Author
Edwin NarayanDirector & ASIC Registered Liquidator
1300750599
Our guide to Creditors Voluntary Liquidation provides you with a comprehensive understanding of what is involved in the process, why you would enter it, and how our team at Mackay Goodwin can assist.
What is a creditors’ voluntary liquidation?
Creditors’ Voluntary Liquidation (CVL) is a formal insolvency process where the directors of an insolvent company voluntarily appoint a liquidator to wind up the company’s affairs and distribute its assets to creditors.
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.
In contrast to a members’ voluntary liquidation, which applies to solvent companies, creditors’ voluntary liquidation occurs only for insolvent businesses.
Why would a business enter a creditors’ voluntary liquidation?
Winding up the company through creditors’ voluntary liquidation might be the best option for an insolvent business for several reasons.
Company/Financial
- Avoid trading while insolvent: Insolvent trading 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.
Directors
Undertaking a creditors’ winding-up procedure can be beneficial to directors for various reasons:
- 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.
The 5-step creditors’ voluntary liquidation process
Here’s a quick overview of the 5 key steps involved in the CVL process, outlining what to expect from start to finish when winding up an insolvent company.
1. Meeting of Directors
Day 1
Directors meet and agree that the company is no longer viable. A majority vote is determined and a company resolution is passed.
2. Liquidation Appointment Documents
Day 2-7
Your ASIC-registered liquidator will lodge the appropriate documents with ASIC and notify other government entities like the ATO of the appointment. As soon as the liquidator has been appointed, any unsecured creditors can no longer start or continue action against the company (unless a court allows it).
3. Report to Creditors
Day 10
The liquidator then takes the necessary responsibility of the company. They have a duty to all company creditors to collect, protect, and realise the company’s assets. The liquidator creates a creditors’ report within 10 business days of the appointment. This allows unsecured and secured creditors to get updates, ask questions, and communicate directly with the liquidator and their team.
To begin their reporting, the liquidator reviews the company's books and records. This reporting must be completed in accordance with strict timeframes set by ASIC.
4. Administration of Liquidation
1-3 months
Once the liquidator has reviewed the company’s financial records, the findings are reported to ASIC. If funds are available after assets have been realised (sold), a dividend to creditors according to a specific priority order of payment.
5. Finalising Liquidation
3-6 months
Finally, the liquidator will lodge the appropriate documentation (form 5603) with ASIC to have the company deregistered. The company will be officially deregistered 3 months after the form has been lodged.
Who places a company into 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 the 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 it 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 role of the liquidator?
The liquidator has several roles and responsibilities during the CVL process. 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.
How long does the liquidation process take?
A creditors’ voluntary liquidation usually takes up to 3-6 months, however, there is no defined time limit on the process. Our team at Mackay Goodwin administers liquidations in a cost-effective and time-efficient manner. We can put a company into liquidation within 24 hours.
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 varies depending on certain factors:
- Size of the company
- Types of assets
- Value of assets
- Nature of the business
Insolvency laws can be complicated. Employing a liquidator ensures that all steps in the process are completed as required by law.
The average cost of liquidating a small company is between $4,000 and $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.
ASIC prescribes the maximum amount of remuneration that external administrators can charge but additional costs are frequently incurred throughout the process.
Know your options
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 with liabilities of $1 million max. 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. Mackay Goodwin offers a free consultation service that will help you deal with any financial challenges. For all insolvency matters including liquidation, contact us today.
What are the outcomes of a liquidated company?
The outcomes of liquidation can vary for each party involved in the company.
Directors
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.
Credit reporting agencies keep track of insolvent companies that have entered liquidation, alongside the names of the company's directors. This is kept on file for seven years.
Depending on the situation, the director could become personally liable for the company’s unpaid debt. This only occurs if there is unpaid SGC and the director has not worked with the ATO to retrieve that debt.
Shareholders
Being a shareholder of a company that enters liquidation has no serious effects, other than the loss of the value of the shares.
Creditors
A creditor refers to a person or company that is owed money by the company in liquidation. When a company is liquidated, creditors are notified and given regular reports by the liquidator. The outcome for creditors depends on the company’s available assets. If funds are recovered, creditors may receive a partial repayment, known as a dividend, based on their priority and the amount owed. However, in many cases, unsecured creditors may receive little or no return.
Employees
All employees of a liquidated company will lose their employment as it 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.
How Mackay Goodwin can help
While the work in a creditors’ voluntary liquidation is mostly carried out by a liquidator, knowing what to do and where to begin can be a challenging and daunting process.
Mackay Goodwin has helped countless Australian businesses with insolvency challenges. Getting advice from local insolvency practitioners ensures you follow the correct steps. If you’re looking for expert advice about entering company liquidation, contact us today for a free consultation.
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