How to Prepare for Liquidation and Minimise the Damage
When your business is facing mounting debts and insolvency becomes unavoidable, preparing for liquidation properly can help reduce stress, avoid personal liability, and ensure a smoother closure.
This guide will walk you through how to prepare for liquidation in Australia and how to minimise the impact on you, your business, and your personal finances.
What Is Liquidation?
Liquidation is the formal process of winding up a company’s affairs, selling off assets, and distributing proceeds to creditors. It usually occurs when a company can no longer meet its financial obligations.
There are three types:
Creditors’ Voluntary Liquidation (CVL) – initiated by directors/shareholders
Court Liquidation – forced by a creditor via court application
Members’ Voluntary Liquidation (MVL) – for solvent companies
In all cases, once liquidation starts, a registered liquidator takes control of the business.
Step-by-Step: How to Prepare for Liquidation
1. Get Financial Advice Immediately
Speak to a registered liquidator or insolvency advisor as soon as you suspect the business is insolvent. Early action expands your options and protects you from personal liability.
2. Stop Trading If Insolvent
Under Section 588G of the Corporations Act 2001, directors can be held personally liable if they allow the business to continue trading while insolvent.
3. Gather Financial Records
Provide the liquidator with:
Full financial statements
Tax returns and ATO correspondence
Bank statements
Employee records and entitlements
A list of assets and liabilities
Aged creditor and debtor reports
4. Settle Employee Obligations
Employees may be eligible for payments under the Fair Entitlements Guarantee (FEG), but you must ensure accurate payroll and superannuation records are up to date.
5. Secure and Protect Business Assets
Don’t transfer, sell, or gift assets before liquidation — it may be seen as phoenix activity or an uncommercial transaction, which a liquidator can reverse.
6. Prepare for Director Investigations
You must complete a Report on Company Activities and Property (ROCAP). Be honest and thorough. Failing to cooperate with the liquidator can result in fines, director bans, or prosecution.
How to Minimise the Damage
✔ Avoid Personal Liability
Ensure:
All tax lodgements are up to date
Super is paid or declared
No uncommercial transactions were made recently
Avoid Director Penalty Notices (DPNs) by staying on top of ATO lodgements, even if you can’t pay.
✔ Communicate with Stakeholders
Inform employees, landlords, suppliers, and key stakeholders early. This helps reduce confusion and builds goodwill if you plan to start fresh later.
✔ Don’t Strip the Company
Selling assets or transferring them to another entity before liquidation can land you in serious legal trouble. Let the liquidator handle asset sales.
✔ Understand What You Can Keep
In most cases, directors are not personally liable for company debts (except for tax debts covered by DPNs or insolvent trading). Understanding your protections can bring peace of mind.
✔ Keep Personal Finances Separate
Avoid using personal funds to prop up a failing business. Focus on protecting your own credit and planning for a fresh start.
Should You Consider Alternatives?
Liquidation is final — the company is shut down permanently. If your business is still viable, consider:
Small Business Restructure (SBR) – ATO-backed, keeps control of your business
Voluntary Administration – Pauses legal action, allows negotiation with creditors
Payment Plans – If the ATO or creditors are open to negotiation
Speak with a registered practitioner before deciding.
Final Thoughts
Liquidation is never easy, but with the right preparation and professional advice, it doesn’t have to ruin your life. Many directors go on to launch successful ventures after liquidation — what matters is how you handle it now.
References
ASIC – Liquidating a Company
Fair Entitlements Guarantee (FEG)
Corporations Act 2001 – Section 588G
ATO – Director Penalty Notices
