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Company Liquidation

What Does Liquidation Mean For Shareholders

Liquidation is the process of winding up a company and finalising its affairs. When a company is facing extreme financial difficulty, it may enter into liquidation to close the business down, sell any assets and pay off as much creditor debt as possible. There are 2 types of liquidation available for an insolvent company: court and creditors voluntary. It does not matter which process is taken, the result is the same.

Creditors Voluntary Liquidation

This type of liquidation can begin in one of two ways as outlined in the ASIC Insolvency Guide For Shareholders:

  • When creditors vote for liquidation following a voluntary administration or a terminated deed of company arrangement
  • When an insolvent company’s shareholders resolve to liquidate the company and appoint a liquidator.

Court Liquidation

In a court liquidation, a liquidator is appointed by the court with the purpose of winding up the company. This is usually following an application made by a creditor.

During all liquidations, the liquidator’s primary duty is to the company’s creditors. Any secured creditor is first, followed by unsecured creditors. Shareholders rank behind creditors and there is no guarantee that they will receive any dividend during the liquidation process. The amount a shareholder will receive depends entirely on how much money (if any) is remaining after all creditors have been paid.

In other words: shareholders are at the bottom of the chain.

Being a shareholder of a company carries a high risk as in the event of company liquidation you are last in line to be paid. In most cases, shareholders are unlikely to receive any money in a liquidation unless they also have a claim as a creditor.

What Is the Effect Of Liquidation On A Company?

Prior to liquidation, the company director has a duty to act in the best interests of the company, its creditors and its shareholders. The moment a liquidator is appointed, the directors duty is solely to its creditors. At this point, the director also forfeits any decision making power to the registered liquidators. While the director is unable to use their powers from this point, they are still required to assist the liquidator as deemed necessary. This is most commonly in the form of providing the company’s books, records and reports about the company’s affairs.

It is the liquidators role to realise, collect and liquify any company assets for the purpose of distributing the sale proceeds to proven creditors. The powers of a liquidator are further explained in Section 477 of the Corporations Act and include;

  • Collect and protect assets of a company;
  • Trade the business of a company;
  • Sell the assets of a company;
  • Investigate the financial affairs and any transactions of the company;
  • Undertake any legal recoveries or claims.

During a court liquidation, the liquidator is not required to report the process or outcome of the liquidation to the shareholders. Shareholders are still able to inspect the books and records kept by the liquidator upon request.

The process of liquidation is usually complete within 4-6 months. This means that after this short period of time the company will cease trading, all debts will be finalised and the business will be formally closed.

After liquidation, the company director is free of any company debts assuming they did not have any personal guarantees. Any outstanding debts of the company will be written off or dealt with during the liquidation process. Legal action is also halted as soon as the liquidation process commences. Section 471B of the Corporations Act prevents any person from commencing or continuing with legal actions against the company without first seeking a Court order to do so.

Personal Guarantees

In Australia, a company is its own legal entity and is completely separate from its owners. It is for this reason that individuals are rarely held personally liable for the debts of a company. A personal guarantee is a promise by which the guarantor agrees to repay the debt in the event the company is unable to. While it is far more common for directors to agree to a personal guarantee, a shareholder may also provide a personal guarantee. If a shareholder does provide a personal guarantee, they may be personally responsible for paying back any debts of the company if it is liquidated.

How Is Cash Raised During A Liquidation?

As previously mentioned, when a liquidator is appointed they gain control over all business affairs. It is the liquidators role to realise, collect and liquify any company assets to distribute the proceeds to proven creditors.

In certain cases the company may continue to trade whilst in liquidation, however this is at the discretion of the liquidator. While the role of a liquidator is ultimately to bring a business and its affairs to an end or ‘wind up a company’, they do have the power under the Corporations Act to trade a company while in liquidation if it is commercially beneficial and practical to do so. A liquidator may continue to trade a business in order to sell the assets to pay its debts or if it is in the best interest of the creditors to do so. A liquidator may also continue trading a company for a short period of time in order to complete and sell an otherwise profitable business.

