Practical advice for directors of insolvent companies
A creditors voluntary liquidation, often called a CVL, is a formal process used when a company is insolvent and cannot pay its debts as and when they fall due.
For many directors, the decision to place a company into liquidation is difficult. It often follows months of pressure from creditors, the ATO, suppliers, landlords, finance companies or employees. In some cases, directors have already used personal funds, negotiated payment arrangements or tried to keep the business going longer than was commercially realistic.
A CVL can give directors a degree of control over an otherwise deteriorating situation. It can stop the company from incurring further debt, bring creditor pressure into a formal process, and allow directors to deal with the company’s affairs in a lawful and orderly way.
At IRT Advisory, we understand that directors usually do not arrive at this point lightly. We deal with directors respectfully and practically, while also being clear about the statutory duties that apply once a liquidator is appointed.
IRT Advisory is based in Melbourne and acts for companies throughout Australia.
If your company is under financial pressure, you can contact us for a confidential discussion, request a same-day assessment, or use our Insolvency Assessment Tool to better understand the level of financial pressure your company may be facing before speaking with us about the options available.
What is a creditors voluntary liquidation?
A creditors voluntary liquidation is a voluntary winding up of an insolvent company.
The process is usually initiated by the company’s directors and shareholders. Once the company is placed into liquidation, a registered liquidator is appointed to take control of the company’s affairs, realise available assets, investigate the company’s financial position and distribute any funds available to creditors in accordance with the priorities set out in the Corporations Act.
Read More
A CVL is different from a members voluntary liquidation, which applies to solvent companies. In a creditors voluntary liquidation, the company is insolvent or likely to be insolvent, meaning it cannot pay all of its debts when they fall due.
A CVL can provide a lawful and orderly way to bring the company’s affairs to an end. It also helps directors deal with the position openly, rather than allowing creditor pressure, statutory demands, court proceedings or enforcement action to continue escalating.
The CVL process at a glance
Although every liquidation is different, a creditors voluntary liquidation usually involves the following steps:
- The directors seek advice and decide whether liquidation is appropriate.
- The company’s shareholders resolve to wind up the company and appoint a registered liquidator.
- The liquidator notifies creditors, ASIC and other relevant parties.
- The liquidator takes control of the company’s assets, books and records.
- Creditors are invited to submit claims and are kept informed during the liquidation.
- The liquidator investigates the company’s affairs and reports to ASIC where required.
- Available funds are distributed according to the priorities set out in the Corporations Act.
- Once the liquidation is complete, the company is deregistered.
When should directors consider a CVL?
Common warning signs include:
- overdue ATO debt
- unpaid superannuation
- payment arrangements that the company cannot realistically maintain
- statutory demands or threatened winding up proceedings
- suppliers placing the company on stop credit
- unpaid employee entitlements
- loans, leases or finance arrangements in default
- continual reliance on director loans or personal credit cards
- creditors taking legal action
- cash flow forecasts showing that the company cannot meet upcoming liabilities
A CVL may be appropriate where there is no realistic prospect of trading out of difficulty, refinancing, restructuring or selling the business.
However, liquidation is not always the first or only option. Depending on the circumstances, other options may include informal restructuring, safe harbour advice, small business restructuring, voluntary administration, refinancing, asset sales or negotiating with key creditors.
The earlier advice is obtained, the more options are usually available.
What does the liquidator do?
Once appointed, the liquidator takes control of the company. The powers of the directors are suspended, although directors remain required to assist the liquidator.
The liquidator’s role usually includes:
- notifying creditors and relevant authorities of the liquidation
- taking control of company assets, books and records
- securing bank accounts, insurance policies, leases and trading arrangements
- deciding whether any limited trading should continue to preserve value
- selling company assets where appropriate
- collecting outstanding debts
- investigating the company’s affairs
- reviewing transactions entered into before liquidation
- reporting to creditors
- reporting to ASIC where required
- adjudicating creditor claims
- distributing available funds in the order required by law
- finalising the liquidation and arranging for the company to be deregistered
The liquidator must act in the interests of creditors as a whole. That does not mean the liquidator is hostile to directors. It does mean, however, that the liquidator must perform statutory duties independently and cannot act as the director’s personal adviser.
What happens to directors after liquidation?
- when the company became insolvent;
- whether the company incurred debts while insolvent;
- whether company money or assets were transferred improperly;
- whether some creditors were preferred over others;
- whether director loan accounts or related party transactions exist;
- whether employee entitlements and superannuation were properly dealt with;
- whether the company kept adequate books and records.
These issues do not mean that every liquidation results in a claim against directors. The liquidator must consider the evidence, the law, the likely recovery and whether pursuing a claim would be commercial.
