Your Guide to Creditors’ Voluntary Liquidation
A Creditors Voluntary Liquidation (CVL) is a type of liquidation that occurs when the members of the company determine the Company is insolvent and it needs to be wound up. A CVL is the most common type of liquidation commenced voluntarily, and its purpose is to wind up the affairs of the Company and to distribute the company’s assets among creditors.
Our guide to Creditors Voluntary Liquidation provides you with a great understanding of what is involved in the process, why you would enter and how our team at Australian Debt Solvers can help.
What is a creditors’ voluntary liquidation?
A Creditors’ voluntary liquidation is a type of liquidation initiated by the Directors and shareholders, and it’s one of the most common types of liquidations. 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, the liquidator is appointed. The liquidator then alleviates the director of the company stress, takes control, and winds up its affairs in an orderly, fair way for the benefit of the company’s creditors. When entering into liquidation voluntarily, the company appoints a liquidator of their choice, as opposed to a court appointed Liquidator, in an involuntary liquidation.
The liquidation follows a simple 5-step process before the company is wound up and deregistered. If the company has received a wind-up application, the director of the company must enter a court-ordered liquidation, and cannot proceed with a creditors voluntary liquidation.
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.
Winding up the company through a creditors’ voluntary liquidation might be the best option for an insolvent business for several reasons.
- The business is unsalvageable – With some smaller companies, the voluntary administration process might be too expensive, and not viable to save the business.
- Run out of cash – The indebted company might have run out of money to pay the ATO and other creditors, and does not have any access to cash to fund trading or any arrangements to pay its outstanding debt.
- No assets – The company might have no assets or no assets of notable value to save, recover or sell off to 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. Therefore, it may not be realistic to consider or continue trading a business that does not have the ability to generate a profit.
- 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 in some cases, prior to the issuance of a DPN.
- 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 up an insolvent business lets you move on to other things and life.
Creditors’ voluntary liquidation: the process
A creditors’ voluntary liquidation can begin in two ways.
- creditors vote for liquidation after a voluntary administration ends or a deed of company arrangement (DOCA) has been terminated.
- Alternatively, it could be initiated when the company’s shareholders resolve to liquidate the company.
The 5-step CVL process
- Liquidation Appointment Documents
Your registered insolvency practitioner will lodge the appropriate documents with ASIC and notify other government entities like the ATO of the appointment.
- Registered Liquidator by ASIC
As soon as the company goes into liquidation and the liquidator has been appointed, any unsecured creditor/s can no longer start or continue action against the company (unless a court allows it).
- Report to Creditors
The liquidator then takes necessary responsibility of the company and has a duty to all creditors of the company. They will collect, protect, and realise the company’s assets. The liquidator creates a report to creditors within 10 business days of the appointment. This creates an opportunity for unsecured and secured creditors to obtain answers to questions, get an update on the status of the business and open lines of communication to converse directly with the liquidator and their team. The Liquidator will review the books and records of the company to begin their reporting. This reporting must be done in accordance with strict time frames set by ASIC.
- Administration of Liquidation
Once the liquidator has reviewed the company’s financial records, our team will report the findings to ASIC. If funds are available after assets have been realised (sold), a dividend to creditors according to a specific order of priority will be paid.
- Finalising Liquidation
The last step is when the liquidator will lodge applicable documents with ASIC and request ASIC deregisters the company. At this point the liquidation is complete.
How long does the liquidation process take?
We can put the company into liquidation within 24 hours. To begin, we require company information and then can proceed with the process. A CVL usually takes up to 3-6 months, however there is not defined time limit on the process. Our team at Australian Debt Solvers administer liquidations in a cost-effective and time efficient manner.
How much does a CVL cost?
Our team at Australian Debt Solvers carry out CVLs in a cost-effective manner. Each situation is different.
What are the outcomes for directors, shareholders, creditors, and employees of a liquidated company?
The outcomes of liquidation can vary for each party involved in the company.
A director of a liquidated company can carry out life as usual and even proceed to become a director of another company in future. There are no severe consequences for being a director of a liquidated company as the company is a separate legal entity. There are credit reporting agencies that keep track of insolvent companies who have entered liquidation, alongside the names of the directors of such companies. It is important to note that this is only on your file for seven years. However, depending on the situation there are times when the director may potentially become personally liable for the company’s debt. This only occurs if there is unpaid SGC and the director has not worked with the ATO to retrieve that debt.
Being a shareholder of a company that enters liquidation has no serious effects, other than the loss of the value of the shares.
A creditor refers to a person or companies that are owed money by the company in liquidation. One of the first steps involved in liquidation is notifying all creditors that the company has entered liquidation. Creditors receive several reports on the process of liquidation, which states the likelihood of them receiving any distribution or dividend by the liquidator.
All employees of the company will lose their employment as the company winds up its affairs. Depending on the company’s situation, if they are unable to be paid their employee’s entitlements, the government assists this with their Fair Entitlements Guarantee scheme.
What is the role of the liquidator?
There are several roles and responsibilities the liquidator has during the process of a creditor’s voluntary liquidation. The overarching goal is to wind up the affairs of the company in a cost-effective manner. The Liquidator acts in the best interests of the Company and its creditors.
To learn more about the role of the liquidator, read our article ‘What is a liquidator? Roles and responsibilities’.
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. As with all types of liquidations, a creditors’ voluntary liquidation results in the company being wound up. This allows the director of the company to then move on to another chapter or path.
How Australian Debt Solvers can help
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 and daunting 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, contact us today for a free consultation.
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