If the shareholders of an insolvent company vote in favour of liquidation, or if creditors vote in favour of liquidation this is commonly referred to as creditors’ voluntary liquidation. It is the most common type of insolvent liquidation.
What does creditors’ voluntary liquidation mean?
The company liquidation process for an insolvent company sees an independent registered liquidator step in to manage its dissolution. The liquidator facilitates the wrapping up of the entity’s affairs in a way that benefits creditors. So what are liquidators exactly? They are specialist accountants registered with ASIC and qualified to wind up the affairs of a company.
According to Australian insolvency law and liquidation law, there are two types of insolvent liquidation: creditors’ voluntary liquidation, and court liquidation.
The most common type of insolvent liquidation is creditors’ voluntary liquidation (CVL). Sometimes referred to as creditors’ voluntary winding up, CVL occurs when an insolvent company’s creditors determine that it has little chance of becoming solvent again and must be liquidated, sometimes after a period of voluntary administration or a terminated deed of company arrangement (DOCA). At this point a liquidator is typically appointed to oversee the process, allowing all parties to avoid Court involvement.
Creditors’ voluntary liquidation allows for creditors to gain from the collation and distribution of the company’s assets, and for an investigation into why insolvency, and company failure, occurred.
The creditors’ voluntary liquidation process
The process of CVL typically involves the following steps:
- Liquidation is pushed for – It is determined that a company cannot repay its debts and its creditors, or in certain cases its directors, vote to place it into liquidation.
- Appointing a liquidator – A liquidator is appointed to the company. The role of the liquidator is to oversee the process of liquidation, and remain independent of the company.
- Published Notices – The appointed liquidator will publish a notice on the ASIC Published Notices Website. Any company, including your creditors, are able to browse for insolvency and deregistration notices here.
- Creditors notified – Creditors will be advised of appointment of the liquidator.
- Creditor’s meeting – The liquidator may hold a creditor’s meeting, or the creditor’s may do so themselves. At this stage, the creditors may be called upon to approve the liquidators suggested proposal for the action plan of the company. Alternatively, the creditor’s may choose to appoint a replacement liquidator.
- The process of liquidation – Liquidation begins, generally involving the closing of the business, selling of assets and making payments to creditors.
- Company deregistration – Once the CVL is completed, ASIC is notified and the company is deregistered.
Directors should keep in mind that the effect of liquidation on directors can be severe if criminal offences are identified by the liquidator. Further, if the director is found to have traded while insolvent, they may be held personally liable for company debts. The director may even be stung with a Director Penalty Notice (DPN) by the Australian Taxation Authority.
When and why would voluntary liquidation occur?
In Australia, voluntary liquidation occurs when a company’s leadership, shareholders or creditors determine it should not continue to operate, or a deed of company arrangement has been terminated. It is proposed to terminate a company’s operations, wrap up its affairs, and distribute its assets to the profit of any creditors – as per their assigned priority.
There are two types of voluntary liquidation, depending on whether the business is insolvent or solvent:
Creditors’ Voluntary Liquidation (CVL) – Relevant for insolvent companies, and also known as when a company does not have enough assets to meet its liabilities. As mentioned above, the directors, stakeholders or creditors vote to appoint a liquidator for the dissolvement of the company and its assets to pay creditors.
Members Voluntary Liquidation (MVL) – Relevant for solvent companies, also known as when a company has enough assets to meet its liabilities. In this instance, the directors or shareholders will proceed with the termination of a company, and its assets will be liquidated and distributed to the shareholders.
A MVL generally occurs when the director(s) and shareholder(s) decide that the company is no longer required and the assets should be converted into cash and distributed to the shareholder(s).
How is voluntary liquidation different from involuntary liquidation?
The process of liquidation may either be voluntary or involuntary. Where voluntary liquidation is one involving company leadership and shareholders agreeing to move forward with the dissolvement of a company, involuntary liquidation is typically initiated by creditors through applying to the Court for a winding up order. It can be applied for by a creditor, shareholder, director, or even ASIC.
