When businesses close, the assets are disposed of, the business is liquidated, and the name is officially removed from the register. As part of the closing process, all the outstanding liabilities have to be cleared before formally winding up the business.
This article will explain what happens to assets when a business closes, how they are disposed of and how the money raised can be used to satisfy creditors. If you have any further questions, don’t hesitate to get in contact with our experienced commercial lawyers.
Overview:
- What happens to assets when a business closes?
- Hierarchy of repayment after sale of business assets
- What happens to retained earnings when a business closes?
- Checklist for closing down a business
What Happens to Assets When a Business Closes?
Under normal circumstances, the assets are sold to third parties or even to competitors to raise as much money as possible. This process is known as the ‘liquidation of assets‘ and involves the sale or auction of company assets.
The business can sell assets on the open market for cash to settle outstanding debts and satisfy creditor requirements. While a small business has the legal right to sell assets even in the absence of a cash-crunch, this process is typically associated with insolvency procedures.
The shareholders of a company will usually appoint a liquidator who executes the following functions:
- Collect or make a list of company assets
- Conduct a sale of assets
- Use the money raised to settle employee wages and pending debts
Hierarchy of Repayment After Sale of Business Assets
Once the liquidator sells the small business assets, there is a specific order in which repayments are distributed:
1. Secured Creditors
The first on the hierarchy list are secured creditors. A secured creditor is an asset-based creditor, bank or lender. Creditors who hold a fixed charge over assets also fall into this category.
Examples of assets usually covered with a fixed charge could include machinery, vehicles and property. At times, in the absence of a liquidator, the fixed charge holder may sell the assets.
2. Preferential Creditors
Preferential creditors could include employees whose wages have not yet been paid. As they have given their time, effort and skills to a business which is no longer solvent, they are paid next. The payment may also include leave or bonus pay and any other unpaid dues.
Please contact an employment lawyer if you have additional questions or concerns.
3. Creditors Holding a Floating Charge
Creditors holding a floating charge claim their payments from the funds that remain after secured and preferential creditors have been paid. Floating charge payments only come into play when businesses close or go into receivership.
4. Unsecured Creditor
Unsecured creditors are the largest and the last group to be repaid when it comes to the sale of business assets. Examples of unsecured creditors include:
- Suppliers
- Landlords
- Credit card companies
- Bank loans not secured with a fixed asset
- Student and payday loans
- Tax debts and so on
What Happens to Retained Earnings When a Business Closes?
Retained earnings (or RE) is the net income that remains after shareholders have been paid. When you sell your business, it no longer has an operating life from a financial or legal perspective.
To understand this better, it’s a good idea to take a deeper dive into what makes up retained earnings and what happens to assets when a business closes. Since its inception, the company’s total accumulated profits and undistributed income is known as its ‘retained earnings’.
Retained earnings help the business cope with difficult market conditions and less-than-ideal credit lending environments. Robust companies usually have healthy retained earnings to help them tide over challenging periods. When businesses close, the retained earnings will be distributed as part of the asset sale to settle outstanding liabilities.
Checklist for Closing Down a Business
If you’re considering closing down your business, it can be a tough decision to make, and you need to plan well ahead. The following checklist describes important considerations before winding down a business:
- Set a date and let your customers, suppliers and employees know by posting notices on the website, on your storefront or sending out emails and letters.
- Remember to end your lease or rental agreements. Depending on the contract, you may need to pay your rent until the end of the lease term.
- Sell business assets, distribute payments to creditors and settle debts.
- Settle Capital Gains Tax (SGT) or Goods and Service Tax (GST) and file final tax returns.
- Cancel the ABN (Australian Business Number) and also get the business name removed from the register (Australian Securities and Investments Commission).
- Preserve important business records, close your business bank accounts and get any licenses or permits cancelled.
For a more comprehensive guide, you can also download our closing down a business checklist.
Contact Reliable Insolvency Lawyers for Guidance
Closing a business can be a physically, mentally and emotionally draining experience, and it may be a good idea to seek the services of competent insolvency lawyers.
Hiring a reputed legal firm can save you a lot of money, time and wasted effort. As trained insolvency lawyers, Owen Hodge Lawyers has extensive experience in helping businesses close down with minimal hassle while simultaneously staying compliant with Australian laws.
For professional advice on closing your business, sale of assets, acquisitions and mergers or more questions on what happens to assets when a business closes, please call our dedicated team of legal experts on 1800 770 780.