• What is Liquidation? 
  • Purpose of Liquidation 
  • Types of Liquidation 
  • Key Steps in the Liquidation Process 
  • Impact of Liquidation on Different Parties
  • If a Liquidator seeks to make a claim against you
  • Order of Payment in Liquidation 
  • Cessation of Trading 
  • Duration of the Liquidation Process 
  • Conclusion of the Liquidation Process 
  • Costs Associated with Liquidation 

What is Liquidation? 

In Australia, liquidation refers to the procedure for wrapping up a company’s operations, especially when it faces insolvency or is on the verge of it. This procedure entails disposing of the company’s assets to pay off obligations to creditors, employees, and shareholders. The initiation of this process can come from the Court, the company’s members, or its creditors, and it is conducted by a Registered Liquidator. 

Following the sale of assets and settlement of debts, the company is removed from the Australian Securities and Investments Commission (ASIC) registry, which marks the formal conclusion of its existence. 

Purpose of Liquidation 

The process of liquidating an insolvent company is designed to place the control of the company into the hands of an independent, registered liquidator. This step is crucial for orderly and equitable dissolution of the companys affairs, primarily for the advantage of its creditors. 

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Types of Liquidation 

There are several types of liquidation, each with its specific context and procedures. These types are primarily categorised into voluntary and involuntary liquidation: 

Voluntary Liquidation

Voluntary liquidation occurs through a deliberate decision by the company’s leadership. This decision to liquidate is made by the company officers, who conduct a vote to dissolve the company. This process can manifest in two forms, depending on the company’s financial health: 

  • Member’s Voluntary Liquidations (MVL) 

This applies to companies that are solvent, meaning they have the ability to pay their debts. The primary aim here is for the company to gracefully conclude its operations, settle its affairs, return capital to the shareholders, and possibly take advantage of certain tax benefits or simplify corporate structures without the burden of excessive administrative costs. 

  • Creditors Voluntary Liquidations (CVL) 

This route is chosen by companies facing insolvency, where the financial obligations exceed the available resources, and the company cannot continue its operations. The process is initiated by the company’s directors and shareholders, aiming to liquidate assets and distribute the proceeds among creditors, thereby discharging the company’s debts as much as possible. 

Involuntary Liquidation

Involuntary liquidation is not a choice made by the company but is instead imposed upon it, typically through external pressures. The most common scenario leading to involuntary liquidation involves: 

Court Liquidation 

This process is initiated when a creditor, or sometimes multiple creditors, apply to the court for the company to be liquidated due to unpaid debts. The court then appoints a liquidator to oversee the dissolution of the company. The objective here is to ensure that the assets of the company are fairly and equitably distributed among its creditors, after which the company is formally brought to an end. 

Both voluntary and involuntary liquidations are mechanisms designed to orderly wind up a company’s operations, either as a strategic decision by its own members in the case of voluntary liquidation or as a forced outcome due to external pressures in involuntary liquidation.  

The key difference lies in the initiation of the process, voluntary liquidation arises from internal company decisions, while involuntary liquidation is a result of legal action taken by creditors or, in some cases, regulatory bodies. 

Key Steps in the Liquidation Process 

The liquidation process involves a structured approach to winding up a companys affairs, overseen by a liquidator. The specifics of this process can slightly vary depending on the type of liquidation: Creditors Voluntary Liquidation, Members Voluntary Liquidation, or Court Liquidation. 

Initial Documentation and Notifications

The process begins with the liquidator filing necessary appointment documents to formalise their role. Following this, various government agencies, including the Australian Tax Office and state government revenue offices, are informed about the liquidators appointment to ensure legal compliance and coordination. 

Director Cooperation

Directors of the company are required to fill out a detailed questionnaire and hand over all the companys financial records and books to the liquidator. This step is crucial for the liquidator to gain a complete understanding of the companys financial situation. 

Asset Liquidation

The liquidator takes charge of the companys assets, which involves collecting and selling them. The proceeds from the sale are used to cover the costs of the liquidation process and repay creditors. 

Reporting to Creditors

The liquidator compiles a report for the creditors, detailing the assets that were sold, the total funds collected, and the proposed distribution plan among creditors. 

Investigation and Recovery

An investigation into the companys books and records is conducted to identify any discrepancies or hidden assets. If assets that were not disclosed or improperly handled are discovered, the liquidator may initiate recovery actions to retrieve these assets for the benefit of the creditors. 

Distribution of Assets

If there are funds available after selling the companys assets and covering the liquidation costs, the liquidator will distribute a dividend among the creditors as per the legal priority of claims. 


