Your questions answered.

Liquidation is the process of winding up a company’s business: selling its assets, investigating its affairs, recovering any legal claims, and distributing the funds received to creditors and, if there are funds left after costs, to shareholders.

A liquidator is registered with the Australian Securities & Investments Commission (ASIC) and is appointed to the company to carry out the liquidation process.

• Australian Securities & Investments Commission (ASIC) (opens in new tab)

A Director’s Advocate is a skilled business professional who supports company directors and business owners throughout the process of liquidation. During liquidation, the advocate is very likely the only source of professional, independent support for the director — every other professional involved has legal duties that can conflict with the director’s.

Your name will appear permanently on a public register called the National Personal Insolvency Index (NPII). Other information on the register usually includes your date of birth, residential address and occupation.

In addition, credit reporting agencies keep a record of your bankruptcy for 5 years from the date you became bankrupt, or 2 years from when your bankruptcy ends, whichever is later. A list of credit reporting agencies can be found on the Moneysmart website.

• AFSA — National Personal Insolvency Index (NPII) (opens in new tab)
• Moneysmart — credit reports (opens in new tab)

Lodging a debtor’s petition with AFSA does not usually involve an application fee, but there are costs in the administration of a bankruptcy — for example, a trustee’s fees and government charges taken from realised assets or income contributions. If you are thinking about bankruptcy, get advice first: there may be alternatives, such as a debt agreement or a personal insolvency agreement.

• Australian Financial Security Authority (AFSA) (opens in new tab)

It’s a form of protection for consumers and business owners buying a large asset or extending credit. A search can be made at ppsr.gov.au against an asset to find out if another entity or person — for example a lender — has a claim over it.

• Personal Property Securities Register (PPSR) (opens in new tab)

Who holds a security interest over an asset (a vehicle or a boat, for example), what the security interest is, and when it was registered.

Cost has ranged between about $2 and $7 depending on how the search is lodged. Check the current PPSR fees list for today’s prices.

• PPSR fees (opens in new tab)

The PPSR is a national online register of security interests in personal property — things other than land, such as vehicles, equipment, stock and receivables. A business that has an interest in goods it doesn’t physically hold (for example goods supplied on credit, on consignment or leased) can register that interest. Registrations are generally ranked in time order, so registering early and correctly matters.

• Personal Property Securities Register (PPSR) (opens in new tab)

If you supply goods on credit, a PPSR registration protects your interest in the goods you are supplying. This means that should a customer go into liquidation before paying your invoice, you are in the best position to get your goods, or their value, back.

Unfortunately, it’s an unforgiving process, so you must take the time to get it right — near enough is usually not good enough. An incorrect registration can be defeated by a liquidator. In these circumstances it’s often worthwhile getting professional help.

There are a number of options. Do it yourself: go to your ATO portal and follow the prompts. Ask your accountant: if you have a tax agent registered on your ATO account, they can apply for you. Or contact one of our Solvers and we can assist you with a proposal, including negotiations with the ATO.

Always get a loan document drawn up so that both lender and borrower know and agree the terms. Security for the loan should also be considered. A little bit of thought before the money is advanced could save a lot of pain later. Speak to one of our legal advisers.

A secured creditor is one that holds a security interest over property — for personal property, typically registered on the PPSR. It may allow the creditor to sell the property to satisfy their debt.

Section 556 of the Corporations Act sets out the order in which a liquidator must pay out money. Certain creditors, including employees for some entitlements, have priority over ordinary unsecured creditors.

• Corporations Act s 556 (opens in new tab)

Secured creditors are generally not impacted by preference claims to the extent of their security. Tighten up your terms and conditions and register on the PPSR before you give credit or accept payment on terms. But it’s vital your PPSR registration is accurate — an incorrect registration defeated by a liquidator is useless.

1. Follow a standard debt collection process agreed with the customer. 2. Keep written communication to a minimum. 3. Enter instalment arrangements early. 4. Don’t accept round-figure payments from debtors — have specific invoice amounts paid. Overall, don’t hesitate to pursue overdue debts.

Six months for regular creditors. For related parties it can be up to four years, and for transactions intended to defeat creditors up to 10 years.

‘Voidable transaction’ is industry jargon for a number of recovery tools available to a liquidator under Part 5.7B of the Corporations Act. They all aim to deal with payments or dealings by an insolvent company that disadvantage other creditors. They include unfair preferences, uncommercial transactions, unfair loans and unreasonable director-related transactions. A preference payment is one type of voidable transaction.

• Corporations Act Part 5.7B (opens in new tab)

Consult a lawyer who specialises in insolvency law who can develop a strategy for you. Agree a fixed fee for their time, so you can then make informed decisions.

Take advice early — you will then know whether you should stand and fight, or fold. Defences may be available depending on the facts.

Every situation is different, depending on what you are selling and who ultimately funds, and therefore owns, the underlying assets of the business. With a new business it is, on balance, probably best to start with a company and transition to a trust if your affairs get more complex in the future. This is very general — your specific circumstances may dictate a different answer, so contact us for advice.