CREDITORS VOLUNTARY LIQUIDATION:
Everything you Need to Know (Updated 2024)
A Creditor’s Voluntary Liquidation is used to end the affairs of an insolvent company and is initiated by the company’s directors and shareholders. It is the most common type of liquidation and used in circumstances where the company is deemed to be unable to pay its debts as they fall due.
- When do you need a Creditors Voluntary Liquidation
- How is a Creditors Voluntary Liquidation started
- Why Choose a Creditors Voluntary Liquidation?
- What is the process of a Creditors voluntary Liquidation
- How are different parties affected by a liquidation?
- What is the role of the Liquidator in a Creditors Voluntary Liquidation
- What is the role of the ATO in a Creditors Voluntary Liquidation
- What are the creditor priorities and types
- Who can act as a liquidator in a CVL
- Are the Courts involved in a CVL
- Is the appointment of a CVL advertised
- Are creditors told about the Appointment of a CVL
- Who gets paid first in a liquidation?
- During a liquidation, when does the company cease to trade?
- How long does the liquidation process typically take?
- How do liquidators sell the assets of the company?
- What kinds of investigations does the liquidator do?
- What reports does a liquidator give to creditors?
- What formal meetings will the liquidator hold with creditors?
- When does the liquidation process end?
- How much does a liquidation cost?
- What is a phoenix company?
- What can creditors do if they’re unhappy with how the liquidation is proceeding?
- How many liquidations happen each year?
- Personalised advice
When do you need a Creditors Voluntary Liquidation?
If a company is insolvent (can’t pay all of its debts as they fall due), and there is no prospect of a successful turnaround, then it needs a Creditors Voluntary Liquidation. If it will be able to pay all debt within a year, a Members Voluntary Liquidation is appropriate.
How is a Creditors Voluntary Liquidation started?
Creditor’s Voluntary Liquidation is initiated by the company’s directors and shareholders. The directors call a General Meeting of the company at which the shareholders vote on entering liquidation. A Special Resolution must be passed which requires a minimum of 75% of the shareholding who vote on that day to agree to the liquidation.
Why choose a Creditor’s Voluntary Liquidation?
CVLs are popular because they are a simple, easy to initiate, and a relatively cheap way to bring to an end a company’s life. That allows directors and shareholders to move on. CVLs are also significantly cheaper than putting a company into Voluntary Administration.
What is the process of a Creditors Voluntary Liquidation?
The process of a creditors’ voluntary liquidation is quite simple from the perspective of the directors and shareholders. A director’s involvement is usually complete within 2 weeks as long as they provide books and records and some other information to the liquidator. There is a lot of additional work for the liquidator to do but the directors and shareholders are not involved in that work. At Insolvency Solutions Group, a straightforward CVL can be effectively finished within three months. More complicated CVLs can take six to eight months and occasionally longer.
Appointing a Liquidator (Day 1)
- We send you an Appointment Pack by email.
- The Director(s) and Shareholder(s) sign the standard resolutions and return them to Insolvency Solutions Group– you’ve appointed the Liquidator as soon as the last shareholder signs.
The days following appointment (Days 2 to 7)
- Insolvency Solutions Group lodges various appointment documents and advises various government organisations, such the Australian Tax Office and state government revenue offices, of the liquidation.
- Insolvency Solutions Group send the Director(s) a Post Appointment Pack which includes a Questionnaire to complete and a request to deliver the books and records of the company to the Liquidator.
- The Liquidator collects and sells any assets of the company.
The Creditors Report (Day 10)
- The Liquidator prepares a Creditors Report which advises creditors of the appointment.
The Liquidator’s tasks (Around 1 to 3 months)
- The Liquidator reviews the books and records and reports findings to the regulator.
- The Liquidator may commence recovery processes if they discover any “hidden assets “or assets that should be recovered.
- The Liquidator prepares a Statutory Report to Creditors 3 months after the appointment date to inform creditors about the progress of the Liquidation and if they are likely to receive a dividend payment from the Liquidation.
- If the Liquidator has funds available, a Dividend is paid to creditors.
Finalising the liquidation (A further 3 to 4 months)
- The Liquidator will prepare a Final Report for Creditors.
- The Liquidator will lodge various documents with the regulator and request that they deregister the company.
- The regulator will deregister the company 3 months after the liquidator’s final lodgement.
How are different parties affected by a liquidation?
Winding up a company affects various parties in various ways. Here are a few:
Effect on the directors of the company
A liquidation may have an effect on a director’s credit rating, but not a severe effect. Credit Reporting Agencies keep track of companies that enter liquidation (for insolvent companies) and the names of the directors of those companies. However, a liquidation is not bankruptcy! A company is a separate legal entity to a director and the company’s directors are not automatically liable for a company’s debts. A personal bankruptcy is a serious black mark on your credit rating – being a director of a company that went into liquidation is a less serious mark.
