What is a Creditors’ Voluntary Liquidation (CVL)?
Directors have a duty to prevent a company from trading whilst insolvent which, if breached, can result in significant personal financial exposure and criminal charges. Creditors’ Voluntary Liquidation is commonly chosen as a procedure to end the life of an insolvent company for several reasons, as it:
- Enables directors to avoid escalating personal liability for certain debts owed to the ATO;
- Ensures an independent person oversees the process in a fair and equitable manner free from pressures that might otherwise be felt by the directors;
- Enables the assets of a company to be distributed equitably among creditors;
- Reduces the loss to the economy caused by insolvent companies continuing to trade;
- Enables directors to avoid escalating personal liability for insolvent trading.
Liquidation procedures are governed by the Corporations Act. In broad terms 75% of a company’s shareholders must resolve to wind the company up and to appoint a registered liquidator.
The liquidator will then report to creditors. Creditors may resolve, amongst other things, to replace the incumbent liquidator and request that a meeting be convened for that purpose.
Impact On Creditors
Upon liquidation, creditors are no longer able to pursue their debts through normal means such as instituting legal action. Creditors instead submit their claims to the liquidator, who then assesses each claim and ranks them to establish priority to the funds, if any, available for distribution.
The property available for distribution amongst creditors of a company includes:
- the company’s own property;
- any unpaid calls on shares;
- rights of action for damages;
- compensation recoverable by the liquidator from directors for insolvent trading;
- certain property improperly disposed of by the company prior to liquidation; and
- voidable transactions that can be clawed back by the liquidator, including unfair preferences and uncommercial transactions.
The Liquidator’s Functions and Duties Liquidation transfers the power of management from the directors to the liquidator.
The liquidator’s primary function is to convert the company’s assets to cash and then distribute those funds to the company’s creditors in the priority set out in the Corporations Act. In very broad terms the order of priority is: secured creditors, employees, and unsecured creditors. Shareholders will only receive a return after all creditors’ claims have been paid in full with interest.
The liquidator has a duty to creditors to act independently and in good faith. During the course of the liquidation, the liquidator must also:
- Lodge relevant notices and reports with ASIC;
- Carry out an investigation into the company’s affairs; and
- Investigate breaches of the Corporations Act.