Why is no such thing as low-cost Liquidation?
At the moment Liquidators are advertising low cost Liquidations or Liquidations for around $5,000. There is no such thing as a low-cost Liquidation because what you are not being charged for up front, you or your creditors will legally be forced to make up through a number of ways.
To complete a Liquidation, it will generally cost around $15,000 to $20,000 per company, so if a Liquidator is accepting a $5,000 up front payment, they need to make up their costs or they will make a loss on the file. Given that Liquidators are accountants by trade, they do not like making a loss anywhere but especially not on a file.
Preference Payment Claims
Whilst a Liquidator is unable to force creditors to pay for the Liquidation by sending them an invoice, they will be more inflexible when it comes to negotiating a settlement amount for claims such as preference payments or uncommercial transactions. Whereas a Liquidator may have accepted a $1,000 settlement on a $10,000 preference claim, they may look at accepting nothing less than $3,500 for the same preference claim.
Preference Payment Claims – ATO
If a Liquidator is aware that a Company has made a payment arrangement with the Australian Taxation Office, they may be more willing to do a low-cost liquidation because they know that they will be paid from this claim. This may not be a big problem if the amounts paid under the payment arrangement with the ATO were less than circa $125,000 over 6 months. However, the ATO may seek an indemnity from the Director for any amount repaid to the Liquidator under a preference payment claim. The greater the sum that is being pursued by the Liquidator against the ATO, the greater the chance the ATO will either attach you to the Liquidator’s claim or seek an indemnity from you.
Similarly like a preference payment claim, a Liquidator will be less likely to accept a smaller amount to settle an insolvent trading claim against the Director. Refer to our blog on what an insolvent trading is for further details.
All in all, what we are saying, is that the Liquidator will be like a dog with a bone in respect of their claims if they have accepted a smaller up-front payment.
If the Liquidator is not sure about the recoverability of claims or Company assets, they may ask the Director to sign a personal guarantee. This guarantee will state if the Liquidator is able to realise the assets of a Company for a certain amount, the Director will pay nothing towards the fees of a Liquidator. A couple of comments here – a savy Liquidator will have the agreement say assets not claims, so regardless of the amount they recover under their claims, if they only received $5,000 from the assets of the Company (debtors, plant and equipment auction etc), you will be forced to pay the balance of their fees as stated in the agreement.
When a Director thinks about the sale of assets, many Directors think that the Liquidator will open the doors of their shop and tell tradies to bring their tools. Nothing could be further from the truth. What the Liquidator does is call the auctioneer of choice and asks them to come and pull out everything that is not nailed down. There is a massive expense in the relocation of the asset to the auction house, any realisation expense getting the asset to looking its best as well as the auctioneer’s fees to sell the asset which are all passed onto you under the agreement. So, make sure that the agreement is for the gross amount of the assets not the net amount of the assets.
If you sign a personal guarantee for a Liquidator, make sure that it is:
- Not solely for the assets of the Company – ensure it is for the claims of the Liquidator as well; and
- It is for the gross amount of the assets sold. This will ensure that the cost of the recovery of the assets is with the Liquidator.
Talking of Company assets, a Liquidator will be willing to commence a low or no cost Liquidation if they know that there are assets in the company that they can sell. Generally, they will do this matter if there are physical assets or a business with a lot of interest to sell. Liquidators do not like doing a Liquidation without an up-front fee if the majority of assets are debtors, as there can be a lot of problems collecting money from debtors.
Directors should remember to purchase any assets that they want to keep from the company for fair market value prior to the Liquidation of the Company. Such assets may include motor vehicles, phones and phone numbers, trading name, plant and equipment. If these assets are financed, it is also much easier to refinance these assets out of the Company name if there is no history of a Liquidation on the file. We can help you to do this the right way to ensure a smoother Liquidation process going forward. We can also help show how to maximise every dollar made from the sale of company assets and in some cases how to double use the same money, sounds impossible but call us to find out how.