Liquidation is the legal process by which a company is prepared for dissolution, involving cessation of its operations, realisation of its assets, payment of its debts, and distribution of any balance to its members. Liquidation occurs when a company is formally wound up, generally after becoming insolvent, although a solvent company may be liquidated if the relevant parties decide, for whatever reason, that it should be closed. Liquidation can therefore be voluntary or involuntary.
When an insolvent company enters liquidation, the winding-up process is overseen by an independent, qualified outsider known as the liquidator. In this scenario, the liquidator takes control of the company and aims to wind it up in such a way that the company’s creditors receive the maximum possible return. If there is a trading business, the liquidator almost always cease trading because they risk personal liability for unpaid trading debts during their appointment.
There are three ways a liquidation may be initiated:
- Creditors’ liquidation (most common) – where the company’s members elect to liquidate
- Court liquidation – where the Court orders the liquidation of the business
- Members’ liquidation – where the members (shareholders) elect to liquidate
There is no set timeframe for a liquidation. Most liquidations end about a year from the date of commencement, although some can take multiple years.
A liquidation effectively ends once the liquidator has dealt with all of the company’s assets and distributed all its money to the creditors.
However, there are still two formalities to be completed before the liquidation can officially end. First, the liquidator must provide ASIC with an end of administration return (which is a final account of receipts and payments). Second, ASIC must deregister the company, which occurs three months after the end of administration return is lodged.