Effect on the shareholders of the company
There are no repercussions for a shareholder of a company that enters liquidation, other than the loss of any value the shares may have had.
Effect on the employees of the company
Liquidation will mean the company’s employees lose their employment. If the company is unable to pay the employee’s entitlements, once it is in liquidation, the government steps in to help with the Fair Entitlements Guarantee scheme. An employee of a company that has entered liquidation may be able to claim:
- unpaid wages—up to 13 weeks
- unpaid annual leave and long service leave
- payment in lieu of notice—up to five weeks
- redundancy pay—up to four weeks per full year of service
For anything else they are owed they become a priority creditor in the liquidation.
Effect on the creditors of the company
Creditors are the people or companies that are owed money by the company entering liquidation. All creditors will be notified at the start of the liquidation. They will receive several reports from the liquidator, informing them of the process of the liquidation and the likelihood of them receiving any of the money owed to them (sometimes called a distribution or dividend by the liquidator). In the majority of liquidations creditors receive between 0 and 10% of the total amount owed to them.
What is the role of the Liquidator in a Creditors Voluntary Liquidation?
The liquidator takes control of the company upon appointment. The directors’ powers are suspended. The liquidator has a wide range of responsibilities to the company, creditors and employees. But the over-riding objective is for the liquidator to wind up the affairs of the company.
What is the role of the ATO in a Creditors Voluntary Liquidation?
The ATO is a creditor to some degree in almost every liquidation. As a result, the ATO has a large number of staff dedicated to providing information to liquidators and participating in the liquidation process. Because they are often the only creditor in a liquidation, the ATO commonly participates in a liquidation and assists the process of the liquidation by attending and voting at creditors meetings.
What are the creditor priorities and types?
A Secured Creditor is a creditor who holds a valid security interest that is registered on the Personal Property Securities Register (PPSR) – this used to be called taking a “Charge”. Often secured creditors are banks or finance companies. If there are funds to be distributed to creditors in a liquidation, secured creditors are paid first.
Priority Unsecured Creditor
Employees of the company in liquidation enjoy priority over other unsecured creditors. This often comes into play with Superannuation which is not covered by the Government’s Fair Entitlements Guarantee scheme like other entitlements are.
An unsecured creditor is a company or person that is owed money by the company in liquidation, and does not have any security over company assets or priority status. Most creditors fall into this category. Unsecured creditors receive payment in a liquidation only after all other creditor categories have been satisfied.
The ATO ranks as an Unsecured Creditor. Many years ago, they used to be a priority creditor. They no longer hold that privileged position and instead have the ability to sometimes pursue company directors personally for unpaid PAYG, Superannuation and now GST with a Director Penalty Notice.
Who can act as a liquidator in a CVL?
Only a Registered Liquidator can act in a CVL.
Are the Courts involved in a CVL?
Not usually. The CVL process is designed to avoid the involvement of the courts. However, should any type of challenge or dispute arise during the process, they can be settled by the courts.
Is the appointment of a CVL advertised?
Yes. The appointment is advertised on the Insolvency Notices Website and against the company’s listing on the regulator’s website.
Are creditors told about the Appointment of a CVL?
Yes. Any party who either is, or may be, a creditor of the company is sent a creditors report 10 days after the commencement of the liquidation and again after 3 months.
Who gets paid first in a liquidation?
The general rule is that Secured creditors are paid first – it is a bit more complicated than that is the staring point. The costs of the liquidation rank next. Anything left after that goes to Employees and then is evenly distributed to Unsecured Creditors.
During a liquidation, when does the company cease to trade?
In nearly all cases the company has ceased trading either before the liquidation becomes effective or on the appointment of the liquidator. It is rare, but possible, for the liquidator to choose to continue to trade if it will help to dispose of assets and wind up the business. A liquidator can trade the business for up to 3 months, but that is quite rare.
How long does the liquidation process typically take?
At Insolvency Solutions Group, a straightforward CVL can be effectively finished within three months. More complicated CVLs can take six to eight months and occasionally longer.
How do liquidators sell the assets of the company?
A liquidator has a responsibility to sell company assets and obtain the best possible price, bearing in mind that in most cases the assets cannot be sold as a “going concern”. That is, it is a liquidation sale. How a liquidator sells assets will vary. Sometimes a liquidator will appoint an auctioneer to sell plant and equipment or a real estate agent to sell real property. A liquidator will attempt to sell assets quite quickly and usually within three months at most.
What kinds of investigations does the liquidator do?
