What is liquidation?

Published Thursday 23 July 2026

Table of contents

• What does liquidation mean?
• What is liquidation of a company or business?
• Types of liquidation in Australia
• The liquidation process in Australia
• What happens when a company is liquidated?
• Who gets paid first in a liquidation?
• How liquidation affects directors, employees and creditors
• Alternatives to liquidation
• What is liquidation in accounting?
• Manage your business finances with Xero
• FAQs on liquidation

Key takeaways

• Liquidation is the process of winding up a company by selling its assets, paying creditors in a legally defined order, and deregistering the business with the Australian Securities and Investments Commission (ASIC).
• In Australia, there are 4 main types of liquidation: creditors' voluntary liquidation, members' voluntary liquidation, court-ordered liquidation, and simplified liquidation for small businesses with debts under $1 million.
• Costs of the liquidation, employee entitlements, and other priority debts are paid before unsecured creditors and shareholders, as set out in section 556 of the Corporations Act 2001. Secured creditors are generally paid from the proceeds of their secured assets separately.
• If your business is struggling financially, alternatives like voluntary administration, small business restructuring, and informal workouts may help you avoid liquidation altogether.

What does liquidation mean?

Liquidation generally means converting assets into cash. The money moves from being locked up in a physical item or investment to being freely available as liquid cash.

Inventory is a type of asset that's regularly liquidated in this way. Retailers hold liquidation sales to clear out-of-season stock, generating cash they can reinvest into new-season products. You might also hear the term used when investors sell shares or other financial assets to free up funds.

What is liquidation of a company or business?

When applied to a company, liquidation refers to the formal process of winding up operations, selling assets, and distributing the proceeds to creditors and shareholders. In Australia, this process is governed by the Corporations Act 2001 and overseen by a registered liquidator.

Companies are generally placed into liquidation under 1 of 3 scenarios:

• an owner wants to sell their business but can't find someone to buy it as a going concern
• an owner wants to sell but can't get the right price and is better off selling assets individually
• a business can't pay its debts and is placed into liquidation by its directors or a court order, rather than pursuing an exit strategy

It's worth noting that in Australia, companies don't "go bankrupt." Bankruptcy applies only to individuals under the Bankruptcy Act 1966. When a company can't pay its debts, it's placed into liquidation or administration instead.

Types of liquidation in Australia

Australian law recognises several types of liquidation, each suited to different circumstances. The type that applies depends on whether the company is solvent or insolvent, and who initiates the process.

Creditors' voluntary liquidation (CVL)

A CVL happens when the directors of an insolvent company resolve to wind up the business voluntarily. This is the most common form of liquidation for small businesses that can't pay their debts. The directors appoint a liquidator, and creditors have the right to replace that liquidator at a meeting.

Members' voluntary liquidation (MVL)

An MVL is used when a solvent company decides to wind up. The directors must sign a declaration of solvency confirming the company can pay all its debts within 12 months. This type is common when business owners want to retire, restructure, or simply close a profitable business.

Court-ordered liquidation

Also called compulsory liquidation, this occurs when a court orders the company to be wound up. Creditors, ASIC, or the company itself can apply to the court. A common trigger is when a company fails to comply with a statutory demand for payment within 21 days.

Simplified liquidation

Introduced in 2021, simplified liquidation is designed for small businesses with total debts of less than $1 million. It follows a streamlined process with reduced costs and shorter timeframes, making it more accessible for small business owners who need to wind up quickly.

The liquidation process in Australia

The liquidation process follows a structured sequence of steps. Here's how a creditors' voluntary liquidation typically works, as it's the most common path for small businesses.

1. The directors resolve that the company is insolvent and can't continue trading. They pass a special resolution to wind up the company voluntarily.
2. A registered liquidator is appointed to take control of the company. The liquidator's role is to act in the best interests of creditors.
3. ASIC is notified of the liquidation, and the appointment is published on ASIC's published notices website.
4. The liquidator notifies all known creditors and calls a meeting where creditors can ask questions and vote on matters like replacing the liquidator.
5. The liquidator investigates the company's affairs, collects and sells assets, and recovers any outstanding debts owed to the company.
6. Proceeds are distributed to creditors in the priority order set out in section 556 of the Corporations Act 2001.
7. Once all assets are realised and distributed, the liquidator lodges a final report with ASIC. The company is then deregistered.

The entire process can take anywhere from 6 months to several years, depending on the complexity of the company's affairs.

What happens when a company is liquidated?

When a company is liquidated, its operations stop and the liquidator takes control. The directors lose their power to manage the company, and the liquidator's job is to maximise the return for creditors.

The liquidator will sell the company's assets, collect any money owed to it, investigate the company's financial history, and distribute proceeds to creditors. If the company has been trading while insolvent, the liquidator may pursue the directors personally for debts incurred during that period.

