Liquidation is a highly misunderstood process. Here are five myths I regularly encounter in conversations with directors and creditors:
1. “Liquidation means fraud was involved.” Not true. While misconduct can play a part in some cases, many businesses fail due to external pressures like economic downturns or industry disruption.
2. “Employees always lose everything.” Employee entitlements are given priority in the distribution waterfall. In Australia, schemes such as FEG (Fair Entitlements Guarantee) provide additional safety nets.
3. “Directors always go bankrupt.” Directors can continue in business after a liquidation, provided they’ve acted appropriately and fulfilled their duties.
4. “Liquidation is the same as bankruptcy.” Bankruptcy applies to individuals; liquidation applies to companies. Very different frameworks and obligations.
5. “It’s better to wait and see if things improve.” Delay often makes matters worse. Acting early can preserve options and reduce personal exposure.
Liquidation is not a punishment; it’s a legal process designed to protect creditors, employees, and the community. Clear information helps reduce fear and stigma.
What other misconceptions about insolvency have you heard in your industry?