A liquidator is required by the Corporations Act to undertake an investigation into the affairs of a company. The investigation will include a review to see if any offences were committed and a review of past transactions to see if any money can be recovered for creditors. The liquidator reports on the investigation findings to creditors in the “3 month” report.
What reports does a liquidator give to creditors?
The liquidator issues an initial report 10 days into the liquidation process announcing the liquidation and providing information on creditors rights. A detailed report is issued 3 months into the process that explains the findings of the investigation phase and the likelihood of a dividend to creditors. In complex matters there may be a further final report or remuneration report.
What formal meetings will the liquidator hold with creditors?
The law regarding creditors meetings in older liquidations
Previously the liquidator had to hold several meetings with creditors of the company to allow them to vote on various matters.
The law regarding creditors meetings for since 2017
Regulations changed in 2017 that meant now there is no requirement for a creditors meeting in a standard liquidation. If a liquidator needs the creditors to vote on a matter it can be done remotely through a “resolution without a meeting” – a process where the liquidator sends a letter outlining the resolution with a polling slip and the creditors vote by post. However, creditors with claims of a certain value can request in writing that the liquidator hold a meeting of creditors. The right to request meetings, including in the circumstances described below, is not available if a simplified liquidation process is adopted.
What creditors meetings can he held?
A liquidator can call a meeting of creditors whenever they wish. Creditors can also force a liquidator to call a Meeting. A meeting may be requested by creditors in the first 20 business days in a creditors’ voluntary liquidation if 5% or more of the value of the creditors request the meeting. Otherwise, meetings can be requested at any other time or in a liquidation by:
- 10% but less than 25% of the known creditors on the condition that those creditors provide security for the cost of holding the meeting; or
- 25% or more of known creditors; or
- creditors by resolution, or
- a Committee of Inspection (this is a smaller group of creditors elected by, and to represent, all the creditors).
If a request complies with these requirements and is ‘reasonable’, the liquidator must hold a meeting of creditors as soon as reasonably practicable.
When does the liquidation process end?
The liquidation process ends when the liquidator is satisfied they have finished investigating any matters they see as relevant, and the regulator has provided clearance for them to apply for the company to be struck off. The liquidator will then lodge their final return which causes the regulator to deregister the company three months later.
How much does a liquidation cost?
The cost of a liquidation varies depending on the circumstances. A liquidator will normally want to see an amount paid upfront to cover minimum expenses, but if the company has assets of sufficient value, that requirement may be waived. If the company can pay the fee, it should, if not the liquidation can be funded by anyone. Here at Insolvency Solutions Group, we are small and efficient. This means we can provide a liquidation process faster and cheaper than big firms.
What is a phoenix company?
The general concept is that a Phoenix Company is a company that “rises from the ashes” of a failed company. The most common scenario is when:
- A new company, which we will call “NewCo”, begins trading as an identical business from the same location, with a similar trading name as another company, which we will call “OldCo”.
- The assets of OldCo are transferred to NewCo and no consideration is paid for those assets.
- OldCo ceases to trade and probably enters liquidation and leaves a number of creditors unpaid.
The situation as described is a bad thing for two main reasons. Firstly, there is the financial loss suffered by the creditors of the OldCo when they go unpaid. Secondly, the situation is grossly unfair for the competitors of the Phoenix Company – if a company is not paying its tax debts or trade creditors then its cost base is lowered, usually to such an extent that a competitor can’t match its pricing.
What can creditors do if they’re unhappy with how the liquidation is proceeding?
Can creditors request information?
Creditors have the right to request information from the Liquidator at any time. A liquidator must provide a creditor with the requested information if their request is ‘reasonable’, the information is relevant to the liquidation, and the provision of the information would not cause the liquidator to breach their duties. A liquidator must provide this information to a creditor within 5 business days of receiving the request, unless a longer period is agreed. If, due to the nature of the information requested, the liquidator requires more time to comply with the request, they can extend the period by notifying the creditor in writing.
Can creditors tell a liquidator what to do?
Creditors, by resolution, may give a liquidator directions in relation to a liquidation. A liquidator must have regard to these directions, but is not required to comply with the directions. If a liquidator chooses not to comply with a direction given by a resolution of the creditors, they must document their reasons. An individual creditor cannot provide a direction to a liquidator. Creditors can also compel the liquidator to call a meeting and can vote at that meeting to replace the liquidator with another of their choice.
How many liquidations happen each year?
Australia currently averages about 8,000 liquidations per year but has experienced a significant decrease since COVID-19. CVLs are on average 40% of the national total, so they average around 3,200 per year. Court Liquidations average 30% of the total with around 2,400 per year and Voluntary Administrations average 22% at around 1,760 per year.
Every company’s circumstances are different. We strongly encourage anyone considering liquation to give us a call to discuss your specific circumstances. We may even recommend a cheaper (or free!) solution.