Companies suffering from bankruptcy have many options available under the Australian Companies Act 2001. Among these options, voluntary liquidation of creditors is a common solution used to liquidate a business and repay debts to creditors. voluntary liquidation Directors are responsible for financial matters and can lead the company to organizational conclusions.
This article details the details of a creditor’s voluntary liquidation and how this process can recover money owed by a creditor.
What is voluntary liquidation of creditors?
Voluntary Liquidation of Creditors (CVL) is a bankruptcy process that allows a company’s directors to voluntarily liquidate the business. If the company’s directors become aware of serious financial difficulties, they may decide to appoint a liquidator without the need for court intervention. This allows the company to be liquidated in an orderly manner and to distribute assets between employees and creditors.
Company directors or shareholders may vote to appoint a liquidator of their own accord if:
- they find the company bankrupt
- They suspect that the company will go bankrupt.
- At the end of optional administration
- Certificate of Corporate Arrangement (DOCA) expires
It is also common for company directors to enter the CVL after receiving demands from creditors or after the ATO has initiated litigation against the company. Directors often choose liquidation rather than risk personal liability for insolvent transactions or failure to meet tax obligations.
When considering voluntary liquidation by creditors
The directors or shareholders of the company may voluntarily appoint a liquidator if the business is insolvent or is suspected of becoming insolvent. Since bankruptcy transactions are illegal in Australia, it is often more profitable for company directors to liquidate a business than to try to keep it going.
Key signs of insolvency include:
- Consistently ongoing loss
- Poor cash management
- Increase in debt-to-value ratio
- Difficulties in paying suppliers and workers on time
- Demand for payment from creditors
- Problems in obtaining new lines of credit
- Lack of management and business direction
Bankruptcy is a little different for each business. Large companies with a lot of liquidity can have a hard time recognizing the early signs of bankruptcy. As such, management and deeds are less likely to save the business. In such cases, CVL is a common solution to avoid the need for court liquidation.
Voluntary liquidation process for creditors
The voluntary liquidation process for creditors begins the moment the liquidator is appointed by the directors. A liquidator is a professional accountant who is independent of a bankrupt business. Their role is to provide an impartial service that allows creditors to collect as much debt as possible.
The liquidator begins the process by notifying the creditors of the liquidation. This notice contains information about the company, the rights of creditors and how creditors can contact the liquidator.
In some cases, the liquidator may hold a creditors’ meeting, but is not required to do so as part of a voluntary liquidation. From there, the liquidation follows the usual format, with the liquidator identifying, collecting, and selling the company’s assets to recover money owed to creditors. Along the way, the liquidator will keep creditors informed of progress and report findings as they examine the company’s financials.
Once all company assets have been collected and sold, the funds will be distributed as follows:
- Liquidator’s costs and fees are paid first
- Employee Unpaid Wages and Retirement Pensions
- Unpaid employee leave entitlement
- employee severance pay
- unsecured creditor
Finally, once all distributions have been made, the liquidator applies to ASIC to deregister the company. A deregistered company no longer exists and creditors cannot pursue outstanding debts.
creditors meeting
Unlike a court liquidation, the liquidator is not obligated to call a creditors’ meeting during the CVL proceeding unless it is required to approve certain matters. Although not obligated, the liquidator may call a creditors meeting even if directed to do so.
The liquidator must call a meeting of creditors if:
- Less than 25% of the number of creditors (less than 5% of the value) request a meeting in writing, and;
- none of the creditors who requested the meeting were related to the bankrupt company; and;
- The claim is made within 20 days after the resolution of the liquidation of the company is made
At a creditors meeting, creditors and liquidators can meet to discuss progress, approve matters, or approve the liquidator’s fees. If a meeting of creditors is called to vote on an issue, the resolution will pass if 50% or more of her creditors (in number and amount) vote in favor of the resolution. This allows creditors to influence the outcome of liquidation proceedings without a court order.
