Creditors’ Voluntary Liquidation: How the Process Works
Overview
A creditors’ voluntary liquidation, commonly referred to as a CVL, is a formal process used when a company is insolvent and restructuring is not considered viable or appropriate.
It provides an orderly framework for bringing the company’s affairs to an end. Control of the company passes to a registered liquidator, creditor claims are dealt with collectively, the company’s assets and financial history are examined, and any available funds are distributed under the priorities established by the Corporations Act.
The company remains registered while that work is completed. It is deregistered after the liquidation has ended.
Ceasing trade is not the same as winding up
A company may stop operating, but that alone does not resolve its legal and financial affairs.
Its debts remain payable, creditors may continue recovery action, and ongoing tax, ASIC and record-keeping obligations may still need to be addressed. The directors also remain responsible for the company while it continues under their control.
A CVL changes that position. Control of the company passes to a registered liquidator, who takes responsibility for its property and affairs and administers the winding up for the benefit of creditors as a whole.
A CVL is generally used where a company is insolvent. Where a company is solvent but has reached the end of its useful life, a members’ voluntary liquidation may instead be appropriate.
The decision starts with insolvency
Section 95A of the Corporations Act provides that a company is insolvent when it cannot pay all its debts as and when they become due and payable.
The assessment is based principally on cash flow rather than a simple comparison of assets and liabilities. A company may own substantial assets but still be insolvent if those assets cannot be converted into cash in time to meet debts as they fall due.
The position should be assessed using the company’s actual financial circumstances, including:
- the timing of receipts and payments;
- overdue tax and superannuation;
- creditor payment arrangements;
- access to finance;
- continuing trading losses;
- unpaid employee entitlements;
- legal recovery action; and
- the reliability of the company’s financial records.
A temporary cash shortage does not necessarily require liquidation. The more important question is whether the company has a properly funded pathway back to solvency.
Where the business remains viable, small business restructuring, voluntary administration, refinancing or an informal agreement with creditors might need to be considered before liquidation.
How a CVL begins
A company may enter a CVL directly through a resolution of its members.
The directors will usually meet first to consider the company’s financial position and resolve to convene a meeting of shareholders. The shareholders then consider a special resolution that the company be wound up voluntarily and appoint a registered liquidator to conduct the winding up.
In a CVL, the winding up begins when the special resolution is passed.
A CVL may also follow a voluntary administration. In that case, the creditors may resolve that the company be wound up and appoint the administrator or another registered liquidator to conduct the liquidation.
Where a creditor has already filed an application to wind up the company in insolvency. Once that application has been filed, the company cannot resolve to wind up voluntarily without leave of the Court.
Control changes on appointment
The directors do not cease to hold office merely because the company enters liquidation. However, they can no longer exercise their powers unless they have the written approval of the liquidator, the Court or are otherwise permitted to act under the Corporations Act.
The liquidator assumes responsibility for the company’s affairs:
- assets and bank accounts;
- books and records;
- outstanding contracts;
- employees;
- legal proceedings;
- debts and claims;
- business operations; and
- communications with creditors.
The company may continue trading for a limited period where the liquidator considers that doing so will improve the outcome. This may occur where work in progress can be completed, stock can be sold more effectively, or the business may be sold as a going concern.
Trading during liquidation is a commercial decision for the liquidator. It is not a continuation of the company’s former operations under the directors’ control.
The company itself continues to exist throughout the liquidation. Its legal existence ends only when it is deregistered.
The starting point is the company’s records
The liquidator must establish what the company owns, what it owes and what occurred before the appointment.
Directors are required to provide a report on the company’s activities and property, commonly called a ROCAP, together with the company’s books and records.
In a CVL, the directors must generally provide the report within five business days after the shareholders pass the winding-up resolution.
The records required will usually extend beyond the company’s formal financial statements. They may include:
- bank statements;
- accounting files;
- tax returns and activity statements;
- payroll and superannuation records;
- finance and security documents;
- contracts and leases;
- asset registers;
- company registers;
- correspondence with creditors;
- records of related-party dealings; and
- documents concerning the sale or transfer of company property.
Poor or incomplete records can make it more difficult to establish the company’s true financial position. They can also affect the liquidator’s assessment of insolvency, asset ownership, transactions and possible claims.
