Company Liquidation
Company liquidation in Australia is the formal process of winding up a company’s affairs, selling its assets, and dissolving the entity, primarily governed by the Corporations Act 2001 (Cth). Liquidation occurs when a company is insolvent—unable to pay its debts as they fall due—or when solvent members decide to close the business.
Primary Legislation
Corporations Act 2001 (Cth): The core legislation governing company insolvency, types of liquidation, and the duties of directors and liquidators.
Insolvency Practice Schedule (Corporations) 2016 (Schedule 2 of the Act): Sets out rules for the registration, discipline, and conduct of liquidators.
Insolvency Practice Rules (Corporations) 2016: Provides specific procedures for conducting meetings, reporting, and investigations.
Types of Liquidation
Creditors’ Voluntary Liquidation (CVL): Initiated by shareholders when the company is insolvent, often following a failed voluntary administration. The creditors appoint the liquidator.
Court-Ordered (Compulsory) Liquidation: Initiated by a court order, usually following an application by a creditor (e.g., ATO) who is owed at least $2,000.
Simplified Liquidation Process: A streamlined process for small businesses (liabilities under $1 million) introduced on January 1, 2021, designed to speed up insolvent windings up.
Members’ Voluntary Liquidation (MVL): A process for solvent companies aiming to wind up affairs, requiring a declaration of solvency by directors.
Key Legal Responsibilities & Effects
Role of the Liquidator: An independent, registered liquidator takes full control from directors to collect and sell assets, investigate company failures, and pay creditors.
Director Liability (Section 588G): Directors must prevent insolvent trading. If they fail, they may be personally liable for debts incurred during insolvency, face civil/criminal penalties, or face disqualification.
Employee Entitlements: Employees receive priority payment from the sale of assets, often assisted by the Fair Entitlements Guarantee (FEG) scheme.
Voidable Transactions: Liquidators can recover money from certain transactions made before liquidation, such as unfair preferences or uncommercial transactions.
Deregistration: The company is formally dissolved by ASIC at the end of the process.
Recent Regulatory Changes
Small Business Reforms (2021): Introduced simplified liquidation for small companies and new debt-restructuring processes to allow faster cheaper alternatives to traditional, complex liquidation.
Illegal Phoenix Activity: Increased enforcement by ASIC to prevent directors from transferring assets to a new entity while abandoning debts in the old company.