What is Creditors Voluntary Liquidation?
A Creditors Voluntary Liquidation or, CVL for short, is a formal insolvency process which begins when the shareholders of an insolvent company decide to liquidate the company and appoint a liquidator. This usually occurs when the members of a company decide that the company can longer pay its debts and that it is insolvent or likely to become insolvent. The process allows for a sell off of the company’s assets and investigating the reasons behind the failure of the company. A CVL allows for the winding up of the company without the need for Court intervention.
Why does a Creditors Voluntary Liquidation occur?
A Creditors Voluntary Liquidation can occur when creditors (suppliers or other parties which are owed money by the company) favour liquidation of the company following a Voluntary Administration or a failed Deed of Company Arrangement. It can also occur when the shareholders of an insolvent company decide to liquidate the company and appoint a liquidator.
What are the effects of a Creditors Voluntary Liquidation?
A Creditors Voluntary Liquidation can affect a variety of stakeholders. These stakeholders include:
- secured creditors,
- unsecured creditors, and
- employees
The process will not usually affect the ability for a secured creditor to enforce its security.
Unsecured creditors have their rights to pursue a company for unpaid debts suspended but have the ability to lodge a claim for the amount of debt owed to them.
Employees of a company in liquidation are given priority over other unsecured creditors with regards to their employee entitlements. The Fair Entitlements Guarantee Scheme is a federal government program that protects employee entitlements should a company be placed into liquidation. FEG provides financial assistance to eligible employees who lose their jobs due to liquidation or bankruptcy of their employer. Employees may be able to claim unpaid wages, unpaid annual leave and long service leave, payment in lieu of notice and redundancy pay but unpaid superannuation is not covered under the scheme.
Once a CVL commences, shareholdings generally have no value as the company as the company is insolvent and unable to pay its debts. It is unlikely that shareholders will receive a distribution in a CVL.
When a liquidator is appointed, the powers of the company’s directors are suspended, however the director are still required to provide assistance to the liquidator during the winding up of the company and must comply with all requests made by the liquidator. There is the potential that directors may become liable for some company debts if they have provided personal guarantees to creditors.
Once the process has started, the liquidator will take control of the company’s assets and affairs and is required to act in the interests of the company and its creditors.
What is the Liquidator’s role in a Creditors Voluntary Liquidation?
Once the process has started, the liquidator will take control of the company’s assets and affairs and is required to act in the interests of the company and its creditors. The role of the liquidator throughout this process is to act as an independent party to ensure the process is carried out in accordance to the law.
Generally, the process involves the liquidator:
- investigating the failure of the company
- identifying, collecting and selling the company’s assets
- reporting to creditors and other parties which are owed money by the company
- reporting to ASIC on any transgressions committed by company officers
- completing a variety of reports and lodgments to ASIC
What are the outcomes of a Creditors Voluntary Liquidation?
Once all the company’s assets have been sold, investigations are completed and distributions of funds has occurred, the liquidator will apply to ASIC to have the company deregistered. Once this has occurred, the company will cease to exist and creditors will no longer have any claim against the company.
A Creditors Voluntary Liquidation is just one of a variety of potential options for a business which is in financial distress.
If you’re dealing with financial issues in your business, it’s important to look at the facts and be open and honest about your situation. Addressing the situation early can prevent worst case scenarios and help alleviate the stress on everyone involved.
Meeting with a professional may seem daunting but often just discussing your situation openly can relieve a huge amount of stress and help you to see things more clearly. Our financial stress management professionals are here to help your business when you need it most. If you’re still wondering ‘what does restructuring mean in business?’ feel free to reach out to our expert team today.