Directors and former directors must continue to assist the liquidator and answer reasonable questions.
Dealing with the company’s assets
One of the liquidator’s first tasks is to identify, secure and realise the company’s assets.
This may include:
- cash and bank accounts;
- plant and equipment;
- motor vehicles;
- stock and work in progress;
- real property;
- intellectual property;
- amounts owed by customers;
- loans to directors or related parties;
- insurance claims;
- tax refunds; and
- other rights capable of being converted into money.
Ownership is not always straightforward. Assets used by the company may be leased, financed, held by a related entity or subject to a security interest. The liquidator must determine what property belongs to the company and what rights secured creditors or other parties may have over it.
The liquidator will then decide how the assets should be dealt with. Depending on the circumstances, this may involve collecting debts, selling assets individually, completing work in progress, temporarily continuing to trade, or selling the business as a going concern.
The liquidator must consider the most commercially appropriate way to sell the company’s property for the benefit of creditors, having regard to the costs, risks and likely return.
Investigations, recovery powers and statutory reporting
The liquidator must investigate the company’s financial affairs, the causes of its failure and the conduct of its directors and other officers.
Those investigations are not undertaken only for reporting purposes. They may identify money or property that can be recovered and made available for creditors.
Depending on the circumstances, a liquidator may pursue claims such as:
- unfair preference payments;
- uncommercial transactions;
- unreasonable director-related transactions;
- unfair loans;
- creditor-defeating dispositions;
- compensation from directors for insolvent trading;
- compensation from a holding company for insolvent trading by a subsidiary; and
- claims arising from breaches of directors’ duties, negligence, breach of trust or the misuse of company property.
The liquidator can demand payment, negotiate a settlement or commence legal proceedings in the name of the company.
The Court can make orders requiring a recipient of a voidable transaction to repay money, return property or compensate the company for the benefit received.
A liquidator may also ask ASIC to make orders undoing certain creditor-defeating dispositions.
A recovery claim is not established merely because a payment or transaction occurred before liquidation.
Each claim has specific legal requirements, time periods and defences. The liquidator must assess the evidence, the likely amount recoverable, the cost of proceedings, available funding and whether the proposed defendant has the capacity to satisfy a judgment.
The liquidator also has significant powers to obtain information and evidence. Directors and other officers must assist the liquidator and provide the company’s books and records. Where records or property are withheld, the liquidator may seek court orders or a warrant to obtain them.
The liquidator may also apply to the Court to publicly examine directors, former directors and other people who may have information about the company’s affairs. A person summoned for examination can be required to answer questions on oath and produce relevant documents. These examinations are commonly used to investigate transactions, trace assets and obtain evidence for possible recovery proceedings.
Recovery action is separate from offence reporting. If the liquidator identifies suspected offences, they are required to lodge a report with ASIC. This is generally known as a Section 533 report.
ASIC then determines whether the information warrants further investigation, regulatory action, director disqualification proceedings or prosecution.
A liquidator must attend to minimum statutory duties, but is not required to incur unfunded expenses beyond those duties. The extent of further investigations and any recovery action will depend on the company’s available assets or external funding from creditors, litigation funders or ASIC’s Assetless Administration Fund.
Creditors receive information without an automatic meeting
The old system of mandatory initial, annual and final creditor meetings no longer applies to a CVL.
In a CVL, the liquidator must send creditors initial information within 10 business days after the shareholders’ meeting. This includes a summary of the company’s affairs, creditor information and details of creditors’ statutory rights.
The liquidator must also provide creditors with a declaration disclosing relevant relationships and any indemnities. This enables creditors to assess the liquidator’s independence and any arrangements connected with the appointment.
A more detailed statutory report will be provided within three months of appointment addressing:
- the company’s financial position;
- assets identified and realised;
- investigations undertaken;
- possible recovery actions;
- the estimated duration of the liquidation; and
- whether a dividend is likely.
A meeting may still be convened where one is required or where creditor consideration is appropriate.
To avoid the cost of calling meetings, most resolutions can instead be put to creditors through a proposal without a meeting.
Creditors also have rights to request information, require meetings in specified circumstances, appoint a committee of inspection, seek a review of remuneration, or take steps to replace the liquidator.
Liquidation does not automatically make directors liable
A company is a separate legal entity. Its debts do not automatically become the debts of its directors merely because it enters liquidation.
