Restructuring & Insolvency
Creditor’s Voluntary Liquidation (CVL)
Once a company is insolvent or likely to become insolvent and the directors, and other stakeholders, have deemed Voluntary Administration inappropriate, liquidation may be the only pathway forward.
Liquidation is the process of winding up a company’s financial affairs by realising its assets, conducting appropriate investigations and enabling a fair distribution of the company’s assets to its creditors.
The following information discusses the Creditors Voluntary Liquidation (CVL) process, which is the type of liquidation undertaken when the company is insolvent (likely insolvent) and the Liquidator has not been appointed by the Courts.
Who appoints the liquidator?
In a creditors voluntary liquidation (as opposed to a Court appointed liquidation), it is the members (or shareholders) that appoint the liquidator.
The two-step appointment process occurs as follows: first, the directors, having formed the opinion that the company is insolvent i.e. unable to pay debts as they become due and payable per section 95A of the Corporations Act 2001 (the Act), convene a meeting of members. Second, at that meeting, members pass a special resolution (more than 75% of members) to wind the company up. Creditors are not required to attend those meetings.
Creditors have certain rights to change the appointed liquidator at any time. However, this is not a common occurrence.
How to choose a liquidator
Before appointing a liquidator, the member(s) need to obtain a ‘consent to act’ from a registered liquidator. A registered liquidator is a financial professional registered with ASIC. The registered liquidator must also be independent of the company. This means that they must not have provided services to the company or its directors within the previous two years.
Proving the company is insolvent is not required
Similar to directors appointing an administrator, members can appoint a liquidator on the basis that the company is insolvent or they believe the company is insolvent now or is likely to be insolvent in the future – i.e. there is an approaching debt and the company has no resources to service that debt.
There is no requirement to obtain solvency advice prior to an appointment. However, member(s) may choose to obtain solvency advice if they feel the decision to appoint a liquidator could be challenged. A company is insolvent if it cannot pay all its debts as and when they fall due, even if the company has an asset surplus but no way to liquidate those assets quickly.
A company can also be deemed to be insolvent when it fails to do certain things prescribed by law, for example, when it fails to satisfy a creditor’s statutory demand or fails to keep adequate books and records.
Can solvent companies be wound up?
Yes. Solvent companies can be wound up by its members via a members’ voluntary liquidation.
Solvent companies can also be wound up by the court by way of an application to the court by its directors or members. Court appointments are typically sought when there is a dispute over the control or conduct of the company.
Who manages a liquidation?
Liquidations can only be administered by specialist accountants or lawyers who are registered liquidators with ASIC.
At appointment of a liquidator, directors’ powers cease.
A liquidator’s powers
The Act sets out the liquidator’s powers. These powers include all the powers vested in the directors of the company, plus the powers to:
- investigate and examine the affairs of a company;
- identify transactions that are potentially voidable;
- examine the directors and others under oath (via public examination);
- realise the assets of the company;
- conduct and sell any business of the company; and
- admit debts and pay dividends to
A liquidator’s duties
A liquidator’s duties include:
- identifying, protecting and realizing the assets of a company;
- communicating with secured creditors in relation to assets subject to security;
- conducting investigations into the financial affairs of the company and any suspicious transactions;
- making recoveries where commercially appropriate;
- issuing reports to ASIC and creditors;
- making distributions to creditors, where possible; and
- applying to ASIC to deregister a
It is important to note that the liquidator is not required to incur expenses in relation to the winding up of the company unless there are enough assets within the company to meet such costs. Accordingly, certain actions or investigations may be hindered should assets not be available to meet the liquidation costs.
What happens to a company in liquidation?
Typically, the following occurs:
- control of assets, the business and other financial affairs are transferred to the liquidator;
- the directors cease to have authority to act on behalf of the company;
- all bank accounts are frozen and balances are transferred into a liquidation bank account controlled by the liquidator;
- employees may be terminated depending on the circumstances of the appointment; and
- at the end of the liquidation, the liquidator applies to ASIC for the company to be Having been removed from ASIC’s register, the company will cease to exist.
Can the company continue trading?
If the company is trading at the time a liquidator is appointed, the liquidator will have the decision of whether the company should continue trading. Doing so is referred to as the business being ‘traded on’. A trade-on is considered if there is a strong prospect of selling the business as a going concern or completing and selling any work-in-progress or contracts. Both outcomes are intended to result in an increase in company assets available for creditors.
A liquidator is obligated to end trading and wind up company affairs as quickly as reasonable but also in a commercially responsible and practical way.
Again, the liquidator is not obliged to incur debts unless there are enough assets to cover such costs. It follows that a liquidator may decide not to trade on a business where there is uncertainty as to whether sufficient assets would be recovered to cover the costs of the trade-on and provide a higher return to the company’s creditors.
