What is Liquidation?
Liquidation is the formal process of closing a company and redistributing its assets.
When a business is liquidated, its operations cease, assets are sold, and proceeds are distributed to creditors and shareholders according to legal priority. This process can be voluntary or compulsory, depending on the circumstances.
Types of Liquidation
Understanding the different liquidation processes
Compulsory Liquidation
Court-Ordered Process
Initiated when a company cannot pay its debts. A court order mandates the appointment of a liquidator to manage the process.
Who can petition:
- Company creditors
- Company shareholders
- The company itself
- Government authorities
Common grounds:
- Unable to pay debts
- Business ceased operations
- Just and equitable reasons
Voluntary Liquidation
Shareholder-Initiated Process
Members of the company decide to wind up operations voluntarily, requiring 75% shareholder approval.
Two types:
Members' Voluntary Liquidation (MVL):
Company is solvent and can pay all debts. Directors make a statutory declaration of solvency.
Creditors' Voluntary Liquidation (CVL):
Company is insolvent. Creditors' meeting is called to oversee the process and protect their interests.
The Liquidation Process
Step-by-step overview
Petition or Resolution
Court petition filed (compulsory) or shareholders pass resolution (voluntary)
Liquidator Appointment
Official receiver or liquidator is appointed to manage the process
Asset Collection
Liquidator identifies and collects all company assets and property
Claims Assessment
All creditor claims are verified and validated
Asset Distribution
Assets sold and proceeds distributed according to legal priority
Company Dissolution
Final reports filed and company is officially dissolved
Payment Priority Order
Understanding who gets paid first
| Priority | Claimant Type | Description |
|---|---|---|
| 1st | Liquidator's Costs | Fees for managing the liquidation process |
| 2nd | Fixed Charge Creditors | Secured lenders with fixed charges on specific assets |
| 3rd | Administrator Costs | If administrator was previously appointed |
| 4th | Employee Wages | Outstanding salaries and superannuation |
| 5th | Worker Injuries | Compensation for workplace injuries |
| 6th | Employee Leave | Accrued vacation and sick leave |
| 7th | Retrenchment Payments | Severance payments to employees |
| 8th | Floating Charge Creditors | Secured lenders with floating charges |
| 9th | Unsecured Creditors | Trade creditors and other unsecured debts |
| 10th | Shareholders | Distribution of remaining assets (if any) |
75%
Shareholder approval required for voluntary liquidation
100%
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