What is a liquidation?

A liquidation is the legal process that occurs when a company is formally wound up. Generally, companies enter liquidation because they’ve become insolvent (although a solvent company may be liquidated if the directors decide, for whatever reason, that it should be closed).

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 to trade because they risk personal liability for unpaid trading debts during their appointment.

There are two types of insolvent liquidation:

  • Creditors’ voluntary liquidation (most common)
  • Court liquidation

Creditors’ voluntary liquidations can be initiated in three ways:

  • Shareholders put the company straight into liquidation
  • Creditors put the company into liquidation after it has been in voluntary administration
  • Creditors put the company into liquidation after a terminated deed of company arrangement

Court liquidations occur in response to a winding-up application filed with the court. Winding-up applications may be filed by:

  • Creditors (most common)
  • Directors
  • Shareholders
  • ASIC

During an insolvent liquidation, the liquidator will:

  • Provide reports to creditors
  • Establish the company’s financial position
  • Sell its assets
  • Investigate why the company failed
  • Investigate if any offences were committed by directors or staff
  • Make payments to creditors