Business Liquidation: What It Is and Why It Happens

It’s always good news when a big idea comes to life and innovative businesses are rewarded for their hard work. However, keeping the momentum going isn’t easy. In fact, 60% of small businesses in Australia close their doors within their first three years of operation.

No one wants their company to fail, but when the worst-case scenario happens, it’s helpful to have a fallback strategy in place to ensure you can exit safely without any further legal or financial issues. One of these strategies is known as liquidation.

In this guide, we’ll explain why liquidation happens, how it works, and what you can do to avoid it.

• What is liquidation?
• Liquidation vs. administration vs. bankruptcy
• Why does liquidation happen?
• Types of company liquidation in Australia
• The liquidation process step by step
• Creditor payment hierarchy
• What are the consequences of liquidation?
• Best practices for avoiding liquidation
• Help your bottom line with Salesforce
• FAQs

Let’s start by clearing up the definition. Liquidation is the process of stabilising a business’s finances before it stops trading due to an inability to meet financial obligations. It involves selling assets, both tangible (such as hardware and inventory) and intangible (such as patents and customer lists), to help the business pay its debts to creditors and shareholders. It’s usually the final step before a business closes for good.

At the start of the liquidation process, the company appoints a liquidator to oversee all aspects of the debt settlement. At this point, the business directors will no longer be in control of their company’s finances, leaving the liquidator to handle all remaining affairs.

While liquidation can be an uncomfortable process for the business’s owners, it’s also a valuable safeguard. Inability to settle debt could lead to costly legal issues and disputes. This makes liquidation a necessary proactive measure to prevent bigger problems down the line.

The most important thing to understand is that the liquidation process involves selling off a company’s assets to pay debts. This means it usually doesn’t leave the business owner liable as an individual. Once the debts are settled, the company closes down for good.

Bankruptcy, on the other hand, occurs when an individual can’t pay their debts (meaning that they’re declared bankrupt). It only applies to personal debt or the debt of a sole trader, not the debt attached to a company, which is a separate legal entity.

Administration involves an external administrator taking control of the company temporarily to assess options and decide on its future. Often the administrator will try to restructure or ‘save’ the business before they resort to liquidating assets. This is often a precursor to liquidation.

Liquidation is usually an enforced action rather than a voluntary one. It often occurs when a business is unable to meet its financial obligations due to internal challenges or, in some cases, external issues.

For example, events like the 2020 pandemic show how even well-run companies can face sudden disruptions that reduce revenue and strain cash flow.

That said, companies will sometimes make the strategic choice to liquidate voluntarily. Let’s examine the three main reasons for liquidation in more detail.

This is the most common reason for liquidation. Despite their best efforts, sometimes companies find themselves in a position where they can no longer pay off debts. This means they need to sell off assets and shut their doors for good. Common causes of insolvent liquidation include:

• Poor financial management
• Operational and strategic issues
• External factors

Some businesses may be in a position where a court forces them into liquidation because unpaid creditors have taken action. With this type of liquidation, the underlying reasons are a little more wide-ranging than financial issues. Common triggers for the court liquidation process include:

• A violation of the law or a clear lack of compliance in certain areas
• A failure to maintain adequate records
• A reasonable belief of fraud or serious mismanagement

In essence, a court can order liquidation if there’s sufficient belief that the business isn’t operating in a legal manner.

Sometimes, a business owner may opt for voluntary liquidation. While this can be linked to financial issues, it could simply be the case that the owner chooses to liquidate even when the business isn’t insolvent. Some reasons might include:

• The owner is retiring
• The owner hasn’t been able to find a suitable successor
• The market outlook becomes unfavourable
• The business leaders make the strategic decision to take the business out on a high note

As mentioned, liquidation can happen for many reasons, and each reason results in a different type of liquidation as defined by Australian law. Let’s take a look.

Creditors’ voluntary liquidations occur when companies are no longer able to pay their debts. In this case, the company director and shareholders appoint a liquidator to settle outstanding debts and disagreements. This is the most common type of liquidation and the standard procedure for insolvent Australian companies.

In this case, the company is still solvent (able to pay off debts), but the director of the company or a major shareholder wants to exit the business, often due to retirement or other interests.