Can You Write Off Your Shareholding As A Capital Loss?

As a shareholder of an insolvent company, ASIC says you can realise a capital loss if:

  • A liquidator or administrator makes a written declaration that they have reasonable grounds to believe there is no likelihood of shareholders receiving any distribution in the course of the company being wound up; or
  • No declaration is made, then the deregistration of a company at the end of the liquidation also allows shareholders to realise a capital loss.

Are You The Shareholder Of A Company Facing Liquidation?

Receive free, professional advice from the Insolvency Experts. With over 30 years of experience, our licensed insolvency practitioners are here to answer any questions you may have and outline all options available to you.

Call now 1300 767 525 and speak directly to an expert!

 


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Categories
Company Liquidation Director Liabilities

Can A Director Resign When A Company Is In Liquidation

The short answer: No! And even if you resigned in the period leading up to the liquidation, you will still be held responsible for your conduct whilst you were the director.

Who Is A Director?

While this may seem like a simple question, the answer may surprise you.

A director is not just a person formally appointed to that role. The Corporations Act 2001 states that a person may be a director if they act in that role, even if they are not formally appointed. A person may also be deemed a director if the appointed directors of the company or key staff act in accordance with their wishes or instructions.

If you were not formally appointed as a director you may be unable to technically resign from the role. This means that you may still be held personally liable as a deemed director even if you were never formally appointed.

Should A Director Resign During Liquidation?

While it may seem tempting to resign from your position as director, there is often little benefit.

When a company enters liquidation the director loses all decision making powers and is essentially relieved of their director responsibilities. At the point a liquidator is appointed, they immediately gain control of all company affairs and assets. The powers of a liquidator are further explained in Section 477 of the Corporations Act and include;

  • Collect and protect assets of a company;
  • Trade the business of a company;
  • Sell the assets of a company;
  • Investigate the financial affairs and any transactions of the company;
  • Undertake any legal recoveries or claims.

Even if a director was to resign during the liquidation process, which they cannot do, they would still be required to assist the liquidator as deemed necessary. This includes supplying supporting documents such as the company’s books and records.

Further to this, simply resigning as a director will not exempt you from being included in the company investigation. As part of the liquidation process, the appointed liquidator must undertake a detailed investigation into the company’s financial dealings including reasons for failure and the conduct of the directors and any shadow directors. Your actions during your time as director will be investigated and reviewed to identify whether any illegal activity or breach of director duties took place.

The law requires directors to maintain proper books and records and also:

  • Take active steps to question and confirm the financial position and solvency of the company;
  • Regularly review the company’s financial situation;
  • Seek advice from qualified professions is a problem is suspected;
  • Act in a timely manner to address any solvency issues.

If a director is found to have acted illegally such as insolvent trading or breached their director duties during their period with the company: they may be personally liable for the debts of the company, be imprisoned for up to 10 years, or be fined. Directors may also be disqualified from managing future corporations under Section 206B of the Corporations Act if:

  • The person is convicted on indictment of an offence that;
    • Concerns the making or participation in making decisions that affect the whole or a substantial part of the business of a corporation or its financial standing
  • Is convicted of an offence that:
    • Is a contravention of the Corporations act and is punishable by imprisonment for a period greater than 12 months; or
    • Involves dishonesty and is punishable by imprisonment for at least 3 months
  • The person is an undischarged bankrupt
  • The person has executed a Deed of Arrangement under Part X of the Bankruptcy Act which terms have not been fully complied with.

Resigning during liquidation will not help the director as it is their actions prior to the liquidation that are investigated.

What Are The Effects Of Liquidation On A Director?

While being the director of a company facing liquidation is not an enviable position, it may not be as bad as you fear. Many directors fear that they will be personally liable for the debts of the company and may lose their home and other personal assets. For this reason, many directors will either avoid liquidation or are tempted to resign during the process.

