A creditors’ voluntary liquidation (CVL) exists to provide for the winding up of the affairs of the company and to provide for a fair and equitable distribution of the company’s property and assets amongst its creditors, and it allows for investigations into the company’s failure. It may only occur if the company is insolvent or likely to be insolvent. It can commence following a Voluntary Administration (VA) resolving that the company be wound up or by a resolution of the company’s shareholders.
When is a CVL suitable?
The procedure may be used when:
- a company has come to the end of its useful life; and
- the company is insolvent, yet no application or order has been made by the Court that the company be wound up in insolvency
What are the steps in a CVL?
A CVL can be initiated by circular resolution executed by the directors and shareholders or by holding separate meetings of directors and shareholders. In both cases, the steps in a CVL are shown on the following page.
A company that has a winding up application commenced against it cannot resolve to be wound up whilst the application remains on foot. There are two key steps in a CVL.
- Passing of resolutions by the directors
- Passing of resolutions by members
The liquidator must, within 10 business days after receiving the report on the company activities and property from the directors, lodge a copy with ASIC.
What are the steps in a creditors voluntary liquidation?
The liquidator must give creditors notice of their appointment and information advising creditors of the following:
- their right to request information, reports and documents
- their right to direct that a meeting of creditors be held
- their right to give directions to the liquidator
- their right to appoint a reviewing liquidator
- their right to remove and replace the liquidator
- a summary of the company’s affairs and a listing of the names, addresses and estimated amounts owed to the company’s creditors (and identifying if any of the creditors are related entities of the company).
The liquidator must also
- send with this information an initial remuneration notice if they propose to seek fee approval during the liquidation
- lodge a copy of these documents with ASIC
Within 3 months
The liquidator must provide a report to creditors within 3 months after their appointment. after appointment
There is no statutory requirement for the liquidator to provide further reports to creditors. However, a liquidator will often provide further reports to creditors updating them on the conduct of the liquidation.
In a creditors’ voluntary liquidation, a meeting may be requested in the first 20 business days by ≥ 5% of the value of unrelated creditors.
At any other time, a liquidator is not required to call a creditors’ meeting unless a matter requires creditor approval.
The liquidator can call a creditors’ meeting at any time and if directed to do so by the committee of inspection and/or creditors. Requests should be made in writing and creditors should provide security for the costs of calling and holding the meeting.
The liquidator is not required to comply with a direction to call a meeting given by a committee of inspection or creditors if that direction is not reasonable.
What happens during a creditors voluntary liquidation?
Once the liquidation has commenced, the liquidator takes control of the company assets and affairs and is the only one with power to bind the company.
- realises assets
- investigates affairs / failure of company
- pursues actions (e.g. voidable transactions, related party transactions and insolvent trading)
- reports to ASIC on conduct of directors
- distributes where funds available
What are the effects of a creditors voluntary liquidation?
Once a company is placed in liquidation, unsecured creditors cannot continue recovery action against the company unless the creditor obtains the leave of the Court.
The directors and officers lose their rights of management powers and authority to the liquidator. They are also required to provide information regarding the company’s financial position and assistance to the liquidator in undertaking his or her duties.
Liquidation brings to an end the normal operations of the company. It can only continue to trade so far as it is necessary for the beneficial disposal or winding up of the business and its assets.