolvent. This presumption is only active for 3 months, so creditors need to act quickly.
The purpose here is for the company to be liquidated so the creditor can be repaid. If the petition is granted by the courts, an official liquidator will be appointed to assess and sell the company’s remaining assets.
Example
Ronald runs a company named ‘R Enterprises’, which sells clothing and homewares online. However, his company is in significant debt to ‘Buy to Wear’, a larger company that has lent R Enterprises money. Buy to Wear issued R Enterprises with a statutory demand which went ignored for 21 days. Buy to wear has since commenced action in the Federal Court to wind up the company. A liquidator will be appointed to sell all assets owned by R Enterprises and then repay Buy to Wear.
Liquidation
In commercial terms, liquid means cash. Liquidation is the process of converting assets to cash, usually in order to pay back debts or shareholders. A liquidator is a professional (usually an accountant or lawyer) who manages this. Certified liquidators are registered with ASIC.
Conclusion
Winding up and liquidation both signify the end of a company. While winding up is the broader process of concluding all business affairs, liquidation is a necessary part of this process which sells off the company’s assets. If you have further questions in relation to winding up your company, it may be worth getting in touch with a commercial lawyer.
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