However, liquidation does not remove liabilities that already exist outside the company structure.
A director may still face personal exposure arising from:
- a personal guarantee;
- a director penalty notice issued by the Australian Taxation Office;
- an amount owing by the director under a director loan account;
- insolvent trading;
- breaches of directors’ duties;
- an unreasonable director-related transaction; or
- other recovery proceedings brought by the liquidator.
The liquidator cannot simply take a director’s home or other personal property because the company owes money.
Personal assets only generally become exposed where the liquidator establishes a legal claim, a creditor enforces a guarantee, a secured creditor enforces their security or a judgment ultimately results in bankruptcy.
The legal basis for the claim must first be established.
Creditor enforcement is replaced by a collective process
An unsecured creditor generally cannot commence or continue civil proceedings against a company in CVL without leave of the Court.
Instead, creditors submit proofs of debt to the liquidator. The liquidator assesses those claims when funds become available for distribution.
This prevents one unsecured creditor from obtaining an advantage through individual enforcement while the company’s available property is being administered.
Secured creditors occupy a different position. Liquidation does not ordinarily prevent a secured creditor from enforcing a valid security interest. Depending on the security, the creditor may:
- appoint a receiver;
- take possession of secured property;
- sell the property itself;
- allow the liquidator to sell it; or
- prove for any remaining shortfall.
Whether a security is effective will depend on its terms, validity, perfection and priority.
Employees and the Fair Entitlements Guarantee
Liquidation will usually bring the employment of the company’s employees to an end, unless the liquidator continues to trade the business or retains particular employees to assist with the winding up.
Employees are creditors for unpaid entitlements such as:
- wages;
- superannuation;
- annual leave;
- long service leave;
- payment in lieu of notice; and
- redundancy pay.
Employee claims receive priority over ordinary unsecured creditors. Broadly, outstanding wages and superannuation are paid first, followed by leave entitlements and then retrenchment amounts. Each class must be paid in full before the next class is paid. Where there are insufficient funds to pay a class in full, the available amount is distributed proportionately within that class.
If the liquidator continues to employ staff after appointment, the entitlements arising from that continued employment are generally treated as expenses of the liquidation and paid ahead of employee entitlements that arose before appointment.
Where the company does not have sufficient funds, eligible employees may be able to claim assistance through the Government’s Fair Entitlements Guarantee, commonly called FEG.
FEG may provide advances for:
- up to 13 weeks of unpaid wages;
- unpaid annual leave;
- unpaid long service leave;
- up to five weeks’ payment in lieu of notice; and
- redundancy pay of up to four weeks for each full year of service.
FEG payments are subject to eligibility requirements, statutory limits and a maximum weekly wage. FEG does not cover unpaid superannuation.
FEG assistance is not automatic. The employee must make their own application and generally must lodge an effective claim within 12 months after the later of:
- the date their employment ended; or
- the date the company entered liquidation.
Contractors and excluded employees, including directors and certain relatives of directors, are generally not eligible. Citizenship or eligible visa requirements also apply.
The liquidator assists FEG by providing company records and information relevant to employee claims.
When the Commonwealth pays an employee under FEG, it assumes the employee’s rights to the extent of that payment and may claim in the liquidation with the same statutory priority.
A dividend depends on what is recovered
Liquidation does not guarantee that creditors will be paid.
The amount available depends on the company’s assets, the costs of recovering and selling them, the success of any claims, and the priority attaching to competing creditor interests.
Secured creditors generally rely on the assets subject to their security for repayment.
However, where the security extends to circulating assets, certain priority employee claims may take precedence. If the company’s other available assets are insufficient, those claims may be paid from assets subject to the circulating security interest before the circulating secured creditor is paid.
From the property available to the liquidator, the statutory priority broadly provides for payment of:
- certain costs and expenses of preserving and realising company property;
- the expenses and remuneration of the liquidation;
- priority employee entitlements; and
- ordinary unsecured creditors.
Creditors within the same class generally rank equally. Where there is not enough money to pay a class in full, the available funds are distributed proportionately.
Shareholders receive nothing unless everyone else has been paid in full.
Simplified liquidation
Simplified liquidation is a streamlined process that may be used in an eligible creditors’ voluntary liquidation. It is not a separate form of appointment. The company first enters liquidation and the liquidator then determines whether the simplified process can be adopted.
