If you are a business in Australia facing insurmountable debt, you may be starting to hear the term “liquidation” thrown around. What does it mean in Australia? And how does it affect you as a director or creditor? As an insolvency firm, we know this can be complicated, and we are here to help.
Liquidation in Australia is the process of winding up a company’s affairs, selling its assets, and distributing the proceeds to creditors, employers and shareholders, before the company is dissolved and deregistered with ASIC.
Whether you’re a business owner exploring your options, a creditor trying to recover what you’re owed, or just trying to wrap your head around what liquidation is, as business recovery experts, we have the answers you’re looking for.
In this BRI Ferrier blog, we break down everything you need to know about liquidation in Australia, the different types of liquidation, the reasons why a business may consider liquidation, and what happens when a company goes into liquidation.
What is Liquidation?
Liquidation in Australia is the formal legal process of converting a company’s assets into cash, so that any debts can be repaid. Liquidation is typically conducted when a company is insolvent or near insolvency and is carried out by a Registered Liquidator.
The Court can initiate the liquidation process on behalf of the company’s members or its creditors. In the aftermath of the liquidation of its assets and the settlement of any debts, the company will be officially deregistered with ASIC.
How Does Liquidation Work?
The liquidation process generally follows six distinct steps. Immediately entering into liquidation, a licensed insolvency practitioner (a liquidator) will be appointed to take control of the company. From this point forward, the process unfolds as follows.
- Appointing a Liquidator: A company’s creditors can appoint a liquidator, or the courts can do so. Once the liquidator has been selected, they will take full control of the company’s affairs.
- Investigation of the Company’s Circumstances: Once a liquidator has taken over, they will investigate every aspect of the company’s financial history and look for any potential misconduct, voidable transactions, or uncommercial dealings that may have disadvantaged creditors prior to liquidation.
- Asset Identification & Distribution: All company assets will be evaluated and sold off. This can be a physical item, such as equipment or machinery, or intangible assets such as intellectual property or an outstanding debt owed to the company.
- Creditor Claims: Creditors are then invited to lodge formal proofs of debt. The liquidator then assesses each claim and ranks them in a legally defined priority under the Corporations Act 2001.
- Distribution of Funds: Recovered funds will be distributed to creditors in the following priority order. This goes as follows:
- Secured creditors (e.g. banks with a registered security interest)
- Liquidator’s fees and costs
- Employee entitlements (wages, superannuation, leave)
- Unsecured creditors
- Shareholders rarely receive anything
- Deregistration: Once all assets have been realised and funds distributed correctly, the liquidator lodges a final report with ASIC, and the company will be formally deregistered, ceasing to exist as a legal entity.
Types of Liquidation
In Australia, there are three main types of liquidation and understanding each of these options is crucial if your business is currently facing financial difficulties. Each of the three types of liquidation is triggered by different circumstances and initiated by different parties.
Voluntary Liquidation Australia
When a company is insolvent they will often enter voluntary liquidation. This is when a company pays all of its debts in full but decides to close the business. If a business has reached the end of its natural life or can no longer operate profitably, this process is sometimes entered into.
The key features of voluntary liquidation include:
- Only available to solvent companies.
- Directors must sign a Declaration of Solvency confirming that all debts can be paid within 12 months.
- Typically, this is used for retirement, restructuring, or tax-effective asset distribution.
- A smoother, more controlled process than an insolvent liquidation.
Creditors’ Voluntary Liquidation
This is the most common form of liquidation in Australia, and is a process that allows a company to distribute assets correctly to its creditors. The company winds up voluntarily once it realises it can no longer pay its debts. This form of liquidation puts the decision in the company’s hands rather than forcing it to do so by a court.
The key features of a creditors’ voluntary liquidation include:
- Initiated by the company’s directors and shareholders
- Creditors vote to appoint a liquidator at a meeting
- Allows directors to act proactively, which can reduce personal liability exposure
- Generally faster and less costly than court-ordered liquidation
The process will begin with the company’s creditors, with the cooperation of the directors and stakeholders.
Court-Ordered Liquidation
In Australia, this is also known as compulsory liquidation, and is most often initiated by a court order. The Federal Court, or a State Supreme Court, then appoints an official liquidator. The cooperation of the company director and stakeholders is expected during this process.
The key features of a court-ordered (compulsory) liquidation include:
- Typically triggered by an unpaid creditor who has issued a statutory demand
- The company has 21 days to comply with or dispute a statutory demand before winding-up proceedings can begin.