One structure a liquidator may use to control risk and costs of a trade-on is a licensing agreement. A typical scenario is when a third party wishes to purchase the Company’s business, but settlement cannot occur for a period of time – e.g. the third party many need to negotiate a new lease or have the lease transferred. The third party is familiar with the type of business and can trade it at lower risk and for less costs than if the liquidator were to attempt to do so directly. In these circumstances, the third party and liquidator may choose to enter into an agreement whereby the interested party trades on the business under supervision of the liquidator. There are no specific requirements of what a license agreement must incorporate. Generally, they involve:
- employees remaining employed by the company until a sale of business agreement is entered into, at which point some or all of the employees may be transferred to the new entity;
- the liquidator requiring pre- payment of wages, rent, and overhead costs prior to those expenses being incurred. The liquidator does this to prevent the company’s assets from being depleted as a result
of the trade-on. This usually involves an up-front payment of estimated costs with a balancing adjustment at the end of the trade on period;
- the interested party being solely responsible for the day to day trading, profitability, and expenses incurred during the trade on of the business; and
- the liquidator retaining certain assets, such as the debtor book or parts of work in progress until they are realised or sold as part of a sale of business
Directors’ duties to the liquidator
The directors must:
- give all information in their possession about the company’s financial affairs;
- provide a Report on Company Activities and Property referred to as a A RoCAP details the assets and liabilities of the company as at the date of appointment of the liquidator;
- assist the liquidator when reasonably asked; and
- deliver all company books and records and cooperate with the liquidator throughout the liquidation
The Act contains various offence provisions that apply to directors who do not cooperate with liquidators.
Investigations performed by the liquidator
The liquidator must investigate:
- why the company is insolvent;
- when the company became insolvent;
- if a potential insolvent trading claim exists against the directors;
- whether any offences have been committed by the company’s officers;
- if any voidable transactions, including unfair preferences, can be reversed; and
- if any other recoveries may be available.
Much of the above information is reported to ASIC. A liquidator’s powers include holding public examinations, seizing books and records and gaining access to property.
The liquidator may apply to ASIC for external funding to pursue certain avenues of investigation should there be insufficient funds within the company to undertake those investigations.
Recovering property sold before the liquidation
The liquidator can recover money from creditors who received payments that gave them ‘preferential’ treatment in the six months before the liquidation.
In addition, the liquidator will review any sales or transfers of property in the years before liquidation. If property transactions appear improper, uncommercial or were undertaken to defraud creditors, the property or its value may be recoverable.
How does an insolvent trading claim arise?
Directors have a duty to ensure their company does not continue incurring debts when it is insolvent.
If the directors breach that duty, the liquidator can bring an action against them, personally, for recovery of the amount of the debts incurred during the period that the company was insolvent.
Are directors’ personal assets at risk?
A liquidator can only take possession of a company’s assets. Taking possession of the directors’ personal assets is not permitted.
However, if directors took company assets without paying market value for them, the liquidator can recover those assets. Similarly, if the company loaned money to the directors, the liquidator will seek to recover those funds.
Recovering assets, obtaining repayment of loans and pursuing insolvent trading claims can all lead to court proceedings. Those proceedings can result in a director being made bankrupt, at which point their personal assets will be made available to the trustee, realised and used to satisfy the director’s debt, including those debts brought by the company’s liquidator.
Can creditors attack a director’s personal assets?
Yes, but only if the director signed a personal guarantee on a contract or agreement the company entered into with a creditor.
It is common practice for directors to give personal guarantees for the company’s credit arrangements, for example:
- lease agreements;
- equipment finance or hire purchase finance – i.e. vehicles; and
- company loans.
When a director signs a personal guarantee, it becomes a personal arrangement between creditor and director, as guarantor, and it is not affected by liquidation. It follows that the liquidation cannot extinguish personal guarantees. Creditors can enforce the personal guarantee at any time during the winding up process. Note that this differs from voluntary administration where the moratorium also extends to personal guarantees.
It should also be noted that if more than one director provides a personal guarantee, the claim is ‘joint and several’. The creditor can pursue 100% of the claim from each director until the claim is paid. If one director pays the claim on behalf of the other directors, they will have what’s called a ‘right of contribution’ claim against the other directors.
Secured creditors’ claims in a liquidation
A secured creditor’s rights are not affected by liquidation. Commonly, the secured creditor allows the liquidator to sell the assets the subject of its security and then receive the net proceeds as payment toward the secured
debt. If the proceeds from the secured assets are not enough to pay the secured creditor’s claim, the shortfall is treated as an unsecured claim.
Unsecured creditors’ claims in a liquidation?
Unsecured creditors are unable to recover funds from the company via Court proceedings during the liquidation and must wait until the liquidation is at a stage when, or if, funds are able to be distributed.
Unfortunately, in most instances asset recoveries are not sufficient to pay a return to unsecured creditors.
In what order do creditors get paid?
The liquidator must pay dividends in the order of priorities set out in section 556 of the Act.
Generally, these priorities rank as follows:
- costs and expenses of the liquidation;
- secured creditor and/or employee entitlements depending on the type of asset recovered – circulating or non- circulating;
- unsecured creditors; then
Creditors powers during the liquidation
Under the Insolvency Practice Schedule (Corporate) 2016, creditors have a range of rights, including:
- ‘reasonable’ requests for information from the liquidator;
- ‘reasonable’ requests for meetings;
- arranging for review or oversight of the liquidator; and
- replacing the liquidator.
Importantly, if there are insufficient funds in the liquidation to comply with the ‘reasonable’ request for information and/or meetings’, this could deem the request as being ‘unreasonable’, unless the creditor is willing to pay the costs of such requests.
How long does the liquidation last?
There is no set time limit for a liquidation. It is not unusual for a liquidation to span between 1 and 2 years, and possibly longer.
The liquidation lasts for as long as necessary to complete the required tasks. A liquidator will usually try to finalise the liquidation as soon as possible.
How does the liquidation end?
The liquidator may retire when they have satisfied their duties, recovered and distributed all available assets, and received confirmation that ASIC does not wish to investigate further.
At the time of retiring the liquidator usually applies to ASIC to have the company struck off the register of companies. The strike off usually occurs automatically 3 months after the application is made.
If your business is experiencing financial difficulty, contact us to arrange a free, no-obligation discussion to give you clarity on your position and options available.