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Think liquidation means bankruptcy or losing everything? We bust seven common liquidation myths and explain your options before closing an insolvent company.
When a business experiences financial distress, misinformation can make an already difficult situation even harder. Many directors delay seeking advice because they've heard myths about liquidation that simply aren't true. Unfortunately, waiting too long can reduce the options available and increase personal and financial risks.
The reality is that liquidation is only one of several formal insolvency solutions available to Australian businesses.
Speaking with a registered liquidator or restructuring specialist early doesn't mean you've decided to close your company - it simply helps you understand your options and your obligations as a director.
Liquidation is the formal process of winding up an insolvent company. A registered liquidator is appointed to take control of the company, realise its assets, investigate its financial affairs and distribute available funds to creditors in accordance with Australian law.
Importantly, company liquidation is separate from personal bankruptcy. In many cases, directors are not personally liable for company debts unless they have provided personal guarantees or breached their legal duties.
Learn more about our liquidation services >>
We debunk seven of the most common myths about company liquidation.
If my company is liquidated, I’ll go bankrupt
One of the biggest areas of confusion is the difference between liquidation and bankruptcy. Many company owners worry that the liquidation of a company will automatically lead to personal bankruptcy. Or at the very least, they’re unsure how much personal liability they have for the company’s debts.
It is important to keep in mind that liquidation and bankruptcy are separate legal matters. Just because your business is insolvent doesn’t mean you are also insolvent. A company is a separate legal entity from its directors. Liquidating a company does not automatically result in personal bankruptcy.
Whether or not liquidation leads to personal bankruptcy depends on factors such as:
- Liquidator claims of insolvent trading (representing unpaid creditor claims).
- Personal guarantees on business loans.
- Unpaid tax obligations that fall under the DPN regime.
Even if these apply to you, there are often ways to manage these debts that don’t require declaring bankruptcy. However, it’s advisable to seek professional advice from a registered liquidator early. The longer you delay advice about voluntary liquidation out of fear for personal liability, the more likely you are to place yourself at risk of it.
Speaking to a registered liquidator means I've already decided to liquidate
Many directors avoid seeking professional advice because they believe the process is irreversible once they contact an insolvency practitioner.
This simply isn't true.
An initial consultation is designed to assess your financial position and explain the options available. Depending on your circumstances, liquidation may not even be the recommended outcome. At RSM, talking to an adviser is also completely confidential with no obligation to move forward. The goal is to assess your situation, understand potential risks, and help you make an informed decision.
Early advice can identify opportunities to restructure the business, negotiate with creditors or implement strategies that may allow the business to continue operating. Talking to an adviser about your insolvency concerns doesn’t set anything in stone. In fact, it’s one of the best steps to explore options that may not include liquidation.
Rest assured that many directors reveal poor business practices during these discussions, and our role is not to judge you. It is only to listen and share our initial thoughts on what you should consider moving forward. If you choose not to engage us in any capacity, including as a liquidator, because you’ve decided to continue trading, that’s up to you. Remember that it’s just a conversation, not a commitment.
Getting advice costs money I don’t have
Many business owners delay seeking help because they are concerned about the cost.
While we can’t speak for other firms, RSM’s initial consultations are always free. We do this because we first need to understand your challenges and whether or not we can help your business. If we can, we’ll explain how you can decide where to go from there. We like to think all our clients see our services as an investment, rather than an expense. This is because we always aim to provide a strong return, either through:
- Helping your business get back on track.
- Negotiating debt amounts with creditors.
- Having your liquidation managed by someone you trust.
An adviser can’t do anything anyway
Many directors assume an adviser’s sole purpose is to dismantle their business. In reality, an adviser can help you explore alternatives such as:
- Voluntary administration
- Declaring safe harbour.
- Restructuring the business.
- Securing a refinance.
Every business is different, and the most appropriate solution depends on factors such as cash flow, creditor support, business viability and future trading prospects. You should know that safe harbour provisions only apply if specific strict criteria are met, including engaging with an insolvency practitioner.
Your adviser may also have a strong network of financiers and other professionals who can assist where similar options have failed.
Everyone will know I'm speaking with an insolvency practitioner
Many directors worry that seeking insolvency advice will immediately become public knowledge. Discussing insolvency with an insolvency practitioner is a very sensitive matter. It is fair to be concerned that word could get out and creditors and customers could start questioning your business's viability.
