What Directors Need to Know Before Going into Liquidation
When a company faces serious financial difficulties, liquidation may become the only viable option. But before you proceed, it’s vital to understand what liquidation really means — and the consequences it carries for directors.
This guide outlines the key considerations, risks, and responsibilities company directors must be aware of before initiating the liquidation process in Australia.
What Is Liquidation?
Liquidation is the formal process of winding up a company that cannot pay its debts. A registered liquidator is appointed to:
Sell the company’s assets
Distribute proceeds to creditors
Deregister and close the business
Once liquidation begins, control of the company shifts to the liquidator, and directors no longer manage day-to-day operations.
There are two main types:
Voluntary liquidation (initiated by directors/shareholders)
Court-ordered liquidation (initiated by creditors via court)
Director’s Duties Don’t End in Liquidation
Some directors assume that once liquidation starts, their responsibilities end. That’s a dangerous misconception.
Even in liquidation, directors are still legally required to:
Cooperate with the liquidator
Provide accurate books and records
Complete a Report on Company Activities and Property (ROCAP)
Failure to comply can result in fines, penalties, or even personal liability.
Personal Liability Risks
Although liquidation typically limits liability to the company, directors can become personally liable in cases of:
1. Insolvent Trading
If you continued trading while knowing the company was insolvent, you could face civil penalties or compensation claims under Section 588G of the Corporations Act 2001.
2. Director Penalty Notices (DPNs)
The ATO can hold directors personally liable for unpaid:
PAYG withholding
Superannuation Guarantee Charges
GST (in some cases)
DPNs must be acted upon quickly — or the director becomes permanently liable.
3. Uncommercial Transactions or Asset Transfers
If assets were sold at undervalue, or funds moved before liquidation, a liquidator can reverse the transactions and pursue recovery from directors or third parties.
What to Prepare Before Liquidation
To ensure a smoother process, directors should prepare:
Complete financial records and ledgers
A list of assets and liabilities
Contracts and legal agreements
A full employee and creditor list
All ATO correspondence and outstanding lodgements
The Business Will Be Closed Permanently
Once liquidation is complete:
The company is removed from ASIC’s register
All employees are terminated
Any licences, ABNs, or trading names are cancelled
The company cannot be revived
If you want to continue in business, consider alternatives like a Small Business Restructure (SBR) or Voluntary Administration, which may allow you to retain the business.
Alternatives to Liquidation
Before proceeding, explore whether:
Payment plans with the ATO or creditors are viable
Small Business Restructure is available (for tax debt restructuring with ATO support)
Voluntary Administration could lead to a Deed of Company Arrangement (DOCA)
Seek Professional Advice Early
The earlier you seek help, the more options you may have. A registered liquidator or insolvency advisor can help assess:
Whether your company is insolvent
Personal risks you face as a director
The most suitable path forward for your business
Final Thoughts
Liquidation is a serious step — one that ends your business permanently and could expose you to personal liability if mismanaged. Directors should:
Understand their obligations
Avoid delaying the process
Work with professionals to reduce legal and financial risks
Speak to a qualified advisor today to explore your options before it’s too late.
References
Australian Securities and Investments Commission (ASIC) – Liquidating a Company
Corporations Act 2001 – Sections 588G & 588M
Australian Taxation Office (ATO) – Director Penalty Notices
Australian Restructuring Insolvency and Turnaround Association (ARITA) – Insolvency Information for Directors