While there is the possibility of personal liability and loss of personal assets, as long as the director has acted lawfully and fulfilled their duties, this will be unlikely. A director may also be personally liable if they have signed a personal guarantee to a creditor. Personal guarantees allow a creditor to place a direct claim on the guarantor and potentially, their personal assets. If a director fully understands their duties and performs them in accordance with the Corporations Act and has not agreed to any personal guarantees, they should have little to worry about in relation to personal liability.

With personal liability off the table, the next worrisome thought for directors is that they will be unable to hold this title again in a new company. This is incorrect. While there are rules in place regarding the ability to be a director in the future, it is possible to be a company director again immediately. For more information on these rules and further information regarding directing a company after liquidation, click here.

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Categories
Company Liquidation Director Liabilities

What Happens To A Director When A Company Goes Into Liquidation

Being the director of a company experiencing financial difficulties can be scary and unknown. All too often, company directors continue to amass company debt as they view entering liquidation as a personal failure and are terrified of being personally liable for any debts incurred by the company. While in most cases the director is not financially liable for these debts, there is the potential for personal assets to be seized.

As the director you have a duty to act in the best interests of your company, its creditors and its shareholders. The extent to which liquidation affects a company’s director will depend on their practices prior to the liquidation. If upon investigation you have acted wrongfully or unlawfully, you may be personally liable for any debts incurred on the company’s behalf. While there is the possibility of personal liability and loss of personal assets, being the director of a company in liquidation may not be as bad as you fear.

As a director of a company facing financial difficulties, it is essential to understand the potential consequences of entering into liquidation.

Loss Of Director Powers

Once a registered liquidator has been appointed and the directors and members resolutions have been passed, the company has officially entered liquidation. At this point, the decision-making powers of a director are immediately suspended. From this point forward, the appointed liquidator will be directly responsible for all affairs of the company including all the company’s assets as laid out in Section 477 of the Corporations Act.

Despite losing their powers, directors may still be personally liable for any debts incurred by the company if they breached their directors duty, entered a personal guarantee loan or operated unlawfully. Directors may also be required to assist the liquidator as deemed necessary throughout the liquidation process by supplying them with supporting documents, like books and records. Additionally, the director must have a verifiable explanation for every financial move the company has made up to and including the point of liquidation.

Personal Guarantee To Secured Creditors

While in most cases a directors personal assets are protected during the liquidation process, any loans taken with a personal guarantee may result in personal liability. A personal guarantee to creditors is a loan taken out where a person (usually the company director) agrees to take personal liability for the business debts in the event the company can not pay. If the company is unable to repay this loan, the creditor has a direct claim on the guarantor and potentially their personal assets. Even if your company is liquidated you may still be personally liable for its debts. The best way to prevent this from happening is never to sign a loan with a personal guarantee, however tempting it may be.

This is the only type of creditor that may claim to collect their debts once a company has entered liquidation. As a result, liquidation may actually prevent a company and its director from further losses.

Another form of personal liability for directors is if a home equity loan was taken out for the business against the value of your home. These secured loans on your home means that you may still be personally liable to repay the company debts after it is liquidated.

Don’t leave your personal assets up to chance! Contact the Insolvency Experts today to ensure the protection of your personal assets.

Insolvent Trading

If your company is insolvent, your legal duty is to your creditors.

Insolvent trading is the practice of continuing trading as usual and incurring further debt once the company is insolvent. That is, where the company cannot pay its debts as and when they fall due for payment. Insolvent trading is illegal and can occur both intentionally and unintentionally. While internationally engaging in insolvent trading may seem more severe, by unintentionally trading insolvent the director is committing a serious miscarriage of their duties and can still be financially liable. Unfortunately, even if no insolvent trading has occurred, if a director has not kept financial books and records for the 7 year period required, they will have no defence if they are hit with a claim of insolvent trading. Keeping books and records up to date is mandatory. Additionally, directors must take an active role in reviewing a company’s financial records. They must question any inconsistencies and seek professional help if they are unsure of how to proceed.

Breaches Of Directors Duties

As mentioned previously, as the director of a company you have a duty to act in the best interests of your business, its creditors and its shareholders. Failure to do so can result in being personally liable for any debts incurred on behalf of the company.