This requires all members to vote in favour of liquidation. Once the vote passes, the shareholders will appoint a liquidator to handle the dissolution. Dissolved assets will then be redistributed to remaining company members (unless the entire business is being dissolved).

Court liquidations happen when creditors or lenders issue a statutory demand to the courts, requiring that a company pay its debts. If the company can’t pay, the court can intervene and begin an involuntary liquidation. A liquidator is then appointed to sell the assets and settle the debts.

In this situation, the court appoints a provisional liquidator to manage assets before the company reaches a final decision. This usually occurs when there are complex ongoing disputes within the business.

In this scenario, the company only liquidates a portion of its assets to pay debts. The company then continues to trade as normal. If the company is able to restrategise successfully and maintain its remaining financial obligations, it may be able to avoid full liquidation in this instance.

Now that we’ve built up an understanding of what liquidation is, let’s take a closer look at how it works in Australia. These steps will largely be standardised across all industries and sectors. And in the case of a partial liquidation, not all steps are required in full.

First, there’s the decision to liquidate. As discussed, this can either be a necessity (such as when a business becomes insolvent) or a voluntary decision. In the latter case, the business will usually need to hold a vote with shareholders to decide whether liquidating is the right choice.

Once the company has decided to liquidate, an independent professional liquidator will be appointed. This is usually a corporate insolvency practitioner registered with the Australian Securities and Investments Commission (ASIC) .

The liquidator will take control of the company’s affairs and manage the liquidation of the assets from start to finish.

At this point, the right people need to be notified of the company’s desire to liquidate. This is broken down into two parts:

• Formal notice: The liquidator will publish a notice on ASIC Public Notices , a public listing that anyone can browse.
• Creditor notice: The liquidator will then notify all creditors in writing about the intent to liquidate, as well as what rights they have and how to claim unpaid debts.

Additionally, creditors can also request to hold a meeting to decide whether they approve the liquidator’s proposed process or whether they want to appoint a replacement.

The liquidation process is now officially underway. The liquidator will identify all of the relevant assets and sell them in a reasonable, viable way to generate cash. These assets could include everything from buildings and equipment to intellectual property.

Additional assets that can be used to satisfy creditors are digital assets, such as cryptocurrency. The liquidator can take control of crypto assets by securing the private keys and selling these to relevant purchasers in much the same way they would sell any other asset.

Along the way, the liquidator will also send progress reports to creditors to inform them of the current state of affairs.

As they sell the assets, the liquidator will also investigate the company’s financial dealings more closely. This will help them discover things such as:

• Unrecorded assets or liabilities, such as missing inventory or unpaid taxes
• Inappropriate transactions, such as preferential payments to specific creditors
• Company director misconduct, including any actions taken to avoid paying creditors
• Criminal offences, such as fraud or insolvent company trading

A thorough investigation improves the chances of a fair liquidation, and it helps the liquidator decide whether they need to take any further legal action.

By this stage, the assets will have been sold, and the liquidator can begin paying out. This process involves the creditors proving their debts and the liquidator distributing the cash accordingly.

Following a review, the liquidator will complete the transactions according to a hierarchy or order of priority: secured creditors first, then employees and unsecured creditors.

With everything complete, the liquidator will apply to the ASIC to dissolve and deregister the company.

Let’s dive deeper into the priority list when distributing payments to creditors. In an ideal world, all parties would receive precisely what they’re due, and there would be no need for prioritisation. However, liquidation often isn’t as clean-cut as this.

In general, the order of priority that a liquidator will consider is as follows:

1. Liquidation costs: The first priority is the costs of the liquidation process itself. This accounts for legal, administrative and accountancy services.
2. Secured creditors: Secured creditors come next. These creditors have registered interest in a company’s assets (meaning they have collateral to back up their claims), so they take priority over other creditors. Banks are usually the most obvious example of a secured creditor.
3. Priority unsecured creditors: This category includes employees who are entitled to wages and superannuation under the Fair Entitlements Guarantee (FEG).
4. Unsecured creditors: Next come the creditors who don’t have secured interests in the business, such as suppliers and contractors.
5. Shareholders: Finally, those with a share of the business ownership are the last to be paid and will only receive payments once the rest of the creditors’ claims against the company are finalised and settled.

This process keeps everything as fair as possible and makes sure every party is compensated in a standardised manner.