Seeking advice early can reduce risk. Delaying action after insolvency has become clear can make the position worse.
What happens to creditors?
Creditors are notified of the liquidation and given information about the company’s position. They may be asked to submit a proof of debt if there are funds available for distribution.
The liquidator deals with creditor claims according to the priorities set out in the Corporations Act. In broad terms, the costs of the liquidation and certain priority claims, including some employee entitlements, are paid before ordinary unsecured creditors receive any dividend.
In many insolvent liquidations, there may be little or no return to unsecured creditors. That outcome is often frustrating for creditors, but the liquidator’s role is to identify and realise whatever value is legally and commercially available.
What happens to employees?
Employees are often among the most important stakeholders in a liquidation. If the company has employees, the liquidator will consider unpaid wages, superannuation, leave entitlements, redundancy and other employment-related claims.
Certain employee entitlements receive priority in a liquidation. This means they are paid before ordinary unsecured creditors if sufficient funds are available.
Where the company does not have enough funds to pay employee entitlements, eligible employees may be able to claim through the Fair Entitlements Guarantee scheme, commonly called FEG. FEG is a Commonwealth Government scheme that may assist with unpaid wages, annual leave, long service leave, payment in lieu of notice and redundancy pay, subject to eligibility criteria. Superannuation is not paid through FEG.
Directors should seek advice promptly if employee entitlements are unpaid or if the company is continuing to trade while unable to meet payroll, PAYG withholding or superannuation obligations.
What are the risks of delaying liquidation?
Directors often delay seeking advice because they hope the business will recover, a large debtor will pay, finance will be approved, or the ATO will agree to another payment arrangement.
Sometimes that optimism is justified. Sometimes it is not.
The risk is that delay may increase creditor losses and expose directors to greater personal risk. Potential issues include insolvent trading, breach of director duties, director penalty notices, unpaid superannuation, voidable transactions, preference payments and claims involving related parties.
A voluntary liquidation does not erase these issues, but it can stop the company incurring further debt and provide a controlled process for dealing with creditors.
The point is not that directors should panic or rush into liquidation. The point is that directors should obtain proper advice before the situation deteriorates further.
Is a CVL always the right option?
No.
A creditors voluntary liquidation is appropriate where the company is insolvent and there is no realistic basis to continue trading or restructure. But other options may produce a better outcome in the right circumstances.
For example, a company may be able to restructure its debts, sell its business, enter small business restructuring, appoint a voluntary administrator, negotiate with creditors, or obtain safe harbour advice while attempting a turnaround.
IRT Advisory can help directors consider the available options and decide whether liquidation is necessary or whether another course should be explored first.
What does a creditors voluntary liquidation cost?
The cost of a CVL depends on the circumstances of the company.
Some routine administrative and statutory tasks are reasonably predictable. These include preparing appointment documents, notifying creditors, lodging statutory forms, reviewing books and records, reporting to creditors and attending to the standard requirements of the liquidation.
Other aspects are less predictable. Costs may be higher where there are substantial assets, trading issues, complex creditor claims, poor books and records, related party transactions, litigation, disputed ownership of assets, employee issues, secured creditor claims, or investigations into voidable transactions and director conduct.
Where a company has assets, the liquidator’s remuneration is usually paid from funds realised in the liquidation, subject to approval where required. Where there are no assets or insufficient assets, an upfront contribution may be required.
We discuss costs upfront before accepting an appointment, so directors understand the likely position before making a decision.
What is simplified liquidation?
Simplified liquidation is a streamlined form of creditors voluntary liquidation available only where strict eligibility requirements are met.
In practice, it is not usually the main issue directors are concerned about. The more important question is whether the company is insolvent and whether liquidation, restructuring or another option is the most appropriate course.
If simplified liquidation is available and suitable, it can be considered after the appointment. However, it is not always advantageous, and the decision should be made having regard to the company’s circumstances, creditor position and the liquidator’s statutory obligations.
How IRT Advisory can help
IRT Advisory assists directors of insolvent companies to understand their options and deal with financial distress in a practical and orderly way.
We can help you consider:
- whether the company is insolvent
- whether liquidation is necessary
- whether restructuring or another option may be available
- what happens if a liquidator is appointed
- what information directors will need to provide
- what risks may arise from continued trading
- what the likely cost of the process will be
- how to communicate with creditors, employees and other stakeholders
We are Melbourne based and act throughout Australia.
If your company is struggling to pay its debts, the best time to seek advice is before creditor pressure turns into legal action.
You can contact IRT Advisory for a confidential discussion, request a same-day assessment, or use our Insolvency Assessment Tool as a practical first step in understanding how serious your company’s financial position may be.
