For all company’s operating in our unstable modern economic landscape, it is vital to understand the differences between liquidation, administration and bankruptcy.
We’ve created this article to help guide you through each of these commonly misunderstood concepts so you can better comprehend what each one entails – before making any financial decisions.
Let’s start by examining what it means for a company to be placed into administration.
When the directors of a company come to the conclusion that they are insolvent, or will likely become insolvent in the near future, they will be considered to have gone into administration.
What happens in this case, is that an external representative of the company – a registered liquidator – will be put in place to manage it. The duration of the administration depends on how long the company needs to determine their financial future.
Administrators can be appointed by the following representatives:
- Secured creditors
- Provisional liquidators; or,
- Company directors
The responsibilities of the administrator include:
- Reporting offences to ASIC,
- Required to take control of the financial assets of the company
- Inquiries into the affairs of the company
- Organisation of creditor meetings to determine whether or not the company should be liquidated; and,
- Communication with directors to ensure a Deed of Company Arrangement is created
After the company has been placed into administration, the creditors will have three option to consider. They can either accept the Deed of Company Arrangement proposal (and control can be given back to the directors), in which case the company can continue operating – or they can be liquidated.
Generally, there are two types of liquidation – voluntary and involuntary. With both variations, assets are sold and the money is used for repaying creditors to pay off as much of the outstanding debt as possible.
After this first step, it is followed by a dissolution of the company’s assets and finally the company is closed. What this means is that regardless of whether the company is voluntarily or involuntarily liquidated – the result is generally the same (the company no longer exists after liquidation).
One important aspect of liquidation to remember is that it only applies to companies. If you’re an individual seeking liquidation, you may want to read on to learn about bankruptcy.
When you become bankrupt you’re declaring that you cannot pay any of your debts. Debt collectors will not only stop contacting you, but you will be considered bankrupt for a duration of three years – and should only be thought of as a last resort.
There are generally two ways in which you can be considered bankrupt. The first is when you voluntarily file for bankruptcy yourself. The second involves your creditors – the people or companies you owe money to – who will file for bankruptcy on your behalf.
While you may be able to keep some assets, such as personal belongings, your income is likely to become reduced over a certain period of time depending on how much money you owe.
Bankruptcy and liquidation, even if they seem like the only option, should always be considered a last resort. It is advisable to seek as much advice as you can before making such a decision, and take the time to understand what options you have available.
Fortunately, there are free financial counselling services around Australia to help determine what option is right for you.