Creditors’ voluntary liquidation: how it works and what it means for directors

A creditors’ voluntary liquidation (CVL) is the most common way an insolvent company is wound up in Australia. The shareholders resolve to wind up the company and appoint a registered liquidator, who takes control, sells the assets, investigates what happened, pays creditors in the order set by law and then has the company deregistered.

What is a creditors’ voluntary liquidation?

A creditors’ voluntary liquidation is a formal insolvency process for a company that can’t pay its debts as they fall due. ASIC explains that it begins when an insolvent company’s shareholders resolve to liquidate the company and appoint a liquidator, or when creditors vote for liquidation after a voluntary administration or after a deed of company arrangement ends.

However, it is different from:

• a court liquidation, where the court appoints a liquidator, usually after a creditor applies to wind up the company
• a members’ voluntary liquidation, which is used to close a solvent company that can pay all its debts.

How a creditors’ voluntary liquidation works

1. Get advice early. A registered liquidator reviews the company’s position with the directors and explains the options, including whether the company could be restructured instead.
2. Consent to act. Next, the directors obtain a registered liquidator’s written consent to act as liquidator.
3. Members’ meeting. Then the directors call a meeting of the company’s members (shareholders), who vote on a special resolution to wind up the company and appoint the liquidator.
4. Liquidator takes control. At this point, the directors’ powers end. Within five business days, the directors must give the liquidator a report on company activities and property (ROCAP), and hand over the company’s books, records and property.
5. Creditors are told. The liquidator gives creditors initial information within 10 business days, and then a statutory report within three months of the appointment.
6. Assets, investigations and dividends. The liquidator sells the assets, investigates the company’s affairs and pays any dividends to creditors.
7. Deregistration. Finally, ASIC deregisters the company three months after the liquidator lodges the end of administration return.

What happens when a company goes into liquidation?

• Control: the liquidator takes control of the company, its assets and its records. The business usually stops trading, although the liquidator may trade it for a short time to sell it.
• Creditors: unsecured creditors can’t start or continue legal action against the company unless the court permits. Instead, creditors lodge a proof of debt to take part in any dividend and to vote.
• Secured creditors: a secured creditor can appoint a receiver to take control of and sell its secured assets.
• Employees: employees are priority creditors for outstanding wages, superannuation, leave and retrenchment pay. If there isn’t enough money to pay them, eligible employees may be able to claim under the Fair Entitlements Guarantee (FEG).

The order in which creditors are paid

Money from the liquidation is paid in this order, and each category must be paid in full before the next is paid:

1. the costs of the liquidation and the liquidator’s fees
2. outstanding employee wages and superannuation
3. outstanding employee leave
4. employee retrenchment pay
5. unsecured creditors.

In contrast, secured creditors are generally paid from the assets they hold security over.

Investigations and recoveries

The liquidator must investigate the company’s affairs and report to creditors. This includes looking into unfair preferences (for example, payments to a creditor in the six months before the liquidation that gave that creditor more than others), uncommercial transactions, creditor-defeating dispositions and possible claims against directors, such as insolvent trading. In addition, the liquidator inquires into why the company failed and reports to ASIC if offences may have been committed.

What liquidation means for directors

• Duty to help: directors must give the liquidator the ROCAP, books, records and property, and meet with the liquidator when reasonably required.
• Insolvent trading: a liquidator, ASIC or a creditor can bring compensation proceedings against a director for debts incurred while the company was insolvent.
• Director penalty notices: if you have a non-lockdown director penalty notice, placing the company into liquidation within the 21 days remits that penalty. See our DPN guide.
• Personal guarantees: liquidation doesn’t cancel a director’s personal guarantees, so creditors may still pursue them.
• Future directorships: directors involved in more than one failed company can face disqualification from managing corporations.

In other words, liquidation winds up the company, not the directors personally. For this reason, acting early usually gives directors more options and can reduce their personal exposure.

Liquidation, voluntary administration or SBR?

How Greengate helps

Our registered liquidators act as liquidators for small and medium companies in Sydney, Brisbane and across Australia. We explain each step, what it means for directors, employees and creditors, and the likely cost before you decide, in plain English, Mandarin, Cantonese or Korean. Examples of our liquidation work:

• Property development company: liquidation and sale of real estate assets for creditors
• Subsidiaries of an ASX listed company: voluntary administration followed by liquidation
• Australian subsidiary owned by a foreign entity: voluntary administration followed by liquidation

Common questions

What is a creditors’ voluntary liquidation?

The process of winding up an insolvent company that starts when its shareholders resolve to liquidate it and appoint a liquidator, or when creditors vote for liquidation after a voluntary administration or a deed of company arrangement.

How long does a creditors’ voluntary liquidation take?

It depends on the company’s assets, investigations and any recovery action. However, the liquidator must give creditors a statutory report within three months of the appointment, and ASIC deregisters the company three months after the end of administration return is lodged.

What happens to employees when a company goes into liquidation?

Employees are priority creditors for unpaid wages, superannuation, leave and retrenchment pay. If there isn’t enough money, eligible employees may be able to claim under the Fair Entitlements Guarantee.

Can creditors still take legal action?

Unsecured creditors can’t start or continue legal action against the company once it is in liquidation, unless the court permits.

Am I personally liable for the company’s debts?

Generally no, but directors can be personally liable through personal guarantees, director penalty notices and insolvent trading claims. Get advice early.

What is the difference between a creditors’ voluntary liquidation and a members’ voluntary liquidation?

A creditors’ voluntary liquidation is for an insolvent company. On the other hand, a members’ voluntary liquidation is for a solvent company that can pay all its debts in full.

This page is general information, not advice about your situation. Sources: ASIC Liquidation: a guide for creditors and Insolvency for directors.