The process concludes with the liquidator preparing a final report for the creditors, submitting any required documents to relevant authorities, and requesting the deregistration of the company. This step officially ends the companys legal existence and concludes the liquidation process. 


Impact of Liquidation on Different Parties 

Liquidation, the process of winding up a companys affairs, has varied implications for the different stakeholders involved. This process is initiated either due to insolvency or as a strategic move for solvent companies. Below are the effects of liquidation on various parties: 

Directors of the Company

For directors, the impact of their company entering liquidation is relatively moderate in terms of personal financial standing. Credit Reporting Agencies track and record the names of directors from companies that undergo liquidation, which might slightly affect a director’s credit rating.  

However, it’s crucial to differentiate between personal bankruptcy and a company’s liquidation; the former severely damages one’s credit score, while the latter, being a less serious mark, acknowledges that the company’s debts do not automatically transfer to the directors due to the legal separation between a company and its directors. 

Directors no longer have power once a liquidator is appointed, and instead must assist the liquidator in performing their duties. Where a director is suspected of wrongdoing, the liquidator can apply to the court to publicly examine a director under oath.


Shareholders face no direct repercussions from the liquidation beyond the loss of their investment. The value of their shares becomes null, representing their primary loss as the company ceases operations and dissolves. 


Employees are significantly affected as they lose their jobs. Nonetheless, this situation could lead to a silver lining if the company was unable to fulfil its financial obligations to its staff. In such cases, the government may intervene through the Fair Entitlements Guarantee scheme, assisting employees to recover: 

  • Up to 13 weeks of unpaid wages 
  • Unpaid annual and long service leave 
  • Up to five weeks of payment in lieu of notice 
  • Redundancy payments, with a maximum of four weeks per year of service 

Employees also become priority creditors for any other outstanding entitlements in the liquidation process. 


Creditors, including individuals or entities owed money by the liquidating company, are directly affected. They receive communication from the liquidator at the commencement of the process, along with periodic reports detailing the proceedings and the prospects of recovering their owed funds. Unfortunately, in most liquidation scenarios, creditors recover a fraction of what is owed, often ranging between 0 to 10 percent of the total debt. 

Where a creditors’ meeting is called, the liquidator will usually update creditors on progress, gauge opinion on certain matters or seek fee approvals. ASIC may also attend these meetings, which may be more likely if there is evidence of some wrongdoing.

If a creditor wishes to vote at a creditors’ meeting, they will need to lodge a ‘proof of debt’ form with the liquidator. This is a prescribed form that sets out the details of the claim against the company including how the debt arose and the amount being claimed. Documentary evidence should also be provided to substantiate the debt claimed.

This last point is important as the chairperson of the meeting can accept or reject a claim for voting purposes. They may decide a creditor does not have a valid claim and prevent them from voting. While this does not prevent a creditor from later receiving payment on a genuine debt, lack of documentary evidence may also hinder the claim.

In the situation where the liquidator does not call a meeting, proposals to creditors can instead be put in writing and voted on this way. This will be the method used in a simplified liquidation.

Where funds are available for distribution to unsecured creditors, they need to prove their debts. The liquidator must give at least 14 days’ notice of the deadline for proving a debt.

The liquidator acknowledge receipt of a claim, and whether any further information is required.

If for some reason the liquidator rejects a claim, they must notify the claimant within seven days and give you the reasons for doing so. The claimant has an opportunity to appeal the decision, following the required steps, or seek legal advice. Failure to do so by the deadline will mean the liquidator’s decision is final.

A creditor’s rights extend beyond just questioning the liquidator about the calculation of a claim or timing of payment. An creditor also has the right to:

  • request the liquidator to provide information
  • inspect certain books and records
  • update the liquidator with information you have that is relevant to the liquidation
  • potentially appoint a reviewing liquidator, or remove and replace the liquidator, and
  • lodge a complaint with ASIC or the court about the liquidator’s conduct.


Upon appointment, the liquidator essentially steps into the company’s shoes, taking over its operations. This role includes bearing personal liability for any new debts incurred during the liquidation process. Consequently, it is rare for companies to continue trading once liquidation has begun, due to this added responsibility on the liquidator. 

Each stakeholder faces distinct outcomes from a company’s liquidation, ranging from moderate impact on directors’ credit ratings, to the complete loss of investment for shareholders, employment for workers, and potential financial recovery for creditors. The liquidator plays a central role, orchestrating the process while assuming certain liabilities to conclude the company’s affairs. 

The liquidator is required to provide creditors with notice of their appointment within 10 business days in a creditors’ voluntary liquidation, or 20 business days in a court liquidation.

