What is a Simplified Liquidation?
A Simplified Liquidation (SL) is a streamlined creditors’ voluntary winding up (CVL) for companies that have liabilities of less than $1 million. It has been possible for companies to enter SL since 1 January 2021. Ultimately the intention of the SL process is to lower costs and improve outcomes for creditors.
What’s the different between a standard CVL and a Simplified Liquidation?
The key differences between to two forms of winding up are:
- Meetings of creditors are not held in an SL. Unlike a CVL, matters to be determined by creditors may only be decided by way of a postal ballot.
- Unlike a CVL, there is no opportunity for creditors to form a committee of inspection.
- As with a CVL, the Liquidator in an SL must report to creditors within three months of the Liquidator’s appointment, but the report is less detailed than a CVL report. It must provide information about:
- any work performed to date by the Liquidator; and
- the Liquidator’s opinion on when the SL may be finalised and the likelihood of a dividend being paid to creditors.
There are no other mandatory reports to creditors.
- If there are sufficient funds to pay a dividend to creditors, interim dividends are not permitted – only a final dividend may be paid.
- There are restrictions on the types of claims that a Liquidator in an SL can seek to recover, as compared to a standard CVL.
What tasks of the Liquidator are the same or similar in both forms of winding up?
In both types of liquidation, creditors can make reasonable requests for information from the Liquidator.
The Liquidator may recover compensation for insolvent trading from the directors, if bringing such a claim is likely to be commercial – in other words, the recovery is likely to exceed the costs.
Subject to the restrictions imposed under the SL process, the Liquidator can seek to recover preferential payments made by the company.
The Liquidator is still required to report any identified misconduct to ASIC, but only if the Liquidator believes an offence under any statute (Federal, State or Territory) has been committed and that the misconduct has or is likely to have a material adverse effect on the interests of creditors as a whole.
What are the eligibility criteria for Simplified Liquidation?
To be eligible for the SL process:
- the company must be insolvent and in a creditors’ voluntary winding up (a court ordered winding up is not eligible);
- the liabilities of the company on the day a Liquidator is first appointed in the creditors’ voluntary winding up must not exceed $1 million;
- the directors must within five business days of the commencement of the CVL give to the Liquidator:
- a report on the company’s business affairs;
- a declaration that they reasonably believe that the company meets the eligibility criteria for the simplified liquidation process.
- no current or past director (in the previous 12 months) of the company has been a director of another company that has been under small business restructuring or subject to the SL process within the past 7 years.
- the company itself has not been through small business restructuring or been the subject of an SL process in the past seven years.
- the company is up to date with all its tax lodgements (although there may be arrears of taxation owing).
How does a Simplified Liquidation start?
The Liquidator in the creditors’ voluntary winding up may adopt the SL process (by lodging the relevant document with ASIC) if:
- he or she reasonably believes the eligibility criteria are met;
- the liquidation has been on foot for no more than 4 weeks (20 business days);
- two weeks (10 business days) before adopting SL, the Liquidator has written to each member and creditor of the company:
- advising that the Liquidator reasonably believes the eligibility criteria for the SL process will be met;
- providing an outline of the SL process;
- advising that creditors may veto the adoption of SL if a written direction is given by at least one quarter by value of the creditors to that effect; and
- providing prescribed information on how the creditor may give the direction in writing not to adopt the SL process.
If at least one quarter in value of company creditors direct the Liquidator not to adopt SL, then that direction must be followed by the Liquidator.
Can a Simplified Liquidation convert into a standard CVL?
The Liquidator is obliged to convert an SL into a standard CVL if he or she becomes aware that any of the eligibility criteria are no longer being met. For example, if after adopting SL, additional liabilities of the company are discovered that push the total value of company liabilities over $1 million.
If the Liquidator forms the view after conducting investigations into the company’s affairs that there appears to have been misconduct involving fraud or dishonesty and that misconduct appears likely to have a material adverse effect on the company’s creditors as a whole or a class of them, for example, employees, then the Liquidator must convert the SL into a standard CVL.