- Directors have no control over the process once the court order is made
- Often more costly and time-consuming than a voluntary liquidation
- ASIC may also apply for a winding-up order in cases of misconduct or public interest
Here is a quick comparison table so you can understand what each of the types of liquidation includes:
| Type of Liquidation | Solvent or Insolvent | Initiated By | Common Reason |
| Creditors’ Voluntary (CVL) | Insolvent | Directors & Shareholders | Can’t pay debts |
| Members’ Voluntary (MVL) | Solvent | Shareholders | Planned closure or restructure |
| Court-Ordered (Compulsory) | Usually Insolvent | Creditor or ASIC | Unpaid debts or misconduct |
Reasons for Liquidation
So, why may a business enter into liquidation? Well, there are a variety of reasons that an Australian company decides to wind up their affairs. Looking at the reasons below and determining whether they apply to your business can be the difference between saving your business and losing it.
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You Can No Longer Pay Debts – Insolvency
The most common reason a company in Australia will enter into liquidation is due to insolvency. If you continue to trade and incur further large amounts of debt, you can put your company into a truly unsalvageable condition.
In Australia, a company is considered insolvent under the Corporations Act 2001 if it cannot do the following:
- Overdue supplier invoices
- Unpaid tax obligations to the ATO
- Outstanding loan repayments
- Lease arrears or utility bills
For those in this position, voluntary liquidation is the best option.
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Protection From Further Debt
If you are a director for a company and your company becomes insolvent, then you can become personally liable for any debts that are incurred. Liquidating the company quickly ensures that you not only protect yourself but also all other directors, members and creditors.
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Failed Business Model or Trading Losses
Some businesses simply stop being viable. Sustained trading losses over time erode reserves, exhaust credit lines, and leave directors with no option but to wind up. This can be caused by:
- Shrinking market demand
- Increased competition
- Poor pricing strategies
- Rising operation costs that outpace revenue
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The Mental Toll is Too Much
If you are a director and find yourself consistently stressed, anxious, and depressed due to the volatility of the business world, especially while trading in a position of debt, liquidation may sometimes be the right choice. The freedom that can come from liquidation can be the start of a new chapter.
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Economic Conditions and External Shocks
Broader economic forces can push otherwise viable businesses into insolvency. Factors such as:
- Rising interest rates
- Inflation and cost-of-living pressures
- Supply chain disruptions
- Global recessions or pandemics
Each of the above circumstances can rapidly deteriorate trading conditions, leaving businesses exposed with little time to adapt.
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The Loss of a Major Client or Contract
In Australia, many small to medium-sized businesses often derive the majority of their revenue from one or two major clients. When a company loses a major client, especially if it’s sudden, this can trigger a catastrophic cash-flow crisis. What does this look like? Think of an inability to meet payroll, supplier obligations, or fixed overheads.
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A Failure to Seek Advice When it’s Needed
One of the many reasons a business may enter into liquidation is simply due to waiting too long to act. Directors who delay seeking insolvency advice often find their options dramatically reduced. Early intervention through restructuring, voluntary administration, or negotiation with creditors can sometimes avoid liquidation altogether.
What Warning Signs Should You Look Out For?
Your company may be heading towards insolvency if any of the following signs are starting to appear within your business.
- Consistently missing payroll or paying staff late
- Relying on new debt to pay old debt
- Receiving ATO overdue notices or Director Penalty Notices
- Being unable to obtain trade credit from suppliers
- Receiving a statutory demand from a creditor
- Avoiding calls from creditors or the bank
Liquidation vs Bankruptcy: What’s the Difference?
In Australia, bankruptcy and liquidation are often misunderstood and used interchangeably, even though they are legally distinct processes that apply to entirely different entities.
So what is the core distinction? Well, a company in Australia cannot go bankrupt; only an individual can. The opposite is also true: an individual cannot be liquidated, whereas a company can.
Another important distinction is the regulator in charge of the process: liquidation is registered with ASIC, while bankruptcy falls under the AFSA (Australian Financial Security Authority).
The table below clearly outlines each of the main differences between liquidation and bankruptcy:
| Liquidation | Bankruptcy | |
| Applies To | Companies | Individuals |
| Legislation | Corporations Act 2001 (Cth) | Bankruptcy Act 1966 (Cth) |
| Administered By | Liquidator | Trustee in Bankruptcy |
| Regulator | ASIC | AFSA (Australian Financial Security Authority) |
| Outcome | The company is deregistered | The individual is discharged after 3 years |
| Initiated By | Directors, shareholders, or creditors | Debtor or creditor |
| Impact On Trading | The company ceases to exist | An individual may continue working with restrictions |
| Public Record | ASIC register | National Personal Insolvency Index (NPII) |
| Reason For Entering | Due to personal insolvency | It can occur due to insolvency or be initiated voluntarily by solvent companies. |
What is the Impact of Liquidation on Shareholders and Employees?
