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A Guide to Creditors’ Voluntary Liquidation

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Liquidation is not something that any business owner wants to have to deal with, but sometimes it really is the best solution. A company may be put into liquidation by order of the court or it may be done on a voluntary basis. Voluntary liquidation can be achieved by two methods: creditors’ voluntary liquidation or members’ voluntary liquidation. This guide looks at the former.

What is creditors’ voluntary liquidation?

A creditors’ voluntary liquidation occurs when a business is insolvent and following a Special Resolution of the shareholders that a company should be wound up. According to the Corporation Act, insolvency means that the company directors cannot in good faith make a formal declaration stating that the company will be able to pay off its debts in the next twelve months. Before going down this path, you need to be absolutely sure that the company is insolvent. If not, you will need to look for an alternative method of winding up the company, such as a members’ voluntary liquidation.

Why choose a creditors’ voluntary liquidation?

In an ideal world there would be no need to put a company into liquidation, but once it becomes insolvent it may be your only option. Besides there are advantages in doing it on a voluntary basis rather than waiting for the courts to force the issue. A director has a responsibility not to trade an insolvent company and runs the risk of legal action for doing so; placing the business into voluntary liquidation avoids this risk. There are also important tax implications for company directors in the event that the ATO has issued a “director penalty notice”.

How does the liquidation process start?

The creditors’ voluntary liquidation process usually starts in one of two ways. Firstly, the creditors may vote to liquidate the company following a period of voluntary administration or a terminated deed of company arrangement. Alternatively a resolution may be passed by the company shareholders to put the business into liquidation. In the latter case, the shareholders will appoint a liquidator who will immediately call a creditors’ meeting. At this meeting the appointment will either be ratified or the creditors will appoint and alternative liquidator.

What happens next?

The liquidator will take control of all the affairs of the company. The directors of the company must assist the liquidators in any reasonable manner. The most important part of this assistance will be to provide the liquidators with all necessary company accounts and information. They may also supervise the general process, but all authority and responsibility will now rest with the liquidators.  The liquidators will perform their duties by realising any remaining company assets, investigating company affairs and reporting them to creditors, investigating the reasons behind the failure of the company and reporting any potential offences to ASIC, and distributing the proceeds of realisation.

What is the effect of the liquidation on the company?

Ultimately the purpose of liquidation is to wind up all company affairs. In the short term, the liquidators may continue to trade the company if they deem it in the best interests of the directors and creditors. The liquidation will conclude with the liquidators calling a final joint meeting of creditors and members, after which the company will be deregistered by ASIC.

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