The process of liquidation signifies the permanent close of a company’s business affairs. The company appoints a liquidator to sell and distribute the company’s assets in order to pay creditors and shareholders. Simplified liquidation is a streamlined creditors’ voluntary liquidation for companies that have less than $1 million in liabilities. This article will provide an overview of simplified liquidation and the eligibility criteria for the process.
What is simplified liquidation?
There are two types of insolvent liquidation: creditors’ voluntary liquidation and court liquidation. The key difference is that creditors’ voluntary liquidation allows for the company’s members to administer the process of winding up the company without the need for court intervention. As mentioned above, simplified liquidation is a streamlined version of the creditors’ winding up process. This scheme only applies to companies that have liabilities less than $1 million and where the event that triggered the liquidation occurs on or after 1 January 2021.
The Australian Government announced the concept of simplified liquidation in September 2020 in order to better serve small businesses. The reforms aim to reduce the complexity, time and costs associated with the insolvency system.
What is the difference between simplified liquidation and a creditors’ voluntary liquidation?
In order to cut time and costs, the simplified liquidation process simplifies the regulatory obligations of the existing creditors’ voluntary liquidation. Key differences include:
- Reduced circumstances in which a liquidator can return an unfair preference payment from a creditor that is not related to the company
- The liquidator can only to the report to ASIC on potential misconduct
- Creditor meetings are not required
- Creditors cannot form committees of inspection
- No mandatory reports to creditors. However, the liquidator must report to creditors within three months of the liquidator’s appointment
- The dividend and the proof of debt process is simplified
- Maximised technology in voting and other communications
- Creditors can make reasonable requests for information from the liquidator
- The liquidator is only able to make one dividend payment when when funds are available to pay a dividend to creditors
What are the eligibility requirements?
To be eligible for the simplified liquidation process:
- The company must be in a creditor’s voluntary liquidation
- The event that triggered the start of the liquidation process occurs on or after 1 January 2021
- The liabilities of the company on the day a liquidator is first appointed must not exceed $1 million
- The company is unable to pay its debts in full within 12 months
- The director must give to the liquidator, within five days after the meeting accepting liquidation:
- a report on the company’s business affairs, and
- a statement declaring that the company meets the eligibility requirements
- No current or previous director of the company within 12 months of the liquidator being appointed, has been a director of another company that has been under restructuring or a liquidation process within the period of the preceding seven years
- The company has not undergone restructuring or been the subject of a simplified liquidation within the period of the preceding seven years
- The company has complied to the requirements under the Income Tax Assessment Act 1997 (Cth).
Can a liquidator propose adopt the simplified liquidation process?
The liquidator in the creditors’ voluntary winding up may also adopt the simplified liquidation process if:
- They believe that the eligibility criteria has been met
- Not more than 20 days have passed since the liquidator was appointed
- The liquidator has given written notice to each member and creditor, at least 10 business day, including:
- A statement outlining that the eligibility criteria will be met
- An outline of the simplified liquidation process
- A statement outlining that the process will not be adopted if at least 25% in value of creditors provide a written statement requesting the liquidator not to follow the simplified liquidation process
- Prescribed information on how the creditor may give the director a written statement requesting that the simplified process to not be adopted
If the liquidator receives written statements requesting the abandonment of the process from more than 25% in value of creditors, the simplified liquidation process must not be adopted.
When should the simplified liquidation process cease?
There are some circumstances where the liquidator must cease the operation of the simplified liquidation process. This may include:
- Eligibility requirements are no longer met
- The liquidator has reasonable grounds to believe that the company, or the director has engaged in fraudulent or dishonest conduct that has, or is likely to have, a material adverse effect on the interests of creditors.
Conclusion
Simplified liquidation is a pathway for small businesses to reduce time and costs during the liquidation process. This information in this article provides a general overview of the process and does not substitute professional legal advice. Check out the Australian Securities & Investments Commission website or contact an insolvency lawyer for further information.