As any good director knows, the backbone of a company is its employees, and ensuring they are looked after during insolvency is essential to maintain continuity and morale. Shareholders and employees are both significantly affected by liquidation. Understanding what your rights and entitlements are in a liquidation scenario is critical.
The Impact of Liquidation on Employees
Once a company decides to enter liquidation, its employees are typically made redundant and their employment contracts are terminated. Under the Corporations Act 2001, employees are classified as priority creditors, meaning entitlements such as unpaid wages, annual leave, long service leave, and redundancy pay are recoverable before unsecured creditors are paid. The Federal Government’s Fair Entitlements Guarantee (FEG) will cover unpaid wages, leave and redundancy up to a certain amount if the company has insufficient assets to cover these entitlements. This is different for superannuation, which has to be pursued separately through the ATO.
The Impact of Liquidation on Shareholders
Shareholders sit at the bottom of the creditor priority order in liquidation, which can put them in a reasonably precarious position. Shareholders are only entitled to funds remaining after all other creditors are paid in full. In many insolvent liquidations, shareholders receive nothing, as shares become essentially worthless. If you are a shareholder in a company that may be headed towards liquidation or insolvency, you should seek tax advice, as any capital losses on shares that are attained may be claimable against gains elsewhere in your portfolio.
Advantages and Disadvantages of Liquidation
A company going into liquidation is not a decision made lightly, as it usually marks the end of a long personal and financial journey. However, under the right circumstances, liquidation can be the most responsible and legally sound path forward.
So what are the advantages and disadvantages?
The Advantages of Liquidation:
- Formal End to Insolvency: Liquidation delivers a structured, legally recognised conclusion to a company’s affairs. Rather than allowing debts to accumulate indefinitely or leaving creditors in limbo, the process provides finality for directors, creditors, employees, and shareholders alike.
- Closure and Stress Release: For directors who have been dealing with the emotional weight of a struggling business, liquidation can provide genuine psychological relief, allowing them to focus on the future.
- Stops Creditor Legal Action: Once a liquidator is appointed, an automatic stay is placed on most legal proceedings against the company. This means creditors cannot continue, or commence, individual recovery actions, providing immediate relief from mounting legal pressure.
- New Horizons: Liquidation presents an opportunity for business owners and employees to explore new horizons, whether that is a brand-new career path or a new business.
The Disadvantages of Liquidation:
- Loss of Overall Control: Once you decide to liquidate, you relinquish all control of the company and hand it over to the liquidator. Going forward, as the director, you have to cooperate with the liquidator.
- Loss of Employment: Liquidation will result in employee layoffs. Depending on the size of the business and the availability of assets, workers may face delays in receiving their entitlements, and this can impact their livelihoods.
- Costly and Time-Consuming: The process of liquidation is not an immediate solution and, in fact, is both costly and can take months to years to complete.
- Not Always the Right Choice: Liquidation is not always the right choice, and there are other insolvency solutions available. Other options such as voluntary administration, a deed of company arrangement (DOCA), or informal restructuring could deliver better outcomes and preserve more value. Seeking professional advice ensures that you explore all options before committing to liquidation.
Why Choose BRI Ferrier?
If you are looking for a business insolvency in Sydney, choose BRI Ferrier. As trusted liquidation specialists, BRI Ferrier provides recovery, insolvency, forensic accounting and advisory services to businesses throughout NSW and Australia.
As the firm’s largest and longest-established office, BRI Ferrier Sydney has a wealth of in-house expertise to address our clients’ most difficult financial challenges.
Explore our financial solutions: Insolvency Sydney, Forensic Accounting Sydney, Business Advisory Sydney and Business Insolvency. Get to know the businesses we administer, how they progress and the news related to all our business matters.
With our various services, we serve businesses across Australia. BRI Ferrier specialises in recovery, personal insolvency, advisory, safe harbour, forensic accounting and small business restructuring, with offices in Melbourne, Perth, Cairns, Brisbane, Townsville and Auckland.
By partnering with our team at BRI Ferrier, you can focus on what you do best. Contact our insolvency firm team today.
