What is a creditors’ voluntary liquidation in Australia?

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Companies struggling with insolvency have a number of options under the Australian Corporations Act 2001. Among these options is a creditors’ voluntary liquidation, a common solution used to extend businesses and pay off debts to creditors. Voluntary liquidation allows directors to take responsibility for financial matters and bring their companies to an organized conclusion.

In this article, we take a closer look at creditors’ voluntary liquidation and how it allows creditors to recover money owed to them.

Voluntary liquidation of creditors

What is creditors’ voluntary liquidation?

Creditors’ Voluntary Liquidation (CVL) is an insolvency procedure that allows the directors of a company to voluntarily wind up its operations. If the company’s directors are aware of serious financial difficulties, they can resolve to appoint a liquidator without the need for court intervention. This allows the company to be wound up in an orderly manner and to distribute its assets between employees and creditors.

A company’s directors or shareholders may vote to voluntarily appoint a liquidator when:

  • They realize that the company is bankrupt
  • They suspect that the company is going bankrupt.
  • At the end of voluntary management
  • The company’s arrangement (DOCA) has been terminated

It is common for a company’s directors to enter into a CVL after receiving a claim from creditors or when the ATO starts taking action against the company. Directors often prefer to enter into liquidation rather than risk the personal liability associated with an insolvent business and failure to meet tax obligations.

When to consider voluntary liquidation of creditors

The company’s directors or shareholders have the option of appointing a liquidator on their own accord if the business is insolvent or is suspected of becoming insolvent. As insolvent businesses are illegal in Australia, it benefits company directors to consolidate the business rather than trying to continue it.

Some key bankruptcy warning signs include:

  • Continuous, ongoing losses
  • Poor financial management
  • Increase debt to value ratio
  • Difficulty paying suppliers and employees on time
  • Payment requests from creditors
  • Difficulties in finding new financing lines
  • Lack of management and business direction

Bankruptcy looks a little different for every business. Large companies with many moving parts may struggle to spot early signs of bankruptcy. That makes the business unsalvageable through an administration or company arrangement. In these cases, a CVL is a common remedy that avoids the need for court liquidation.

Liquid dryer

Creditors’ Voluntary Liquidation Procedure

The process of creditors’ voluntary liquidation starts from the time a liquidator is appointed by the directors. A liquidator is a specialist accountant who is independent from an insolvent business. Their role is to provide an independent service that allows creditors to recover their debts as much as possible.

The liquidator starts the process by notifying creditors of the liquidator. This notice includes information about the company, creditors’ rights and how creditors can contact the Liquidator.

In some cases the liquidator may hold a meeting of creditors, although they are not required to be part of a voluntary liquidation. Then the liquidation is a standard format where the Liquidator identifies, collects and sells the assets of the company to recover the money owed to the creditors. During the course of his investigation of the company’s financial affairs, the Liquidator will keep creditors informed of their progress and report on their findings.

After all the assets of the company are collected and sold, funds are distributed as follows.

  1. Liquidator’s expenses and fees are paid in advance
  2. Higher employee wages and pensions
  3. Advanced labor leave rights
  4. Employee redundancy pay
  5. Unsecured creditors

Finally, after all distributions have been made, the Liquidator must apply to ASIC to liquidate the company. A liquidated company no longer exists and cannot be pursued by creditors for unpaid debts.

Meetings of creditors

Unlike a court liquidation, the liquidator is not obliged to call a meeting of creditors in the CVL process unless it needs to approve an issue. Although there is no obligation, the Liquidator can still call a meeting of creditors if ordered to do so.

If the liquidation follows, a meeting of creditors is required.

  • Less than 25% of creditors in number – representing less than 5% of value – request a meeting in writing and;
  • None of the creditors requesting the meeting are related to the insolvent company, and;
  • The request is made no later than 20 days after the decision to revive the company.

A meeting of creditors allows creditors and liquidators to meet and discuss proceedings, approve issues or approve liquidation payments. If a meeting of creditors is called to vote on an issue, the resolution is passed if more than 50% of creditors (in number and value) support the resolution. This ensures that creditors still have the power to influence ongoing proceedings even without a court order.



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