Alternatives to Company Liquidation

Alternatives to Liquidation

Company liquidation is often seen as the last resort for businesses facing insurmountable financial challenges. However, liquidation isn’t the only path available.

Before proceeding with the liquidation of a company, it’s crucial to explore alternatives to company liquidation that can potentially save the business, preserve jobs, and protect assets. JBC Corporate specialises in providing businesses with comprehensive strategies to prevent business liquidation and explore viable alternatives to liquidation.

What is the Company Liquidation?

The company liquidation process involves the orderly winding up of a company’s affairs, selling off assets, paying creditors, and ultimately dissolving the company. Liquidation can be initiated by the company itself (voluntary liquidation) or by creditors (compulsory liquidation). There are two main types of voluntary liquidation:

Members Voluntary Liquidation (MVL):

• This process is initiated by the company’s shareholders when the company is solvent but wishes to cease operations and distribute assets among members. It’s a formal way to close a business and is often used when the company has completed its purpose or is no longer needed. MVL ensures that the dissolution process is handled in an orderly manner.

Creditors Voluntary Liquidation (CVL):

• A CVL occurs when a company becomes insolvent and can no longer meet its debt obligations. The directors, with the shareholders’ consent, opt to liquidate the company to pay off creditors. This process allows creditors to recover as much as possible from the company’s remaining assets. However, it also terminates the company’s operations.

While liquidation may seem like the only option when faced with insolvency, it’s essential to consider alternatives to liquidation that can help avoid business assets liquidation and preserve the company’s potential for recovery.

Alternatives to Company Liquidation

Before deciding to liquidate, it’s vital to explore the following alternatives:

• Restructuring Instead of Liquidation: Liquidation and company restructuring are often viewed as opposing ends of a spectrum. Restructuring involves reorganising a company’s operations, finances, and management to improve performance and solvency. By addressing the root causes of financial distress, restructuring can be a powerful tool to avoid business liquidation and keep the company operational. This approach may include cost-cutting measures, debt refinancing, or selling non-core assets.

• Voluntary Administration: Voluntary administration is a process where an external administrator is appointed to manage the company’s affairs to restructure the business and pay off debts. This process provides a temporary shield from creditors while a plan is formulated. If successful, voluntary administration can lead to a Deed of Company Arrangement (DOCA), allowing the company to continue trading while paying off its debts over time.

• Safe Harbour Provisions: Under Australia’s Safe Harbour provisions, directors can avoid personal liability for insolvent trading if they are actively working to restructure the company and prevent liquidation. By engaging in Safe Harbour, directors can pursue restructuring strategies without the immediate threat of liquidation, providing breathing room to implement a turnaround plan.

• Debt Restructuring and Negotiation: Engaging in debt restructuring and negotiation with creditors can provide a lifeline for companies facing liquidation. By renegotiating the terms of debt, extending payment deadlines, or even reducing the debt amount, companies can gain the financial flexibility needed to avoid liquidation. This process often involves working closely with professional advisors who can negotiate on the company’s behalf.

The Implications of Liquidation

Liquidation has significant implications for all stakeholders involved. For shareholders, it means the loss of investment; for employees, it results in job loss; and for creditors, it often leads to partial or no recovery of owed debts. The company’s assets are also sold off, and the business is dissolved. Understanding these implications is crucial before proceeding with liquidation, making it essential to explore alternatives to liquidation that may offer more favourable outcomes.