Busted: Seven common myths about liquidation

The time has come to make a tough decision. You think your company could be insolvent, and there isn’t much time before creditors may try to force it on you. 

You want to make the right choice and suspect it might be voluntary liquidation. Yet, you’re reluctant to start the liquidation process because you’re unsure what it entails. How would it affect you, your personal finances, family, staff, and future?

You have heard so many different accounts of liquidation and bankruptcy that you don’t know what to believe. All you know is that you hope there’s a way to save your business, and if not, exit it with the least possible damage.

Before assumptions about liquidation stop you from getting advice early enough to explore other options, here are seven myths about liquidation we want to lay to rest.

Myth one: 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. 

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. 

Myth two: If I talk to someone, it’s over

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. 

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. 

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.

Myth three: Getting advice costs money I don’t have

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.

Myth four: 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.

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. 

Myth five: People will know I’m talking to an insolvency practitioner

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.

You will want to work with an adviser who goes above and beyond to keep all discussions confidential. 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. 

Myth six: 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. 

Myth seven: You can no longer be a director after liquidation

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.