There’s no glossing over the fact that the liquidation process (particularly liquidations that are involuntary) is a difficult period for everyone involved in a business. And while some individuals and parties are affected worse than others, each will have their own areas of difficulty to deal with.

Let’s take a look at the consequences for everyone associated with a company in liquidation.

For the company as an entire entity, the most obvious consequence is that it ceases to exist entirely. There’s rarely a chance of a fresh start or do-over once the liquidators start their work. It simply closes its doors for good (in the case of insolvency).

Other notable consequences include:

• An immediate halting of trade once the liquidation process begins
• Asset stripping to pay creditors, with no consideration given to preferences
• Contract termination with contractors and suppliers
• A halt to legal actions unless severe mismanagement is discovered

As the people ultimately responsible for the fate of a company, directors are the individuals who will often feel the brunt of liquidation most acutely. Even in instances of voluntary liquidation, they can often feel guilty about employees losing their jobs.

For most typical cases of liquidation, some of the other consequences for directors include:

• A loss of control over the company when the liquidator takes over
• Stringent cooperation with the liquidator, likely involving handing over records and information about the business’s finances and operational failures
• A duty to disclose all assets, including things such as private keys for cryptocurrency wallets
• Additional legal consequences if the liquidator discovers fraudulent or serious mismanagement during the process
• Potential personal liability for some debts
• A potential ban or disqualification from acting as a director at subsequent companies

For employees, the consequences of liquidation are clear. If the company goes under, they lose their jobs, as well as the potential benefits that come with it. This can cause stress for the employees as well as their families.

That said, employees have higher priority than unsecured creditors, and the liquidator will make every effort to ensure they’re looked after. They’re usually entitled to unpaid wages, unused vacation pay, and severance pay if the insolvency allows.

Secured creditors are generally given the highest priority. They’ll usually recover all or most of what they’re owed. If the liquidator isn’t able to raise sufficient funds, they can seize everything that was agreed upon as collateral (if an agreement was made). Certain preferential creditors, such as tax authorities, will be next in line.

Unsecured creditors, such as suppliers or landlords, will often have to accept limited returns of what they’re owed. There are also the shareholders, who are considered the lowest priority and often won’t receive any return on their investment if the company goes into liquidation.

Liquidation can be an uncomfortable prospect. But it’s important to remember that it’s considered to be a last resort and, in many cases, avoidable with the right approach. Here are six golden rules to help avoid liquidation and scale with confidence:

• Stress-test your cash flow: Don’t just track your income. Simulate worst-case scenarios, such as a client refusing to pay or something with far broader impacts, such as the pandemic, to see how your business would cope. With this, you can proactively spot vulnerabilities before they become dangerous.
• Adapt and innovate: Market conditions are changing all the time. Remain flexible and use data to your advantage to update your strategies, adjust pricing, and expand into new markets once you’re sure you have the stability.
• Act early: As soon as you sense a shift in market conditions or a major supplier suddenly withdraws support, act immediately to rectify things rather than kicking the can down the road.
• Focus on the customer: Your customers are your bloodline, and customer and client loyalty equate to a steady stream of revenue and growth. Listen to feedback and look for new ways that you can optimise your sales funnel to increase the customer lifetime value.
• Get the most out of technology: Digital tools can automate tedious tasks, enhance decision-making, and provide valuable customer insights. This will give you more time (and data) to deliver outstanding customer experiences.
• Communicate openly: Keep clear and honest communication with stakeholders, suppliers, employees, and investors. Transparency builds trust and helps uncover issues early, helping you build collaborative, proactive solutions before problems escalate.

While there is no perfect solution to avoid liquidation, these tips will help you build a stronger, more resilient business, reduce financial risk, and make smarter decisions that support growth.

Liquidation is a valuable way of making a financially safe exit when a company is no longer growing. That said, it’s also a last resort that’s often avoidable. By taking proactive steps to maintain financial resiliency, it’s possible to stay profitable and extend your business’s time in the sun.

Making the most of new technology is one of the best ways to improve your bottom line over both the short and long term. Agentforce Commerce can unify your customer data, streamline order management, and help you engage and convert customers across all stages of the sales pipeline.

Check out our demo to see how our solutions can help.