The promise of a Cheap Liquidation is a popular myth in the business world.
More often than not, the unsuspecting Company Director is hit with financial liabilities that go way beyond the initial cost of liquidation and can even put his own personal assets at risk.
As this true story demonstrates, Voluntary Liquidation is not the only option. By speaking to an Expert in Liquidation, this Director was able to avoid a $110,000 liability for less than $500.
An accountant asked us to consult on whether liquidation was the best step for his client.
The client company had a number of supplier debts, and the directors believed that if a liquidator was to be appointed, those debts would be eliminated.
On meeting with a liquidator, the Directors were very tempted by the promise of a cheap liquidation at $3,300. Thankfully, they did not act without the advice of their accountant, who suggested tha this client come and see us first.
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“Our advice saved this client up to $110,000 for a fee of less than $500! Not only did we prevent a Liquidation, the Accountant also retained his client.”
Assessing the Risks
Our consultation started by examining the terms of the liquidators’ engagement letter. The letter revealed that the fee of $3,300 was only a contribution toward the cost of the liquidation.
The letter went on to disclose that the actual cost would depend on whether investigations revealed the existence of voidable transactions etc.
In other words, the payment of $3,300 did not release the directors from any liability that may exist for voidable transactions, insolvent trading or breaches of directors’ duties etc. All of which may have been pursued if identified by the Liquidator.
We then undertook a review of the company’s financial position, as well as all payments made by the company that involved the directors.
Through this work it became apparent the directors had recently applied all sale-of-business proceeds ($110K) to the repayment of a personal loan that was neither registered nor had priority overcreditor claims.
The Solution that Saved the Director
Having assessed the risks to the Director and completed our review, we were able to advise the client that liquidation was not in their best interests.
We also warned them that if they went down that path of Liquidation then the transfer of $110,000 would definitely have been pursued by the liquidator.
As a result, we formulated an alternate strategy that did not involve liquidation and that was better for the client.
The Lesson Learned
Liquidations that appear cheap at the outset are rarely ever cheap! Clients need to know that a liquidation cannot be performed for $3,300 or anything remotely close to that price!
Directors also need to understand that even when they pay to liquidate, they are not the client!
Liquidators are legally obliged to investigate, report to ASIC and, wherever able,pursue legal claims on behalf of the company and its creditors. The directors are often the prime targets of this work.
As the target of forensic investigations, it is entirely appropriate that directors seek advice from their perspective as to whether it is liquidation or another course of action that would produce the better financial outcome.
No matter how desperate the situation, liquidation is not the only option. It is only one of a range of options that must be considered.
Not only is an unplanned liquidation a traumatic experience, it may also be the wrong decision for you or your client.