Creditors’ Voluntary Liquidation
Every business faces its own set of challenges, which often includes financial difficulties. Navigating these challenges and making the best decisions for you, your company and your employees often requires professional advice.
The team at Business Savers specialises in helping businesses that are facing financial difficulties. We take a tailored approach that allows us to provide liquidation services that are sensitive to your needs.
If you’re experiencing serious financial troubles, our Creditors’ Voluntary Liquidation services and business liquidation advice may be able to help.
Table of Contents
- What Is a Creditors’ Voluntary Liquidation?
- When Do You Need Creditors’ Voluntary Liquidation?
- Obtaining Business Liquidation Advice
- The Process of a Creditors’ Voluntary Liquidation
- How Money Is Distributed in a CVL
- Creditors’ Meetings During a CVL
- How Liquidation Affects Company Directors?
- How Liquidation Affects Your Creditors
- How Liquidation Affects Your Shareholders?
- How Liquidation Affects Your Employees
A Creditors’ Voluntary Liquidation (CVL) is an insolvency procedure that allows company directors to initiate the liquidation process.
That means you don’t need to wait for creditors to issue letters of demands or involve the Courts.
Instead, directors and shareholders can approve the liquidation internally, which makes it easier to wind up the company in an orderly fashion.
A CVL is administered by a registered Liquidator. Once appointed, the independent Liquidator will assess the company’s finances while gathering and selling any assets. The proceeds from these sales is put towards the outstanding debts held by the company’s creditors, such as banks, lenders, employees and suppliers.
Once the process is complete, the company will be deregistered with ASIC, preventing creditors from pursuing any remaining debts.
The CVL process is designed to help businesses that are experiencing serious financial difficulties. A creditors’ voluntary liquidation may be approved by a company’s directors, shareholders or creditors in a few different circumstances:
- When a company is insolvent
- When a company is experiencing financial difficulties that it won’t recover from
- At the end of the Voluntary Administration period
- If a Deed of Company Arrangement (DOCA) is terminated
It’s common for the directors of a company to approve a CVL if the business is insolvent, or if they think it will become insolvent at some point in the future.
Insolvent trading is illegal in Australia and carries serious penalties. For that reason, it’s important for directors to act quickly if the business becomes unviable. Entering into a CVL not only protects directors from a future risk of insolvent trading, it’s a cost and time-effective alternative to Administration.
Entering into a CVL is a serious decision. At the end of the process your company will be deregistered and cease to exist.
While it might be the right thing to do for some companies, it’s important to seek business liquidation advice before making any decisions.
Companies that are struggling with their finances should consider all their options before settling on liquidation.
Alternatives like Voluntary Administration may allow you to continue trading and avoid the need to wind the company up. Professional business liquidation advice will help you investigate your options and choose the process that provides a better outcome for you, your employees and your creditors.
Creditors’ voluntary liquidation follows a set process.
This ensures everyone involved is meeting their obligations and that directors, shareholders, creditors and employees are given fair notice of what’s going on.
The length of the CVL process can take some time to conclude, depending on the complexity of the situation, the state of the insolvent business and its financial affairs. The typical CVL process is as follows:
- The Liquidator is appointed. A CVL begins as soon as a Liquidator is appointed by the directors or shareholders. The Liquidator must be an independent professional that’s registered with ASIC.
- Liquidation notices are lodged. The Liquidator takes control of the company and notifies ASIC, the ATO and government revenue offices of the liquidation. At this point the Liquidator will also make a formal request to see your company books and records. Any unsecured creditors can no longer start or continue action against the company unless a Court deems it appropriate.
- Creditors are notified. With public notices published, the Liquidator will contact the company’s creditors. Each creditor is informed of their rights and given an information pack with the Liquidator’s contact details. The Liquidator will create a report and issue it to creditors. It’s up to each creditor to lodge their claims and attend creditors’ meetings.
- Company assets are liquidated. This is where the serious work begins. The Liquidator will investigate the company’s finances and gather up any assets. These assets are then sold for the best price attainable.
- Money is distributed to creditors. The money the Liquidator collects is distributed to creditors in a specific order.
- The company is deregistered. Once the money is distributed and the Liquidator has finalised their investigations, the company is deregistered with ASIC. The company ceases to exist and creditors can no longer pursue any remaining debts.
Throughout the CVL process the Liquidator will identify, locate, secure and then sell the company’s assets.