Initial discussions with a registered liquidator or restructuring adviser are confidential. Simply seeking advice does not trigger a public announcement or place your company into liquidation. You should also know that even if you operate under safe harbour, your situation will remain private and doesn’t need to be disclosed publicly.
If we find that an unprofitable part of your business needs to be closed, we can take steps to deal with it separately so public confidence in your core business is maintained.
Employees will suffer
Business owners often worry that liquidation will leave employees without their entitlements. In reality, special protections exist to ensure employees receive what they are legally owed.
Unpaid wages and other entitlements take priority during liquidation, and the government’s Fair Entitlements Guarantee scheme acts as a safety net. Even if the company's assets fall short, the scheme will generally cover all outstanding obligations (excluding compulsory employer superannuation payments).
Especially if your employees have become concerned about your business’s financial position, taking steps to resolve the uncertainty can provide them with much-needed relief.
You can no longer be a director after liquidation
Delaying action is often the greatest risk directors face.
Some directors worry that appointing a liquidator means they are permanently disqualified from managing another company. The short answer is no – placing a company into liquidation does not automatically lead to disqualification.
In instances of repeated corporate collapses, the Australian Securities and Investments Commission (ASIC) can disqualify you after a thorough review. In general circumstances, though, liquidation itself will not affect your ability to be a company director of another business now or in the future.
Do not let myths hold you back
When directors assume that speaking with an insolvency practitioner means their company will be deemed unsalvageable, they will likely continue trading without proper advice for much longer than they should.
In many more cases than you may believe, alternatives are available to rehabilitate a business. In such cases, we consider it a privilege to work with you discreetly, offering our expert guidance while you remain in control.
Remember that our corporate system is designed to encourage directors to act proactively if their company is at risk of insolvency. Delaying or avoiding can make matters worse. Avoid falling prey to myths and act quickly to keep your options open and secure the best outcome for you and your business.
For a free, confidential, and no-obligation discussion with an experienced insolvency practitioner, contact your local RSM office.
Frequently asked questions about liquidation
Not necessarily. Company liquidation does not automatically result in personal bankruptcy. Personal liability generally only arises where directors have provided personal guarantees or become personally liable under specific legislation.
Learn more about personal insolvency and company liquidation, or speak with one of our restructuring specialists to understand your individual circumstances.
Yes. Many businesses are suitable for restructuring through options such as Safe Harbour, voluntary administration or Small Business Restructuring. Early advice gives businesses the greatest opportunity to recover.
Explore our restructuring and recovery services or contact our team to discuss the options available for your business.
Yes. Initial consultations are confidential and are designed to help directors understand their options. Speaking with a restructuring specialist does not commit you to placing your company into liquidation.
Book a confidential discussion with one of our experienced advisers to understand your options before making any decisions.
You should seek advice as soon as your business experiences ongoing cash flow problems, difficulty paying creditors, mounting tax debts or concerns about meeting future financial obligations.
The earlier you seek advice, the more options are typically available. Contact our restructuring specialists for an obligation-free discussion.
Liquidation involves winding up the company and distributing its assets to creditors. Voluntary administration is designed to assess whether the business can be restructured or continue operating through an arrangement with creditors.
Read more about voluntary administration or speak with our team to determine which solution may be appropriate for your business.
If you believe your company may be experiencing financial distress, taking early action is essential.
You should:
- Review your cash flow position regularly.
- Assess whether the business can continue paying debts as they fall due.
- Avoid taking on additional debt without understanding your financial position.
- Understand your legal obligations as a company director.
- Seek independent insolvency advice as early as possible.
- Consider all available restructuring and recovery options before deciding on liquidation.
Early advice provides greater flexibility and can often achieve better outcomes for directors, employees and creditors alike. The earlier you seek advice, the more options are typically available. Contact our restructuring specialists for an obligation-free discussion.
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Get expert advice before making a decision
If your business is experiencing financial difficulty, don't assume liquidation is your only option.
Our experienced restructuring and recovery specialists can explain your options, assess your financial position and help you understand the most appropriate path forward. Whether your business can be restructured, protected under Safe Harbour or requires formal liquidation, obtaining advice early gives you the best opportunity to achieve a positive outcome.
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Get expert advice before making a decision
If your business is experiencing financial difficulty, don't assume liquidation is your only option.
Our experienced restructuring and recovery specialists can explain your options, assess your financial position and help you understand the most appropriate path forward. Whether your business can be restructured, protected under Safe Harbour or requires formal liquidation, obtaining advice early gives you the best opportunity to achieve a positive outcome.
