The winding up process involves investigating the company’s affairs, protecting and realising its assets, recovering any legal claims, and distributing the funds received to creditors and shareholders.
A liquidator registered with the Australian Securities & Investments Commission (ASIC) will be appointed to the company to carry out the liquidation.
There are three types of business liquidation:
1. Court Liquidation
This happens when a creditor applies to the court to wind up a company that owes an outstanding debt. The court liquidation process usually begins when a creditor issues a statutory demand on a company to pay the debt. If not satisfied within 21 days, the creditor can apply to the court to have the company wound up (placed in liquidation). If successful, a liquidator (who can be nominated by the creditors) will be appointed to the company. Upon the liquidator’s appointment, the directors’ powers cease, and the liquidator takes control of the company to carry out the above steps.
2. Creditors’ Voluntary Liquidation
Creditors’ voluntary liquidation (CVL) is similar to a court-ordered liquidation. However, instead of a court application, it is commenced voluntarily by a resolution of the Company’s directors and shareholders. As directors are not obligated to trade a company while it is insolvent, this option is appropriate when a company has outstanding debts it cannot pay as and when they fall due or cannot continue to trade viably.
3. Members’ Voluntary Liquidations
Only solvent companies can undertake this type of liquidation. It is initiated by the company’s directors and shareholders and involves the winding up of the company’s affairs. In most cases, the business has ceased, its assets have been sold, and a small number of funds or loan account balances remain. The appointed liquidator will use the available funds to pay any remaining creditors and distribute any surplus assets to shareholders. This process may offer tax benefits and is often used where it is preferable to have an independent person review and finalise the company’s affairs.