A voluntary liquidation of an insolvent company is known as a creditors’ voluntary liquidation.

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.

The most common way that a voluntary liquidator is appointed is by a company’s shareholders.

Appointment of a Liquidator by Shareholders

Where a company’s directors / shareholders wish to arrange a voluntary liquidation, this can be done within a short period of time. If all shareholders agree to liquidation, 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.

If all shareholders do not agree on liquidation, then a meeting of shareholders can be convened to vote on placing a company in liquidation. Generally, 21 days notice of this meeting will have to be given and for a liquidation to be agreed upon a special resolution will have to be passed meaning more than 75% of shareholders who attend the meeting must vote for the liquidation to occur.

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. This may include things like, collecting cash at bank, recovering debtors and loans, selling real property and equipment or motor vehicles and realising any intangible assets such as intellectual property or goodwill.

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 also issue at least two reports to the company’s creditors, being one within 10 business days of the liquidation commencing and then a second report within three months. A report will also be lodged with ASIC regarding the nature of the company, what assets and creditors it has, the reasons for its failure and also providing details of any misconduct of the company’s directors.

A liquidator is also able to pursue legal claims in their own right or on behalf of the company. Depending on the outcome of a liquidator’s investigations claims may be available for things like:

• Insolvent trading;
• Unfair preference payments made to creditors which may be recoverable;
• Breaches of director’s duties;
• Other voidable transactions;
• Loans or debts owed to the company.

In order to avoid or minimise the risks of any such claims, a director should seek advice from a qualified professional (like those at Pearce & Heers) early and proactively take steps to deal with any financial problems a company may encounter.

Distribution of Funds in a Liquidation

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.

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 details of the company’s assets and their whereabouts;
• 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.

If you are seeking advice regarding voluntarily appointing a liquidator to a company, please contact our Brisbane or Gold Coast office. Our experienced staff will be able to assist you.