Voluntary or Forced Liquidation

I’ll begin by saying that Voluntary Liquidation is much better then forced. If your business goes into voluntary liquidation the liquidator is hand picked by you and he/she then works on your behalf to get the job done. But if forced by your creditors or the TAX MAN the liquidator is appointed by the courts and it could get ugly.

I will also say that I have experienced this first hand and by assisting clients through this process, and “Voluntary” is much better then “Forced”. Nobody wants to admit that they have failed but believe or not between 20-30 business per day in Australia will be put into some form of administration.

So lets puts some important points on the table.

Liquidation, also referred to as “winding up”, is the process by which a company’s assets are liquidated and the company closed, or deregistered.

There is one term that is crucial to understanding liquidation: “insolvent”. A company is solvent if it can pay its debts when they fall due and insolvent if it can’t. Now most small business owners just did a quick mental check to see if that statement rings true for their business. The financial state of your business is important because it determines what kind of liquidation the company will enter, as well as the types of investigations that a liquidator will undertake.

The role of the liquidator in an insolvent liquidation is essentially to collect, and deal with, the company’s assets, and, where possible, to make a distribution to the creditors, and only then to the owners/members. The liquidator also conducts investigations into the failure of the company, the conduct of its directors and, sometimes, the conduct of third parties, like creditors.

The liquidator will also check for insolvent trading.

What is insolvent trading?

Insolvent trading occurs when a director allows their company to incur debts at a time when it was insolvent. The liquidator may make a compensation claim against that director if those debts are left unpaid when the liquidation commences. The director may be held personally liable to compensate creditors for the amount of those unpaid debts incurred from the time the company became insolvent to the commencement date of the liquidation..

So what are some of the signs that your business could be trading insolvent?

• Continuing losses
• Liquidity ratio below 1

A business liquidity ratio is a comparison of its current assets and current liabilities. If the ratio is greater than 1, then there are more current or liquid assets than current or payable debts and an indication that the business should be able to pay debts from available assets.

• Overdue Commonwealth and State taxes
• Suppliers placing you on COD terms
• Dishonoured cheques
• Issuing of post-dated cheques
• Inability to produce timely and accurate financial information to display your company’s trading performance and financial position and make reliable forecasts.
• Solicitors’ letter, summons, judgments or warrants issued against your business.

If your business is displaying some or all of these symptoms then your need to contact a liquidator or your accountant sooner rather than later. Ignoring the situation could lead to forced liquidation and that is not the desired outcome. If you’re having trouble there’s no shame in asking for help.