This initial information should also advise about creditors right to request information and reports, direct that a meeting of creditors be held, give directions to the liquidator, appoint a reviewing liquidator, and remove and replace the liquidator. The liquidator will also give a summary of the company’s affairs, estimated listing of creditors and an initial remuneration notice if they will seek fee approval.

The next step in the process requires the liquidator to send a report to creditors including:

  • a summary on what has happened to the company and its business
  • a statement of estimated assets and liabilities, and the chances of creditors receiving repayment of their debt
  • the liquidator’s anticipated next steps, including further inquiry or possible recovery action.

Depending on the liquidator’s findings, they may convene meetings with the creditors or seek to streamline the process and vote on issues without a meeting.

A liquidator may also seek to recover certain payments made by the company to specific creditors prior to the liquidation, known as “unfair preferences”. This can involve the liquidator looking back over the prior six months to the liquidation (or three months and where more than $30,000 is paid in a simplified liquidation) and reviewing payments where:

  • the company was insolvent when the payment was made or became insolvent due to making the payment
  • the amount received by the creditor was more than they would have received by way of distribution from the liquidation if the payment was set aside and they had to prove their debt instead.

If a Liquidator seeks to make a claim against you

Firstly, you should seek details from the liquidator on the payments they are claiming as an unfair preference and their reasoning and evidence to support their claim.

The most common defence to an unfair preference claim is the “good faith defence” – you became a party to the transaction in good faith, you had no reasonable grounds for suspecting that the company was insolvent, and you provided valuable consideration for the transaction. The Corporations Act provides other defences, such as how to deal with a running account in a continuous business relationship and the right to set off mutual dealings.

Where the issue is unresolved, you should seek legal advice prior to making payment to the liquidator.

Order of Payment in Liquidation 

The process of liquidation dictates a specific order in which parties are paid from the company’s assets. This hierarchy ensures a structured and fair distribution of available funds. 

  1. Secured Creditors: Initially, those holding security interests over the company’s assets, such as mortgages or charges, are the first to be paid. Their claims are directly tied to specific assets, giving them precedence in recovery. 
  2. Liquidation Costs: After settling secured creditors, the expenses incurred during the liquidation process itself, including fees for the liquidator’s services, are covered. 
  3. Priority Unsecured Creditors: This category mainly includes employees of the company. They are given priority among unsecured claims for certain entitlements, such as outstanding wages, leave payments, and redundancy compensations. 
  4. Unsecured Creditors: Lastly, unsecured creditors, who do not have collateral securing their claims, receive payment. This group includes a wide range of entities, from suppliers to utility providers, and they are paid from any remaining funds after settling higher priority claims. 

Cessation of Trading 

The cessation of company operations typically coincides with or occurs just before the initiation of the liquidation process. Liquidators, due to their personal liability for any new debts incurred post appointment, generally opt to halt trading activities immediately. This precaution minimises the risk of accumulating further liabilities that could complicate the liquidation process. 

Duration of the Liquidation Process 

The timeline for completing a liquidation varies significantly based on several factors, including the size of the company, the complexity of its assets, and the nature of its liabilities. A straightforward case involving a small company with minimal assets can conclude within six months.  

Conversely, complex cases, especially those requiring extensive asset liquidation or investigations into misconduct, might extend over several years. On average, the liquidation process can span from about 8 months to a year, with variations depending on the liquidator’s efficiency and the specific circumstances surrounding the company’s dissolution. 

Conclusion of the Liquidation Process 

The liquidation process is finalised when the appointed liquidator completes all necessary investigations regarding the company’s operations, financial dealings, or any other relevant matters.  

After these investigations, and once the liquidator has received clearance from regulatory bodies, they proceed to the final stage of the process. This involves applying for the company to be struck off the register, an action that leads to the company’s deregistration. The deregistration becomes official three months after the liquidator lodges their final return, marking the formal end of the company’s existence. 

Costs Associated with Liquidation 

The financial cost of liquidating a company is subject to variation, influenced by the specific details and complexity of the case at hand. Typically, an upfront payment is requested to cover the initial expenses of the liquidation process. This fee ensures that the minimum costs, such as filing fees, professional service charges, and any immediate disbursements, are adequately covered from the outset. However, if the company possesses assets of significant value, the need for an upfront payment may be waived, as the sale of these assets is expected to cover the costs incurred during the liquidation. 

In situations where the company itself cannot afford the liquidation fees, these costs can be sponsored by any external party willing to fund the process. This flexibility allows for the liquidation to proceed even if the company’s financial resources are insufficient to cover the expenses involved. 

This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.