Liquidation is defined as the process by which a company’s affairs are wound up and its existence brought to an end. The process has a long history, developing alongside the law associated with the separate legal existence of companies.
The process is usually invoked when:
- a company has achieved its purpose and the shareholders wish to regain their capital; or
- the company has become insolvent and creditors wish to recover their debts from the company’s remaining assets.
There are three (3) types of liquidations:
1. Court Liquidation
Once an application to wind up a company has been made through the Court, the applicant may seek the appointment of a Provisional Liquidator to protect the company’s assets until the winding up order is made. Another Option available to directors is the appointment of a voluntary administrator in circumstances where the directors and/or shareholders with to make an amicable proposal to the creditors and either sell or keep trading the business of the company.
2. Members’ Voluntary Liquidation
Liquidations (MVL’S) enable a solvent company to be wound up with a distribution of remaining assets to its shareholders. This can be part of a tax effective process for business owners seeking retirement where there are no sale or succession arrangements in place.
3. Creditors’ Voluntary Liquidation (CVL)
Amendments to the corporation act in 2007 have speeded up the CVL process so that director and shareholder meetings appointing a liquidator can be held on the same day. A subsequent creditors meeting follows which satisfies the appointment of the liquidator. The business usually ceases trading at the initial appointment date. The Australian Taxation Office recognises company liquidation as a means of remission of a liability on a director’s penalty. Previously voluntary administration was notice provided to the appointment within the 2 days notice period.