What is Voluntary Liquidation and what is its purpose?

Liquidation is the process of winding up and finalising a company’s affairs. The purpose of a voluntary liquidation is to bring the affairs of the company to an orderly end.

The most common type of insolvent liquidation is a creditors’ voluntary liquidation. This is because it is relatively straight-forward, inexpensive and initiated by the directors or shareholders, usually following:

• voluntary administration;
• a terminated deed of company arrangement; or
• an insolvent company’s shareholders resolution to liquidate the company and appoint a liquidator.

This is in contrast to a member’s voluntary liquidation, which is only available to solvent companies. The primary reason for a liquidator to be appointed to a solvent company is to return capital to shareholders and to finalise the company’s affairs.

The reason to appoint a liquidator to an insolvent company is to avoid personal liability of directors for insolvent trading and deal with competing creditors who cannot all be paid in full in an orderly fashion.

Liquidation is conducted pursuant to the Corporations Act 2001 (Cth) and typically involves the appointment of a liquidator (who is independent and readily qualified to undertake the role), who takes control of the company to enable the orderly winding up of the company’s affairs and the legal structure itself.

The role of the liquidator will involve:

• the collection of assets;
• the undertaking of investigations; and
• the distribution of funds to creditors and then to shareholders.

When is Voluntary Liquidation a viable option?

Directors often choose to liquidate a company if they find themselves in the following scenarios:

• They are unable to pay creditors and wish to relieve themselves of the burden of on-going calls;
• They are unable to meet their obligations to the Australian Tax Office and risk being issued with director penalty notices;
• They wish to obtain protection from insolvent trading laws;
• They wish to bring the company’s affairs to an end;
• The company has no assets, or insufficient assets to keep doing business; or
• The company is trading at a loss or has ceased to trade altogether.

What is required of directors?

If a company is placed into liquidation, the responsibility for administering the company shifts to a liquidator. The directors are no longer in control of the company and their powers are suspended.

Directors must do the following:

• Assist the liquidator by furnishing information about the company’s property, dealings and affairs;
• Submit a Report on the Company’s Affairs and Property (ROCAP) which describes the financial position of the insolvent company at the date of liquidation;
• Furnish books and records of the Company to the liquidator; and
• Provide reasonable assistance, as may be required from time to time, when requested by the liquidator in respect of its investigation.

How is a liquidator appointed?

Creditors Voluntary Liquidation

If a liquidator is to be appointed in a Creditors Voluntary Liquidation, the following steps are required to be taken:

• Sign a document of the directors’ resolution to place the company in voluntary administration;
• Hold a meeting to sign a resolution by the shareholders to wind up the insolvent company;
• Contact an experienced liquidation services provider;
• The liquidator is to provide the draft minutes of a meeting; and
• The liquidator receives consent to act as liquidator.

Members Voluntary Liquidation

For a members voluntary liquidation to commence:

1. Directors resolve to call a meeting to wind up the company and complete various documents that need to be lodged with ASIC or obtained from the bank - who should be contacted and involved.
2. Hold a meeting where members resolve to wind up the solvent company.
3. Liquidator is appointed.

What are the duties of the liquidator?

Generally, a liquidator will be required to carry out the following duties during a company liquidation:

• Lodge various appointment documents at the Australian Securities & Investments Commission (ASIC);
• Recommend different government organisations, for instance, the ATO and state government revenue offices, of the appointment;
• Gather and sell the assets of the company;
• Set up a creditors report and hold a creditors meeting;
• Review books, records and reports findings to ASIC;
• Consider the possibility of instituting recovery activities if it is transpires there are “hidden assets” or assets that ought to be recovered;
• Pay dividends to creditors if resources are available; and
• Finalise the company liquidation by completing a final report for creditors, lodge different documents with ASIC and request that ASIC deregisters the company.

How long does the process of Voluntary Liquidation take?

While there is no hard and fast rule as to completion of a company liquidation, the process can take as little as 4-6 months, in the event of a members voluntary liquidation, assuming that no major issues are identified; or 6-12 months in a creditor's voluntary liquidation. The reason why the process takes this time is that liquidators are required to report to various government departments and then await the clearance of these steps to be able to move through to completion.

Sometimes however, a liquidation may take substantially longer but this depends on the complexity of the company and the issues involved, including pursuing any legal claims that may exist.

How can Sharrock Pitman Legal help?

If you are a director of a company and are considering winding it up, you may wish to discuss and explore your options as to liquidation. We have legal practitioners who specialise in and can assist with corporate insolvency and commercial litigation. Please feel free to contact us on 1300 205 506 or by email at litigation@sharrockpitman.com.au.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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