three creditors discussing about voluntary liquidationthree creditors discussing about voluntary liquidation

A Guide to Creditors’ Voluntary Liquidation

  • January 2nd, 2019
  • David Hill

Of the different insolvency processes, liquidation is the most drastic, resulting in the company closing down permanently. Liquidation can be ordered by a court, a members’ voluntary liquidation, or a creditors’ voluntary liquidation.

We look at what a creditors’ voluntary liquidation is, explain why you would enter it, and outline the process.

What is a creditors’ voluntary liquidation?

Creditors’ voluntary liquidation is a type of liquidation started by the company, and it’s the most commonly used type of liquidation. This type of liquidation is commenced voluntarily by a special resolution of the company’s shareholders.

Once the shareholders have signed a resolution to liquidate the company, a liquidator is appointed. The liquidator then takes control of the company and winds up its affairs in an orderly, fair way for the benefit of the company’s creditors. As an option, it allows companies to appoint a liquidator and wind down operations without the involvement of lawyers and the courts.

The liquidation follows a fixed process before the company is shut down and deregistered. Note a company that has a wind-up application (based on insolvency) filed against it in court can’t later resolve to wind up through a creditors voluntary liquidation. This rule is designed toprevent it from hampering the actions of creditors.

Why would a business enter a creditors’ voluntary liquidation?

A business might choose to voluntarily enter liquidation through a creditors’ voluntary liquidation because it is insolvent. In contrast to a members’ voluntary liquidation, which applies to solvent companies, a creditors’ voluntary liquidation is for insolvent businesses, like court-ordered liquidation.

Shutting down the company through a creditors’ voluntary liquidation might be the best option for an insolvent business for a number of reasons.

  • The business is small – With smaller companies, the voluntary administration process might be too expensive to save the business.
  • Run out of cash – The indebted company might have run out of money to pay the ATO and other creditors.
  • No assets – The company might have no assets or no assets of notable value to sell off and pay creditors.
  • Trading at a loss – The company might be trading at a loss or unable to recover from past losses. Alternatively, it might already have ceased to trade.
  • Voluntary administration not viable – If voluntary administration (and a Deed of Company Arrangement) isn’t a viable option, creditors’ voluntary liquidation might be the only choice for struggling companies.

Companies might also opt for a creditors’ voluntary liquidation because of its potential benefits for directors:

  • Protect against personal liability – Liquidation could help directors avoid personal liability for tax debts.
  • Stress and worry – Shutting down a company that’s no longer viable could end the stress and worry of trying to save your business.
  • Creditor actions – Liquidation can stop creditors demanding payment.
  • Move on – Winding down an insolvent business lets you move on to other things.

Creditors’ voluntary liquidation: the process

What does the creditors’ voluntary liquidation process involve?

A creditors’ voluntary liquidation can begin in two ways. First, it can start if the creditors vote for liquidation after voluntary administration or a terminated deed of company arrangement. Alternatively, it could be initiated when the company’s shareholders resolve to liquidate the company.

The next step is to appoint a liquidator, which takes effect when the directors and shareholders sign the resolution.

Next you or your insolvency practitioner will need to lodge the appropriate documents with ASIC and notify other government entities like the ATO of the appointment.

Note: after the company goes into liquidation and the liquidator has been appointed, unsecured creditors can no longer start or continue action against the company (unless a court allows it).

The liquidator then takes control of the company and he or she has a duty to all creditors of the company. He or she will collect, protect, and realise the company’s assets. The liquidator will hold creditors meetings to keep creditors up to date as to what’s happening.

The liquidator is also responsible for investigating and reporting to creditors about the company’s affairs, including its failure. This reporting has to be done in accordance with strict time frames.

Once the liquidator has reviewed the company’s financial records, he or she will report the findings to ASIC. If funds are available after assets have been realised (sold), he or she will pay a dividend to creditors according to a specific order of priority.

Finally, the liquidator will lodge applicable documents with ASIC and request ASIC deregisters the company.

At this point the liquidation is complete.

Making the decision to enter creditors’ voluntary liquidation

Creditors’ voluntary liquidation is one of three types of liquidation and it’s typically used by insolvent companies. From insolvency to putting an end to creditor actions, a range of reasons might motivate a struggling business to opt for creditors’ voluntary liquidation.

Once the liquidator is appointed, the company’s assets are realised and any funds go towards paying creditors. And as with all types of liquidation, a creditors’ voluntary liquidation results in the company shutting down permanently.

While the work in a creditors’ voluntary liquidation is mostly carried out by a liquidator, knowing what to do and how to begin can be a challenging process. Getting advice from insolvency practitioners helps you get the steps right. Australian Debt Solvers has helped countless Australian businesses with insolvency challenges. If you’re looking for expert advice about entering creditors’ voluntary liquidation, call Australian Debt Solvers now on 1300 789 499.

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