Creditors’ Voluntary Liquidation
A creditors’ voluntary liquidation is the formal process used to wind up an insolvent company.
I am a registered liquidator and Principal at Worrells with more than 27 years’ experience in insolvency and restructuring. I assist directors and professional advisers with the appointment process and the practical issues that follow.
What is a creditors’ voluntary liquidation?
A creditors’ voluntary liquidation, commonly called a CVL, is the most common form of insolvent company liquidation.
It usually begins when the shareholders of an insolvent company pass a special resolution to wind up the company and appoint a registered liquidator. A CVL can also follow a voluntary administration. Despite the name, it is not usually commenced by the company’s creditors—the word “creditors’” distinguishes it from a members’ voluntary liquidation used for a solvent company.
Once appointed, the liquidator takes control of the company and winds up its affairs. The company remains registered during the liquidation and is deregistered only after the winding up has been completed. Simply ceasing to trade does not bring the company or its debts to an end.
When a CVL may need to be considered
A CVL may need to be considered where the company cannot pay its debts as and when they fall due and there is no realistic and properly funded pathway back to solvency.
- ATO debt, PAYG withholding, GST, superannuation or employee entitlements are overdue and continuing to increase.
- The company does not have enough cash flow to pay debts as they fall due.
- Creditor payment arrangements are failing or suppliers have withdrawn support.
- The company is continuing to trade at a loss without sufficient working capital.
- A statutory demand, winding-up application or other enforcement action has been commenced or threatened.
- A director has received a Director Penalty Notice, or unpaid PAYG withholding, GST or superannuation is creating potential personal exposure.
- The business has closed, or restructuring, refinancing or a sale has been considered, but the company’s affairs still need to be formally resolved.
The CVL process
Assess and prepare
The directors consider the company’s financial position, approach a proposed liquidator and complete the corporate steps required to convene the shareholders’ meeting.
Appoint the liquidator
The shareholders pass the special resolution to wind up the company and appoint a registered liquidator. Control of the company then passes to the liquidator.
Administer the liquidation
The liquidator deals with the company’s assets, books and records, employees, creditors, contracts and investigations, and considers any available recovery claims.
Complete the winding up
Creditor claims are dealt with, any available funds are distributed under the statutory priorities and the company is deregistered after the liquidation is complete.
What does a CVL mean in practice?
The consequences depend on the company’s assets, records, employees, creditors and the directors’ personal circumstances. My detailed guide explains the major issues that commonly arise, including:
- how the liquidator is appointed and when control passes;
- the records, information and assistance directors must provide;
- what happens to the business, company assets, contracts and bank accounts;
- how unsecured and secured creditor claims are dealt with;
- employee entitlements and the Fair Entitlements Guarantee;
- the liquidator’s investigations and possible recovery claims;
- personal guarantees, Director Penalty Notices and director loan accounts;
- insolvent trading and other potential director claims;
- simplified liquidation and when it may be available; and
- dividends, completion of the liquidation and deregistration.
Business Financial Health Check
The Business Financial Health Check asks 12 Yes or No questions across five areas and provides an indicative summary of potential warning signs. It takes about three minutes and does not determine whether the company is insolvent.
Other options that may be available
A CVL is not the appropriate process for every company experiencing financial difficulty.
Small Business Restructuring
For an eligible company with a viable underlying business that may be able to propose a formal compromise to creditors while the directors remain in control.
Small Business Restructuring →Voluntary Administration and DOCAs
For a company that requires an independent administrator to assess restructuring, business-sale or DOCA options before creditors decide its future.
Voluntary Administration and DOCAs →Members’ Voluntary Liquidation
For a solvent company that can pay or properly provide for all its debts in full and is being formally wound up.
Members’ Voluntary Liquidation →Refinancing, a business sale or an informal arrangement may also be relevant depending on the company’s circumstances.
Creditors’ voluntary liquidation FAQs
How do I appoint a liquidator, and can I choose who is appointed?
The directors will usually approach a registered liquidator and obtain their written consent to act. The company then convenes a meeting of shareholders, who pass a special resolution to wind up the company and appoint the liquidator.
You can therefore choose the liquidator you propose, but the shareholders make the formal appointment. Creditors retain statutory rights to replace the liquidator after appointment.
What happens when the liquidator is appointed?
Control of the company passes to the liquidator. The directors remain in office but can no longer exercise their powers unless permitted by the liquidator or the Court.
The liquidator takes control of the company’s assets, bank accounts, books and records, contracts, employees, legal proceedings and creditor communications. The directors must provide the company’s property and records, complete the required report about its affairs and continue assisting the liquidator.
The business will usually cease trading, although the liquidator may continue trading for a limited period or pursue a sale where that is likely to improve the outcome.
Do the company’s debts become my personal debts?
No. The company’s debts do not automatically become your personal debts merely because the company enters liquidation. Liquidation alone does not give the liquidator a claim against your home or other personal assets.
Personal exposure may still arise from a separate legal obligation or claim, including a personal guarantee, Director Penalty Notice, overdrawn director loan account, insolvent trading, breach of duty or another recoverable transaction. Each issue needs to be assessed separately.
Does liquidation remove a Director Penalty Notice?
Not automatically.
Whether placing the company into liquidation can result in a director penalty being remitted depends on the type of liability, when the company lodged the relevant returns or statements, the date of the notice and whether the required action is taken within the relevant period.
A lockdown director penalty is not remitted merely because the company enters liquidation. A Director Penalty Notice should therefore be reviewed immediately together with the company’s lodgement history and the notice deadline.
What does a creditors’ voluntary liquidation cost, and what if the company has little or no money?
There is no standard cost. It depends on the company’s assets, records, employees, creditor numbers, trading position and the extent of the work, investigations or recovery claims required.
Once I understand the company’s position, I can explain the likely initial cost and whether any funding contribution will be required. Liquidator remuneration is usually paid from available company assets and is subject to the statutory approval process.
Where the company has little or no available money, a director, shareholder, creditor or other party may need to provide funding for the appointment and necessary work.
What information do you need from me?
A short summary is enough for the initial discussion. Where available, it is helpful to provide:
- recent financial statements or management accounts;
- the company’s current ATO position;
- a list of creditors and amounts owing;
- details of employees and outstanding entitlements;
- details of company assets, bank accounts and finance;
- information about leases, major contracts and personal guarantees;
- any statutory demand, winding-up application or Director Penalty Notice; and
- details of where the company’s books and records are held.
You should not delay making contact because every document is not yet available. The missing information can be identified once the immediate position and any urgent deadlines are understood.
Need to discuss a matter with me?
Use the Contact page to contact me to discuss your matter. Include any urgent deadline, statutory demand, winding-up application or Director Penalty Notice.