The liquidator may adopt the process if satisfied on reasonable grounds that the statutory eligibility criteria have been met.
Those include:
- the company must be in a creditors’ voluntary winding up where the event that triggers the start of the winding up occurs on or after 1 January 2021
- liabilities of the company on the day a liquidator is first appointed in the creditors’ voluntary winding up must not exceed $1 million
- the company will not be able to pay its debts in full within 12 months
- the directors must within five business days (after the day of the meeting of the company at which the resolution for voluntary winding up was passed) give to the liquidator:
- a report on the company’s business affairs
- a declaration that they believe, on reasonable grounds, the company meets the eligibility criteria for the simplified liquidation process will be met
- no person who is a director of the company, or who has been a director of the company within the 12 months before the date a liquidator was first appointed, has been a director of another company that has been under restructuring or subject to the simplified liquidation process within the period of the preceding seven years
- the company has not undergone restructuring or been the subject of a simplified liquidation process in the preceding seven years
- the company has given returns, notices, statements, applications and other documents required under the Income Tax Assessment Act 1997.
Even where the eligibility criteria are satisfied, the liquidator cannot adopt the simplified process if:
- the company is, or is a related body corporate of, a body regulated by APRA;
- more than 20 business days have passed since the triggering event;
- members and creditors have not been given at least 10 business days’ written notice of the proposed adoption; or
- at least 25% in value of creditors request that the simplified process not be followed.
The 25% calculation is based on creditor claims known at the relevant time. Creditors that are related entities of the company are excluded from the calculation.
The simplified process differs from an ordinary CVL in several respects. The usual statutory provisions for convening creditor meetings do not apply, a committee of inspection cannot be appointed, certain unfair preference claims are restricted and the liquidator may declare and distribute only one dividend.
The ordinary offence-reporting requirement under section 533 does not apply while the simplified process is being followed. A modified reporting obligation applies where the liquidator has reasonable grounds to believe that:
- a past or present officer or employee, member or contributory of the company; or
- a person involved in the company’s formation, promotion, administration, management or winding up,
may have committed an offence in relation to the company that has had, or is likely to have, a material adverse effect on creditors as a whole or on a class of creditors.
The liquidator must report such a matter to ASIC as soon as practicable and, in any event, within six months after first forming that opinion.
The liquidator must stop following the simplified process if the eligibility criteria are no longer met. The process must also end if the liquidator believes on reasonable grounds that the company or a director engaged in fraud or dishonesty that has had, or is likely to have, a material adverse effect on creditors as a whole or on a class of creditors.
In that circumstance, the process is taken to have ended on the day the liquidator first held that belief. If the simplified process ends, the ordinary section 533 reporting requirement may then apply to matters identified while the simplified process was being followed.
Simplified liquidation does not remove the liquidator’s responsibility to identify and realise company assets, obtain the books and records, assess creditor claims and undertake the work necessary to administer the winding up.
However, the investigation, reporting, meeting and dividend requirements are modified to reduce the cost and complexity of the liquidation.
There is no standard completion date
The length of a liquidation depends on what remains to be done.
A company with reliable records, limited assets and no material claims may be dealt with comparatively quickly.
A liquidation may take considerably longer where it involves:
- disputed asset ownership;
- litigation;
- property sales;
- incomplete books and records;
- taxation disputes;
- complex related-party transactions;
- insolvent trading claims;
- recovery proceedings; or
- contested creditor claims.
The liquidator must complete the necessary investigations, realise available property, resolve claims and distribute any funds before the administration can end.
Once that work is finished, the liquidator lodges an end-of-administration return. The company is subsequently deregistered and ceases to exist.
Delay can determine which options remain
The decision to appoint a liquidator should follow a proper assessment of the company’s position, not simply the arrival of a statutory demand or the exhaustion of the bank account.
A company may have restructuring options while it still has reliable records, working capital and the support of key stakeholders.
Those options become more difficult as liabilities increase, lodgements fall behind, suppliers withdraw support and enforcement action progresses.
Where there is no viable restructuring outcome, a CVL provides a controlled process for dealing with the company and bringing its affairs to a conclusion.
Where a viable business remains, the timing of advice may determine whether that business can still be preserved.
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