Companies that are struggling with insolvency have a number of options available to them under Australia’s Corporations Act 2001. Among these options, Creditors’ Voluntary Liquidation is a common solution that’s used to wind up businesses and repay debts to creditors. Voluntary Liquidation allows directors to take responsibility for financial issues and bring their companies to an organised conclusion.
In this article we’ll dive into the details of Creditors’ Voluntary Liquidation and how the process allows creditors to recover the money they are owed.
What Is Creditors’ Voluntary Liquidation?
A Creditors’ Voluntary Liquidation (CVL) is an insolvency process that allows the directors of a company to voluntarily wind the business up. If the company directors become aware of serious financial difficulties, they can resolve to appoint a Liquidator without the need for Court intervention. This allows the company to be wound up in an orderly manner and have its assets distributed among employees and creditors.
The directors or shareholders of a company may vote to voluntarily appoint a Liquidator when:
- They become aware that the company is insolvent
- They suspect that the company will become insolvent
- At the end of a voluntary administration
- A Deed of Company Arrangement (DOCA) is terminated
It’s also common for the directors of a company to enter into CVL after receiving demands from creditors or where the ATO begins taking action against the company. Directors will often choose to enter into liquidation rather than risking insolvent trading and the personal liability that comes with failing to meet tax obligations.
When to Consider Creditors’ Voluntary Liquidation
The directors or shareholders of a company have the option to voluntarily appoint a Liquidator if the business is insolvent, or if they suspect that it will become insolvent. Since insolvent trading is illegal in Australia, it often benefits company directors to wind the business up rather than trying to carry on.
Some of the key warning signs of insolvency include:
- Consistent, ongoing losses
- Poor cash management
- Increasing debt to value ratio
- Difficulties paying suppliers and workers on time
- Demands of payment from creditors
- Problems with obtaining new lines of finance
- A lack of management and business direction
Insolvency looks a little different for each business. Large-scale companies with lots of moving parts may struggle to recognise the early signs of insolvency. That makes it unlikely the business could be saved through administration or a Deed of Company Arrangement. In these cases, CVL is a common solution that avoids the need for Court Liquidation.
The Creditors’ Voluntary Liquidation Process
The Creditors’ Voluntary Liquidation process begins from the moment a Liquidator is appointed by the directors. A Liquidator is a specialist accountant that’s independent of the insolvent business. Their role is to provide an impartial service that allows creditors to recover as much of their debt as possible.
The Liquidator begins the process by informing creditors of the liquidation. This notice includes information about the company, creditors’ rights and how creditors can contact the Liquidator.
In some cases the Liquidator may also hold a creditors’ meeting, although they aren’t required to do so as part of a voluntary liquidation. From there the liquidation follows a normal format with Liquidator identifying, gathering and selling the company’s assets to reclaim the money that creditors are owed. Along the way the Liquidator will keep creditors informed of their progress and make reports on their findings while investigating the company’s financial affairs.
Once all the company’s assets have been collected and sold, funds will be distributed as follows:
- The Liquidator’s costs and fees are paid first
- Outstanding employee wages and superannuation
- Outstanding employee leave entitlements
- Employee retrenchment pay
- Unsecured creditors
Finally, once all distributions have been made, the Liquidator will apply to ASIC to deregister the company. A deregistered company no longer exists and it cannot be pursued by creditors for outstanding debts.
Creditors’ Meetings
Unlike with court liquidation, the Liquidator isn’t obligated to call a creditors’ meeting during CVL proceedings unless it needs to approve a specific matter. Although there is no obligation, the Liquidator can still call a creditors’ meeting if they are directed to do so.
The Liquidator will be required to call a creditors’ meeting if:
- Less than 25% of creditors in number – representing less than 5% in value – request a meeting in writing, and;
- None of the creditors who request the meeting are related to the insolvent company, and;
- The request is made no later than 20 days after the resolution to wind up the company is made
Creditors’ meetings allow the creditors and Liquidator to meet and discuss progress, approve matters or approve the Liquidator’s fees. If a creditors’ meeting is called to vote on an issue, the resolution will be passed if more than 50% of the creditors (in number and in value) vote in favour of the resolution. This ensures creditors still have the power to influence the outcome of liquidation proceedings, even without a Court order.