As a director you are expected to regularly review the finances of the company and take steps to resolve any issues that may arise in a timely manner. Breaches of director duties can involve: insolvent and fraudulent trading, and many other breaches of the Corporations Act.

Insolvent Trading
This occurs when a director continues to trade a company when they know, or should have known that there was no reasonable prospect of the company repaying its debts as and when they fell due for payment. If a director is suspected of insolvent trading they must be able to prove that they took every step possible to minimise loss to the creditors. If the Court determines that insolvent trading has occurred, they can order the director to be personally liable for the company debts with no financial limit. If the claim for losses is high enough, the director may have to file for personal bankruptcy.

Fraudulent Trading
This form of trading involves a director having operated a business with the intention to defraud creditors or any other fraudulent purpose. Examples of fraudulent trading include: entering contracts where you do not have the sufficient funds to complete the undertaking, giving inaccurate information with the intent to deceive and taking deposits for orders you know you are unable to fill. If the Court proves that fraudulent trading has occurred the director may be
personally liable to the debts of the company. Directors may also be imprisoned for up to 10 years, receive a fine, or both.

Misfeasance
This is where a breach of legal fiduciary duties of a director have taken place. Examples of this include: misappropriation of company funds and money improperly drawn from a company. If  this is the case, the Court can order directors to repay and restore these funds or contribute without financial limit to the company debt.

Liquidation may not be the only way out for your company. Voluntary administration is essentially a last-ditch effort to save a company from liquidation by offering creditors a higher return than what they would get if the company was liquidated. Find out if your company may be recoverable through voluntary administration today with help from the Insolvency Experts.

When met with extreme financial difficulty, it is important to understand exactly what options are available to you and what you may be personally liable for. All of these outcomes are possible for all types of company liquidation including creditors voluntary liquidation, voluntary administration and corporate insolvencies. If a director fully understands their duties and performs them in accordance with the Corporations Act, they should have little to worry about in relation to personal liability.

Contact the Insolvency Experts today to receive free expert advice and help you make an informed decision of what is best for you and your company moving forward.

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Categories
Company Liquidation

Can A Company Trade Whilst In Liquidation?

Are your business troubles keeping you up at night?

For many, deciding what to do with their failing business is one of the biggest decisions they will ever have to make. Is there a way to improve sales? Can you cut costs further? Should you sell your house and invest more into your business?

Battling to keep a failing business afloat can take a toll on your mental and physical health as well as the well-being of your family.

Unfortunately for some struggling businesses, liquidation is the only option.

What is liquidation?

Liquidation is the process by which a business and it’s affairs are legally brought to an end. Company Liquidation can be a means to mitigate their financial situation and limit any personal liability of the company directors. Any and all assets of the business are liquified and distributed to secured creditors in a legally fair and correct way. Unsecured creditors may be repaid if there are funds remaining after all other debts have been paid.

Liquidation is different from voluntary administration as it is the process of selling all assets before dissolving a company as opposed to ensuring company debts are paid in full to escape insolvency.

Whether or not liquidation is the best option for your business is a difficult decision and is best left to the professionals.

Receive free, expert liquidation advice available 24/7 by calling The Insolvency Experts.

Our experts will assess your individual situation and determine if liquidation is the best way forward for your business. If you decide to liquidate your business, you will need to appoint a liquidator to take control of the affairs of the company, including all assets. The powers of a liquidator are further explained in Section 477 of the Corporations Act and include;

  • collect and protect assets of a company;
  • trade the business of a company;
  • sell the assets of a company;
  • investigate the financial affairs and any transactions of the company;
  • undertake any legal recoveries or claims.

Can a company trade while in liquidation?

Once a company goes into liquidation, they do not necessarily have to cease trading. A company may continue to trade whilst in liquidation, however this decision is at the discretion of the liquidator. A liquidator has the power and authority to trade a company whilst in liquidation in order to sell the assets to pay its debts or if it is in the best interest of the creditors to do so. A liquidator may also continue trading a company for a short period of time in order to complete and sell an otherwise profitable business.

