Creditors Voluntary Winding up of a Company Explained
‘Winding up a company’ is the process where a company ceases its operations and takes the necessary steps to permanently end the company. Liquidation is the phase of the process where any company assets are sold off and distributed accordingly. This guide provides details on creditors’ voluntary liquidation as an insolvency process, the effect of the winding up, how monies are distributed, and the costs involved.
What does creditors liquidation mean?
Creditors’ voluntary liquidation or CVL as it is often referred to, is an insolvency process that is initiated by the company and the most used type of liquidation. The financial status is the most important factor to take note of when looking at creditors’ voluntary winding up. Creditors’ voluntary liquidation is for companies that are either trading insolvent, or likely to become insolvent and no longer able to pay debts as they fall due. When a solvent company decides to stop trading permanently, they enter what is known as a members’ voluntary liquidation.
Why would a creditors’ voluntary winding up take place?
There is a long list of reasons why companies decide to begin the process of voluntarily winding up. We have broken them down into company, financial, and reasons relating to Directors. They are outlined in detail below:
- Avoid trading while insolvent:Trading while insolvent is illegal and it is a key responsibility of Directors to prevent this from occurring.
- Size: Voluntary administration is an alternative insolvency process that is available but can be costly. Smaller companies may not have the money or time to consider a restructure and turnaround. As a result, creditors’ voluntary liquidation is a more suitable option.
- Financial distress: This includes trading at a loss, declining profits, negative cash flow and a lack of assets.
- Unable to meet financial commitments: A major sign of financial distress is an inability to pay debts as they fall due. This includes loan repayments, supplier invoices, overdue rental fees and outstanding tax payments to the ATO.
Undertaking a creditors’ winding up procedure can be beneficial to Directors. It can:
- Prevent personal liability: If Directors allow a company to trade while insolvent, they may be held personally liable. Winding up a company can prevent Directors from receiving a Director Penalty Notice (DPN).
- Prevent creditor actions: Placing a company into voluntary liquidation can stop creditors demanding payment and prevent a court initiated liquidation. Similarly, if you have received a wind up notice, you must act immediately.
- Allow for new beginnings: The easiest way to alleviate stress is to be proactive. Winding up a company that is no longer viable prevents any additional debt from being accrued and creates a path to new beginnings.
Who places the company into liquidation in a creditors’ voluntary liquidation?
A creditors’ voluntary liquidation can be initiated in one of two ways:
Directors: As per section 248 of the Corporations Act, a special resolution may be passed by Directors of a company to begin the process of liquidation. A majority vote is required by all those eligible to vote and must be signed.
Creditors: Creditors can vote for liquidation after voluntary administration or a terminated Deed of Agreement (DOCA). This means that attempts were made to continue operations to pay creditors but is no longer a viable option.
Once a majority vote is passed in either circumstance, a liquidator is appointed and the process is initiated.
What is the procedure for voluntary winding up?
Depending on the size of the company and the number of assets, it can take months for the creditors’ voluntary winding up procedure to be completed. The major steps are:
- Meetings of Directors: Directors meet and agree that the company is no longer viable. A majority vote is determined and a company resolution is passed.
- Liquidator Appointed: As part of the resolution, Directors and shareholders will agree on the appointment of a liquidator who will subsequently lodge the necessary documents with ASIC and notify the appropriate authorities.
- Collect, sell and distribute: The primary role of the liquidator is to collect a full list of the company assets, liquidate those assets and distribute the monies gathered to creditors in priority order.
- Investigate: The liquidator must also investigate and compile a full report on the company affairs including its failure. They must also hold creditor meetings where required and submit the report to ASIC.
- Documents: Finally, the liquidator will lodge the appropriate documentation (form 5603) to have the company deregistered. The company will be officially deregistered 3 months after the form has been lodged.
ASIC provides a full creditors’ voluntary liquidation flowchart with specific details on the forms and lodgement timelines.
How much does creditors voluntary liquidation cost?
The cost of completing a creditors’ voluntary liquidation will vary depending on the size of the company, the types of assets and their value, along with the nature of the business. Employing a liquidator will ensure that all steps in the process are completed as required by law. Insolvency laws can be complicated which emphasises the need for a specialist liquidator.
ASIC prescribes the maximum amount of remuneration that external administrators can charge but it should be noted that there are additional costs incurred throughout the process. The average cost of liquidating a small company is between $4,000-$8,000. If a company has no assets, a liquidator may ask Directors to make a payment for the amount into a trust account to cover the anticipated minimum costs of the process.
The changing economic landscape has brought about significant changes to insolvency laws. A simplified liquidation process has been introduced to help minimise the costs of liquidation for small businesses that have liabilities of no more than $1 million. Similarly, safe harbour laws have been modified to provide Directors with further protection when attempting to develop a plan that will bring about positive changes that will help avoid liquidation.
An effective way to learn about your financial position and options is by talking to an insolvency specialist. Australian Debt Solvers offers a free consultation service that will help you deal with any financial challenges. For all insolvency matters including liquidation, contact us today.
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