What is a Members Voluntary Liquidation?
A company might shut down involuntarily, due to court order or pressure from creditors or other parties. But what happens when a solvent company wants to shut down to stop trading permanently?
This can happen through a members’ voluntary liquidation. We explore what this type of liquidation involves and why businesses might opt for this process.
What is a members’ voluntary liquidation and how does it work?
A members’ voluntary liquidation means the members agree to shut down the business. It’s a way for solvent companies to enter liquidation and cease trading permanently.
It’s astraightforward, easy way to wind up a company quickly, and you can ensure your business’s affairs are dealt with in a cost-effective, orderly way. It’s important to keep in mind that creditors aren’t involved in starting a members’ voluntary liquidation, and only members make the decision to wind up the company.
When you opt for this type of liquidation, your business assets get distributed, and shareholders and creditors are paid before the business is shut down. Assets might be realised (sold), or you could have assets distributed in specie, which means they’re distributed in their actual form rather than then in the form of post-sale cash proceeds.
Note if an insolvent company wants to liquidate, it has to do so through a creditors’ voluntary liquidation.
Why choose members’ voluntary liquidation?
So why might a solvent company choose to shut down? A few different reasons could drive a solvent company to choose liquidation.
- Viability – The company might not be insolvent (still able to pay its bills) but it’s no longer viable. Given the company has little prospect for growth, the directors might opt to discontinue trading.
- Lifestyle and retirement – Company directors and shareholders might be planning to retire, move overseas, or something similar. These lifestyle and retirement reasons could lead to a solvent company choosing to liquidate.
- Tax effective – Members’ voluntary liquidation could offer a tax-effective way to distribute assets to shareholders.
- Sale or transfer – In the event a third party buys the business’s assets or the assets are transferred to a third party, the company might not be needed anymore. If the company doesn’t meet the criteria for voluntary deregistration, it can be wound up through a members’ voluntary liquidation.
- Restructuring – Large corporate groups might go through a restructuring process where subsidiary companies are no longer needed. In this case, a members’ voluntary liquidation can be the best option for closing down the subsidiary.
What’s the process for a members’ voluntary liquidation?
First, the company directorsneed to meet and pass a resolution to sign a Declaration of Solvency. The resolution should also agree a general meeting of members be called to consider the resolutions and to consider a wind-up. The declaration means the directors believe the company will be able to pay all its existing debts in full within 12 months of the commencement of the winding up.
The Declaration of Solvency then needs to be lodged with ASIC. This should occur before a formal notice of an extraordinary meeting of members is sent out. Members usually should be given 21 days’ notice of the meeting. The proposed liquidator should provide members with a formal remuneration report at the same time as the extraordinary meeting of shareholders is convened.
The members then need to meet to pass a number of resolutions. The resolutions should establish that the company will be wound up, agree that a liquidator will be appointed, and set an amount for the liquidator’s remuneration. A resolution should also be passed to establish the date when the books and records of the company can be destroyed. Then the resolutions should be lodged with ASIC. For the liquidation to go ahead, at least 75% members of members who attend must vote in favour of winding up the company, through a special resolution.
Once the liquidator has been appointed, he or she will notify a list of interested parties to the liquidation before finalising the affairs of the company. This will include things like tax returns, realising assets, paying creditors, and distributing surplus assets to shareholders. The liquidator also fulfils other obligations, like advertising their appointment, notifying the ATO and interested parties at the relevant stages, and providing information to members.
Once the affairs have been dealt with, the liquidator will call a Final Meeting of Members, giving the members at least a month’s notice. The liquidator will also lodge a Final Return and a Final Liquidator’s Account of Receipts and Payments with ASIC. The company will be automatically deregistered three months after ASIC receives the final return for the final meeting.
So a members’ voluntary liquidation allows solvent companies to shut down in an orderly, cost-effective way. A solvent company might choose liquidation because of viability issues, restructuring, sale, lifestyle, or other reasons. As with other types of liquidations, a members’ voluntary liquidation follows strict procedures, so if you’re considering this option for your company, seek expert advice to ensure full compliance.
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