Liquidation 101 – an explanation of the different types of liquidation
Most company directors don’t have experience with how to deal with a struggling company and often don’t understand the terms Advisers use. Part of that is that the official names of the different types of liquidation don’t make a lot of sense! So, I have gone back to basics and explained below: Voluntary Liquidation, Creditors Voluntary Liquidation, Members Voluntary Liquidation, Official Liquidation, Court Liquidation and Provisional Liquidation.
What is a Liquidation?
Liquidation is a formal way to wind up a registered company. It is only possible for companies registered with the Australian Securities and Investment Commission (ASIC). You can tell if you have a registered company if it has an ACN number and usually has Pty Ltd (short for Proprietary Limited) at the end of its name. If you run a business as a Sole Trader or in a Partnership framework you can’t wind it up with a liquidation.
A Voluntary Liquidation is started by resolution of the company’s Directors and then its Shareholders. A Voluntary Liquidation takes one of two forms depending on the solvency of the company (if it can pay its debts when they fall due). Solvent companies require a Members Voluntary Liquidation (MVL). Insolvent companies require a Creditors Voluntary Liquidation (CVL).
Members Voluntary Liquidation
A Members Voluntary Liquidation (MVL) is a formal way to wind up a solvent company. An MVL requires the company to be able to pay all of its debts and that all tax lodgements are up to date.
Creditors Voluntary Liquidation
If your company is insolvent (can’t pay its’ debts when they fall due) then it needs a Creditors Voluntary Liquidation (CVL). Don’t be confused by the name – a CVL is still initiated by the shareholders of a company.
Sometimes it’s called a Court Liquidation. In this variety, a creditor of the company applies to court to force the debtor company into liquidation. The process to do so is lengthy and can be relatively expensive for the creditor. The process involves the creditor serving a Statutory Demand on the company to pay a debt pursuant to section 459E of the Corporations Act. If the company fails to pay the money demanded in the Statutory Demand the creditor then makes an application to the Court to have the company wound up.
In urgent cases involving assets that may be at risk an applicant can go to the Courts and request a Provisional Liquidator be appointed to protect those assets. So in a Provisional Liquidation the Liquidator safeguards the assets, and assesses the position of the company, then usually recommends to the Court an appropriate outcome or resolution