There are two types of involuntary liquidations: Official (or Court) Liquidations and Provisional Liquidations.
Official (or Court) Liquidation (OL) – An OL will typically be pursued by a creditor, most commonly to push for winding up proceedings to commence when the company does not pay an amount demanded under a Wind Up Notice.
Provisional Liquidation (PL) – A PL typically occurs when there is a dispute between directors and shareholders. This type of involuntary liquidation is much less common, and is generally pushed for when a company’s assets are deemed at risk.
What happens when a company goes into liquidation in Australia?
So what does liquidation mean? Well, whether the type of liquidation is voluntary or involuntary, the intended purpose is to see the assets of a company liquidated – as the name suggests – and converted into cash.
When liquidation occurs, it usually involves:
- Identifying and selling the company’s assets
- Contacting creditors and receiving any claims
- Updating creditors with progress reports
- Making payments to creditors
- Investigating the failure of the company, including possible criminal offences
- Selling or deregistering the business
If your company is making the choice between liquidation vs administration as part of the voluntary insolvency process, keep in mind that administration is available to assist or rescue a company by returning it to profitability. Liquidation often occurs when administration is no longer an option.
What is the end result after voluntary liquidation?
In the liquidation process, a company will see its stock, property, equipment, and non-cash assets sold, resulting in the company no longer trading. This means that the end result of voluntary liquidation is the converting a company’s assets into cash, which may be needed to pay any outstanding debts.
Once the assets have been identified and sold, the liquidator’s investigation is finalised, and distributions of payments are made to creditors, the liquidator will apply to ASIC to have the company deregistered. At this point, creditors will no longer be able to make any claims against the company.
How do you know if a company has undergone voluntary liquidation?
As mentioned above, one of the stages of the liquidation process is that the liquidator will publish a notice on the ASIC Published Notices website. If you are a creditor wondering how to check if a company is in liquidation Australia, you may be able to simply conduct a company search through this website yourself.
However, the process of manually checking if a company’s clients, trading partners or suppliers have gone into voluntary liquidation can be time consuming and tedious. It may be worth instead considering utilising the debtor management tools offered by a leading credit reporting agency, like CreditorWatch. Our customers that sign up for 24/7 monitoring and alerts will be notified immediately by our team when we’re advised that any of their client base has been flagged as in voluntary liquidation.
Instant notification of a company going into liquidation could allow your business to move swiftly and take any appropriate action, particularly if that company owes you payment. If a liquidator finalises its processes and moves to deregister a company, creditors will no longer be able to make any claims against it. You may be able to nominate yourself as a priority creditor, helping to ensure you are paid in the liquidation process.
Why does voluntary liquidation matter for creditors?
For creditors, liquidation is generally seen as one of the last ditch efforts to ensure payments owed to their business are made partly, or in full. The voluntary liquidation of a company is a significant process for creditors, and should be monitored carefully.
How long does the process of voluntary liquidation take?
Generally speaking, the process of voluntary liquidation can take several months. According to insolvency experts, a straightforward CVL may only take three months whereas a more complicated CVL could take up to eight months or more.
For context, according to ASIC, the liquidator must give creditors “notice of their appointment and information advising creditors about their rights within 10 business days after their appointment as liquidator in a creditors’ voluntary liquidation (or 20 business days in a court liquidation)”.
Following this, within three months after their appointment, the liquidator must send a report to creditors containing information about:
- “The company’s estimated assets and liabilities
- Inquiries undertaken and further inquiries that the liquidator may need to undertake
- What happened to the company’s business
- The likelihood of creditors receiving a dividend (part repayment of their debt)
- Possible recovery actions.”
This means that, at a minimum, the process of voluntary liquidation should take at least three months.
Don’t be the last to know when a business that owes you money is in the process of liquidation. Get notified when your customers and suppliers go into liquidation with CreditorWatch’s sophisticated 24/7 monitoring and alerts. You’ll be instantly advised through automatic emails whenever new information about your partner entities becomes available.
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