A Creditors’ Voluntary Liquidation (CVL) is a common type of liquidation that occurs when the directors and members of a company determine that the company is, or is about to become insolvent and it needs to be wound up.
The overarching principle of a CVL is to wind up the affairs of the corporate entity and distribute any surplus assets to creditors in accordance with their priority ranking (e.g. employee liabilities and superannuation owed to them or the ATO are a higher priority than debts owed to other creditors and financiers are in a separate category as well).
How does a creditors’ voluntary liquidation begin?
A CVL is generally initiated by the directors talking to the shareholders and recommending to them that a winding up is necessary. The shareholders will then pass a special resolution that the company should be liquidated and that a registered liquidator should be appointed to be the liquidator.
The liquidator is hand-picked by the directors and shareholders. The liquidator has an important role to play because once appointed, they take control of the company, and are required to wind the company up in an orderly, and fair way for the benefit of the company’s creditors. This process is highly regulated by the Corporations Act and the liquidator has an obligation to abide by the law. ASIC is charged with ensuring Liquidators follow the law and comply with their obligations but there are others who keep an eye on the liquidators including their accounting bodies and ARITA.
What actually happens?
Every CVL will be different once it commences however, they usually all start the same way with the company’s shareholders passing a resolution to liquidate the company. Usually your lawyer, advisor or the liquidator you choose will help you to prepare these resolutions – the shareholders will need a consent to act as your Liquidator to be able to pass a valid resolution. To further clarify, consider the following timeline:
Once appointed, the liquidator will lodge various documents with ASIC and notify other government entities like the ATO of the liquidation of the company. Banks will be notified and any accounts in the company’s name will be frozen, and copies of bank statements will be sent to the liquidator to assist with their investigation in to the company’s affairs.
The liquidator will collect, protect, and realise assets that are in the company’s name or appear to belong to the company. They will review the company’s records and ensure that all assets are accounted for as per the company’s records. They may conduct interviews with staff and with directors to ensure that all assets said to belong to the company have been disclosed to them. They will follow up on assets that have recently been sold or are not in the company’s possession.
The liquidator must prepare a short report to creditors within 10 business days of their appointment. This report does not say much and is really just provided to unsecured and secured creditors to let them know about the appointment. A much more detailed report about the company will follow once the liquidator has reviewed the company’s financial records.
After Day 10
The liquidation process can take in excess of 6 months. Each one is different and will vary for many reasons including what the size and quantum of assets, creditors and employees might be.
Once the liquidator is appointed however it is usual for them to realise the company’s assets and to use those funds to pay their fees and expenses, employee entitlements and if there is any surplus after that, unsecured creditors.
What’s the usual Outcome
In addition to looking at realising and selling company assets, the liquidator is going to look at the directors and whether they have breached any corporation law duties, particularly insolvent trading. The liquidator will also look at recovering preferences from creditors and will also consider whether it is necessary to hold a public examination to further advance any potential legal claims against directors, creditors or related parties. They will be looking at whether there are any voidable transactions.
CVL is a necessary process for company’s that can no longer function. Directors need to ensure that their financial statements are correctly presented and that they have full and proper explanations for any related party transactions – no matter the quantum or the circumstances. When dealing with a liquidator, they will understandably require a director claiming a transaction was one way and not the other to prove it. The evidentiary burden of proof will be on the director so it is important to ensure that before CVL, directors have all their materials in place and explanations ready.