While the role of a liquidator is ultimately to bring a business and its affairs to an end or ‘wind up a company’, they do have the power under the Corporations Act to trade a company while in liquidation if it is commercially beneficial and practical to do so.

What is the liquidation process?

Liquidation can either be voluntary or involuntary, depending on who instigated the liquidation. When a company is insolvent, the directors and shareholders may instigate a creditors voluntary liquidation.

The first stage of any liquidation is appointing a liquidator. A liquidator will gain control over all business affairs so it is essential to select a reputable, reliable and trustworthy liquidator. The role of a liquidator is ultimately to realise, collect and liquify the company’s assets for the purpose of distributing the sale proceeds to proven creditors. A good liquidator will be willing to explain the entire liquidation process to business owners and directors, outlining every stage of the process and the effects it will have. They will be there to answer any questions you may have and provide clarification should you require it.

Confidential advice available 24 hours – Call 1300 767 525

Once a liquidator is appointed, the next step is passing a director’s resolution. This stage is often the most taxing for business owners and directors as it officially expresses the intention to liquidate. Once the directors resolution has been passed, a meeting is called where shareholders can complete the final step in starting a liquidation.

After a liquidator has been appointed and the directors resolution has been passed, the liquidation process is outside of the business’ hands entirely. At this stage all powers of the director will be suspended.

Apart from the control, collection and sale of the company assets and affairs, the liquidator must also undertake a detailed investigation into the company’s financial dealings including reasons for failure and the conduct of the directors. The appointed liquidator will identify any illegal or voidable transactions and identify whether the directors have acted appropriately and legally.
All findings of a liquidators investigation are turned over to the ASIC and the company’s creditors. A liquidator will facilitate the sale of company assets and the distribution of any surplus funds.

All creditors will be notified of the liquidation and will now contact your liquidator directly. If a creditor does call you, simply refer them to your liquidator. Your liquidator will take care of everything to do with your company so you are able to focus on other aspects of your life. Occasionally, the director may be required to assist the liquidator as reasonably necessary.

What is the effect of liquidation on a company?

After the liquidator has completed all above steps, the process has officially finished and the company is now liquidated. Majority of liquidations are effectively completed within 4-6 months, allowing you to move on with your life as quickly as possible. While the official process of liquidation takes a few months, the burden on the director and company are removed as soon as the liquidator is appointed.

Business liquidation allows the past to be left behind and a new page to be started. Harassing letters from creditors, the ATO and debt collected will cease and will be dealt with by your liquidator until the process is complete.

Once a business has been liquidated, any outstanding debts incurred by the company will be written off or dealt with during the liquidation process. This is able to occur as the company is viewed as a separate legal entity. The director is not the company and therefore the director is not personally liable to repay the debts of the company. Unless a creditor has a personal guarantee, business liquidation will free you of the debts of your company.

Legal action is also halted as soon as the liquidation process commences. Section 471B of the Corporations Act prevents any person from commencing or continuing with legal actions against the company without first seeking a Court order to do so.

The process of liquidation may also allow your employees to be paid their entitlements if you are unable to. The Fair Entitlements Guarantee Scheme is able to respond to employee claims and will pay most of their unpaid entitlements including wages, annual leave, payment in lieu of notice and redundancy if they lost their jobs due to insolvency.

In reality, making the decision to liquidate your business is the most difficult part of the process. Once you have made this decision and appointed a liquidator, the process is no longer in the hands of the company. Our liquidation experts are often told “If I had known this sooner, I wouldn’t have lost everything by putting it into a failing company. I should have done this a long time ago”. If you are unsure of the best decision for your company moving forward, contact our liquidation experts now for free expert advice.

With over 30 years of experience, Insolvency Experts are your low cost liquidation experts. Our free, no-obligation phone consultations are available to answer all your questions, outline all options that are available to you and execute the best solution for your company moving forward.

Call now 1300 767 525 and speak directly to an expert!