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What is Voluntary Liquidation?
Liquidation usually refers to a business selling or “liquidating” their assets to pay their debts which cannot be repaid. When liquidation is voluntary, it can indicate that the business has has chosen to liquidate the business on their own accord, or have decided to liquidate in response to no longer wanting to operate business affairs. When this happens, the company becomes insolvent. Liquidation is also referred to as “winding up” a business. Voluntary liquidation involves the use of a liquidator which attains the role of selling assets to pay off any debts.
Types of Voluntary Liquidation
Voluntary liquidation branches into two divisions:
Members Voluntary Liquidation (MVL) occurs when a solvent can pay off its debts, however shareholders still decide to liquidate the business. This is typically done for non-financial reasons such as retirement, not wanting to continue operating or restructuring purposes. Creditors Voluntary Liquidation (CVL) occurs when a company is insolvent and cannot pay off their debts. When this happens, the directors and shareholders decide to liquidate the company to minimize losses to creditors. The purpose of doing this is to distribute any debt to the creditors.
Reasons Behind Members Voluntary Liquidation
Whilst creditors voluntary liquidation is quite a linear process: the business becomes insolvent and consequently sells their assets. Members Voluntary Liquidation have different reasons for occurring.
Some include:
Business closure: if the business is at the end of its cycle and the owners or shareholders have decided to close down to business in response to factors such as market conditions changing.
Restructuring: companies may choose to voluntarily liquidate their business as a step in restructuring, which can involve consolidating multiple entities into one or shutting down individual key parts of the business first.
Retirement/Personal Reasons: shareholders and directors may conclude they have reached their retirement age or have personal reasons which would impede on business operations.
Mergers/Acquisitions: voluntary liquidation may occur when the business is in the process of merging or acquired by another company and need to pay off their debts for a smoother transition.
Roles and Responsibilities of Key Parties
Liquidators are individuals who act on behalf of a business to sell their assets in both MVL and CVL. They are a legal entity and are registered by Australian Securities & Investments Commission (ASIC).
The Corporations Act 2001 (Cth) states that Courts have the right to appoint a liquidator after an application to wind up the business has been filed. Liquidators are typically appointed by the Courts, however, a director-initiated liquidation may lead to business owners appointing a liquidator themselves.
Roles the liquidators have include:
- Preserving assets: liquidators take control and safeguard the assets to prevent any errors in the process.
- Communicating with stakeholders: liquidators will communicate with creditors, shareholders and ASIC with regular updates on the liquidation process.
- Realization of assets: liquidators will realize the company’s assets and will aim to maximize the value earnt from selling. They will also determine a fair market value for the assets.
- Distributing funds: liquidators will then distribute the funds which were obtained from the realization process to creditors and pay off any other debts.
- Closure and deregistration: once the businesses have been wound up, the liquidator will then apply for the company’s deregistration with ASIC.
Dealing with Creditors During Voluntary Liquidation
Creditors’ Claims and Their Evaluation
Liquidators have a legal obligation to evaluate a fair market value of the assets sold, it is possible to dispute a claim the liquidator has made.
The Corporations Act requires them to act honestly and ensure the evaluation is fair and accurate.
In circumstances where a director or shareholder may disagree with the evaluation, the steps which should be taken are as follows:
- Review the creditor’s claim through a thorough reading of documents and calculations.
- Identify the basis for dispute through developing the grounds for your disagreement.
- Communicate with creditors in regards to see if they feel as if they are owed a specific amount– this can often resolve disputes without litigation.
- Provide evidence & attend legal proceedings if you still disagree with all their evaluation and have not come to a settlement.
Distribution of Payments to Different Creditors
Creditors are categorized into different classes based on the nature of their claims and the priority given to them by law.
Payments typically include:
Secured Creditors: Secured creditors with valid security interests, such as banks with mortgages or liens on specific assets, are entitled to be paid first from the proceeds of the sale of those assets.
Employee Entitlements: Employee entitlements, including unpaid wages, superannuation contributions, and accrued leave, are usually given a high priority.
Unsecured Creditors: After secured creditors and employee entitlements are paid, any remaining funds are distributed among unsecured creditors, who are typically categorized based on their class and the specific legal order of priority defined by insolvency laws.
Legal Requirements and Regulations in Voluntary Liquidation
As liquidators are legal individuals, the Corporations Act sets out the legal framework and regulations in relation to when they assist in voluntarily liquidating a company. Some legal requirements liquidators have include:
- They must be registered on ASIC.
- Act honestly, especially since they have so much power throughout the winding up process.
- Avoid conflicts of interest, meaning that they must not profit from the position aside from the payment for the work done as a liquidator.
- Act impartially at all times and should not be biased.
Post-Voluntary Liquidation Considerations
Once the liquidation has been completed, there are aspects that must be considered post winding up the business. These considerations include:
- Ensuring all legal and regulatory requirements for liquidation have been met (paperwork, government authorities, informing shareholders.
- Ensuring all debt settlements have been made and confirming that there are no outstanding payments.
- Taxation obligations such as addressing any outstanding tax liabilities, including income tax, and sales tax.
- Closing business accounts and ensuring the business is wound up. This includes deregistering the business through ASIC.
- Maintaining records of the liquidation for any taxation or legal purposes.