The money that’s collected during this process is paid to creditors as a ‘dividend’.
After the costs and expenses of the liquidation have been paid including Liquidator’s fees and expenses , the remaining funds are distributed as dividends as follows:
- Employee wages and superannuation
- Employee leave entitlements
- Employee retrenchment pay
- Unsecured creditors
Each of these categories is paid in full before the next category is paid. If there isn’t enough money to pay a category in full, each creditor receives a prorated amount.
For example, if there isn’t enough money to pay all employee leave entitlements, each employee receives an equal share of the remaining money.
Note there is a government scheme that covers outstanding wages, leave and retrenchment pays in most instances, even where the company’s assets may not be sufficient to cover them.
A creditors’ voluntary liquidation works a little differently to a Court Liquidation. During a CVL the Liquidator only needs to call a creditors’ meeting to approve a matter (such as their fees or a specific course of action). Instead of holding a set number of meetings, the company’s creditors or the Liquidator can call a meeting at any time.
The Liquidator is required to call a creditors’ meeting if:
- Less than 25% of the company’s creditors (but more than 5% in value) submit a written request, and;
- None of the creditors are related to the company, and;
- The request is made no more than 20 business days after the CVL is approved
It’s common for creditors to request meetings to ask questions about the liquidation, provide information about the company or if they have concerns about the Liquidator’s conduct.
Any matter that’s brought before a creditors’ meeting is decided through a voting system. A resolution is passed if more than half of the creditors (in number and in value) approve.
The CVL process can affect company directors in a few different ways.
The most obvious is that your powers as a director are suspended as soon as the Liquidator is appointed. Throughout the CVL process the Liquidator is responsible for managing the company’s affairs.
As part of the process the Liquidator will investigate whether you were acting in good faith.
It’s unlikely that you’ll be subject to any personal liability if you were meeting your obligations (both in your actions and in ensuring the company paid its debts on time).
However, if the Liquidator discovers the directors have breached their duties (like trading while insolvent), you may be held responsible for company debts, and you may be prosecuted by ASIC.
The main purpose of a CVL is to resolve your outstanding debts to creditors. Even if your business is struggling financially, you’re still required to uphold any agreements that were made.
If that puts you in a situation where your business can’t meet its obligations you may need to consider liquidation.
It’s important to understand that a liquidator may not be able to raise enough money to pay all your debts in full.
Money is distributed to creditors in the order we discussed above. Each category of distribution is paid in full before the next one is paid, so creditors may receive partial payments or nothing at all.
For example, if the Liquidator can only raise enough money to pay employee entitlements, unsecured creditors may not receive a dividend.
The Liquidator has a legal obligation to look after the rights of creditors.
Shareholders aren’t considered creditors, so they are only entitled to a dividend after all other creditors are paid in full. If a shareholder is also a creditor then they are entitled to a separate dividend as normal.
Throughout the CVL process the Liquidator is required to keep detailed records of their activities.
Shareholders are allowed to inspect these books at the Liquidator’s office.
Liquidating your company normally ends with employees being terminated.
Employees that are owed money (such as wages, superannuation or leave entitlements) are considered priority creditors.
That means employees receive the money they’re owed before unsecured creditors are paid. In some cases the Liquidator may continue to trade the company while winding it up. If that happens then employee entitlements continue to accrue and will be paid out as a cost of the liquidation.
There is also a government scheme that covers outstanding wages, leave entitlements and redundancy pays in the event of liquidation provided employees meet the relevant criteria.
Please refer to the Department of Employment and Workplace Relations website for information on the Fair Entitlements Guarantee scheme for more information.
Anyone employed on a contract basis is typically considered an unsecured creditor and not an employee. Contractors are also terminated, but they’re only entitled to the same dividends as other unsecured creditors.
Business Liquidation Help from Business Savers
Approving a creditors’ voluntary liquidation is a serious decision. Before you make any decisions it’s important to seek professional business liquidation help from Business Savers. A CVL isn’t the right choice for every business, and there may be alternatives such as Small Business Restructuring available to you.
Our team draws on years of experience as Liquidators and Business Turnaround Management consultants to deliver advice that can help you navigate financial difficulties and wind up your business in an orderly fashion.
If you’re concerned about your business’ finances or if you’re considering creditors’ voluntary liquidation, contact Business Savers for a confidential discussion.