A creditors’ voluntary liquidation, is the term used to define the voluntary liquidation of an insolvent company.
A voluntary liquidation may occur either:
- Through the 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. He or she will then 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. This is done 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 arranging for a voluntary 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.
Where a company’s shareholders wish to arrange a voluntary liquidation, this can be done within a short period of time. The voluntary liquidation appointment is made by way of the shareholders signing a resolution for the liquidator’s appointment. Where we are engaged to assist with the process we will prepare this resolution and assist with further pre-appointment steps.
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 on Company Activity and Property (ASIC Form 507) 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 Voluntary Liquidations
If you would like to obtain further general information regarding liquidation you may wish to access our Liquidation FAQ page.