A creditors’ voluntary liquidation, is generally a voluntary liquidation of a company, which is unable to pay its due and payable debts and is therefore insolvent.
A creditors’ voluntary liquidation may occur either:
- Through the members (shareholders) of an insolvent company resolving to appoint a liquidator to the company; or
- Following a voluntary administration of a company.
Role of the Liquidator
The liquidator of the company will determine the assets of the company (if any) and their value and take steps to realise any assets which are identified, if it is commercial to do so. In accordance with their duties, a liquidator will also conduct a review of the records and financial history of the company in order to investigate such things as:-
- The financial performance of the company;
- Whether any preference payments have been made to creditors, or uncommercial transactions entered into by the company, or other matters which may give rise to potential recovery actions by a Liquidator;
- Whether the company has traded whilst insolvent and the extent of any insolvent trading claim against the company’s director(s); and
- Any offences which ought to be reported to the Australian Securities & Investments Commission.
The liquidator will distribute the funds received from the realisation of a company’s assets, after payment of the liquidator’s costs, in accordance with the priorities set out in the Corporations Act 2001 (Cth), being generally:-
- Firstly (subject to some exceptions) payment to creditors who hold security over a company’s assets;
- Secondly in payment (either in full or in part) of unpaid employee entitlements; and
- Thirdly in payment of debts owed to ordinary unsecured creditors, with creditors being paid on a pro-rata basis based on the amount of their debts.
Benefits Associated with a Creditor’s Voluntary Liquidation
There are often benefits to those associated with a company in arranging for it to be placed in liquidation, including:
- It is a way in which a director may avoid or limit personal liability under a Director Penalty Notice issued by the ATO.
- It may limit or reduce the company’s directors’ liability for insolvent trading.
- It may limit or reduce the company’s directors’ liability for certain offences under the Corporations Act 2001 (Cth).
- It results in an independent person being appointed to the company, who will conduct an orderly winding up of the company’s affairs.
- It avoids the company being placed in liquidation by the ATO or another creditor.
In most circumstances where a company’s shareholders wish to appoint a liquidator to a company, this can be done within a short period of time, by way of the shareholders signing a resolution for the liquidator’s appointment.
Director’s Duties and Obligations
A company’s director has the same duties and obligations during the period of a liquidation as the director had prior to the liquidator’s appointment. In addition, a company’s director must:-
- Provide the liquidator with a Report as to Affairs for the company;
- Provide all of the company’s books and records to the liquidator; and
- Reasonably assist the liquidator in carrying out his or her role.
Information and Advice Regarding Creditor’s Voluntary Liquidations
If you would like to obtain further general information regarding liquidation you may wish to access our Liquidation FAQ page.