If there isn't enough money to pay all creditors in full, they may receive only a partial payment, or nothing at all. Unsecured creditors are particularly at risk, as they sit near the bottom of the priority list.

Who gets paid first in a liquidation?

In Australia, the order in which creditors are paid during a liquidation is set out in section 556 of the Corporations Act 2001. Not all creditors are treated equally, and the priority order can significantly affect what each party receives.

Secured creditors hold rights over specific assets and are paid from those assets separately, outside the s556 priority order. For the remaining funds, creditors are generally paid in this order:

• Costs and expenses of the liquidation: including the liquidator's fees and legal costs
• Employee entitlements: outstanding wages, superannuation, leave entitlements, and retrenchment pay
• Unsecured creditors: including suppliers, trade creditors, and the Australian Taxation Office (ATO) for unpaid taxes
• Shareholders or owners: only paid if all other debts are settled in full, which rarely happens in an insolvent liquidation

If there isn't enough money to pay everyone within a priority class, the available funds are shared proportionally among creditors in that class.

How liquidation affects directors, employees and creditors

Liquidation affects different stakeholders in different ways. Understanding your rights and obligations can help you navigate the process if your business faces this situation.

Directors

Once a liquidator is appointed, directors lose the power to manage the company. They're required to cooperate with the liquidator, hand over company records, and provide a Report as to Affairs (RATA) detailing the company's financial position.

If a director has allowed the company to trade while insolvent, they may face personal liability under section 588G of the Corporations Act 2001. This means they could be required to pay compensation for debts the company incurred while insolvent.

Employees

Employees are entitled to claim outstanding wages, annual leave, long service leave, and redundancy pay as priority creditors. If the company can't cover these entitlements, eligible employees may be able to claim through the Fair Entitlements Guarantee (FEG), a government safety net that covers certain unpaid employment entitlements.

Creditors

Creditors have the right to attend meetings, vote on resolutions, and receive reports from the liquidator about the progress of the liquidation. Secured creditors can enforce their security over specific assets, while unsecured creditors share in whatever remains after higher-priority claims are paid.

Alternatives to liquidation

Liquidation isn't always the only option for a business in financial difficulty. Depending on your circumstances, there may be ways to restructure or recover without winding up entirely. Understanding your business's solvency and liquidity position is a good starting point.

Voluntary administration

Voluntary administration gives a struggling company breathing room while an independent administrator assesses whether the business can be saved. If a Deed of Company Arrangement (DOCA) is agreed upon, the company may continue operating under revised terms with its creditors.

Small business restructuring

Available to companies with total debts under $1 million, small business restructuring lets you develop a restructuring plan with a qualified restructuring practitioner. If creditors approve the plan, you can continue trading while repaying debts over time. This option was introduced to give small businesses a simpler, more affordable path to recovery.

Informal workouts

In some cases, you can negotiate directly with creditors to agree on revised payment terms, reduced amounts, or extended timelines. This approach avoids the cost and formality of a legal process, but it requires the cooperation of all parties involved.

What is liquidation in accounting?

In accounting, liquidation refers to the process of closing down a business, selling off its assets, settling its liabilities, and distributing any remaining value to shareholders. It's the final step in a company's lifecycle from an accounting perspective.

During this process, the company's balance sheet is progressively wound down. Assets are converted to cash, liabilities are paid off, and any surplus is returned to shareholders. Keeping accurate, up-to-date financial records throughout your business's life makes this process significantly smoother if it ever becomes necessary.

Manage your business finances with Xero

Whether you're growing your business or navigating a challenging period, having clear visibility of your finances is essential. Xero's cloud-based accounting software helps you keep your books organised, track cash flow in real time, and stay on top of your obligations.

With accurate financial records, you're better placed to spot problems early, explore your options, and make informed decisions about your business's future. Get one month free.

FAQs on liquidation

Here are some frequently asked questions about liquidation.

What's the difference between liquidation and bankruptcy in Australia?

Liquidation applies to companies, while bankruptcy applies to individuals. A company is placed into liquidation under the Corporations Act 2001, whereas an individual is declared bankrupt under the Bankruptcy Act 1966.

How long does liquidation take in Australia?

A straightforward liquidation might wrap up in 6 to 12 months, but complex cases involving disputes, investigations, or significant assets can take several years.

Can a company continue trading during liquidation?

Generally, no. Once a liquidator is appointed, the company's trading usually stops. However, a liquidator may allow limited trading if it helps maximise the return for creditors.

What happens to directors after liquidation?

Directors lose their management powers when a liquidator is appointed. If the liquidator finds evidence of insolvent trading or other breaches, directors may face personal liability or be disqualified from managing companies.

Is a company automatically dissolved after liquidation?

Not immediately. After the liquidator lodges a final report with ASIC, the company is deregistered, which effectively dissolves it. This happens 3 months after the lodgement.