When the assets of a business are liquidated, it means they are converted into cash. This situation spells the end for the business, as with stock, equipment, property and other non-cash assets sold, there is no means left to trade.
But liquidation is not necessarily the result of a failed business. It can also be a sign that a successful business has served its purpose and the owner, partners and/or shareholders have decided to move on.
Therefore liquidations can be divided into two categories: voluntary or involuntary.
Regardless of which category applies, there are two terms to be aware of: solvent and insolvent. A company that is insolvent does not have sufficient assets to pay its debts when they fall due, while a solvent business does.
Voluntary liquidations are instigated by the director(s) and shareholder(s) of a company and the type of voluntary liquidation that applies depends on whether the business is solvent or insolvent.
Members Voluntary Liquidation (MVL)
If a company is solvent, then a Members Voluntary Liquidation applies. This usually occurs when the director(s) and shareholder(s) decide that the company has served its purpose and want to convert its assets to cash for distribution among the shareholder(s).
Creditors Voluntary Liquidation (CVL)
When a company is insolvent, the director(s) and shareholder(s) may appoint a liquidator to deal with the creditors’ claims. The liquidator sells the business’s equipment, stock, plant and property, which are then used to pay creditors.
There are two types of Involuntary Liquidation, both of which are the result of a Winding Up Order issued by the Court. A creditor, shareholder, director and/or ASIC can apply for an Order.
Official (or Court) Liquidation
A creditor usually instigates an Official Liquidation: most are the result of the Taxation Office moving to recover outstanding taxes.
A Provisional Liquidation is unusual and is generally the result of a dispute between director(s) or shareholder(s). One or more of the parties will lodge an application for the Provisional Liquidation with the Court on the basis that the company’s assets are at risk.
The Order can generally be obtained within one day of filing the application and results in a Provisional Liquidator being appointed to safeguard the assets.