If you are a director of a company that is unable to pay its debts as and when they fall due, it is most likely the company is now considered insolvent. This can be a stressful time for the directors who may be trying to balance the competing interests of the company’s creditors, while also facing potential personal liability.
What is a creditors’ voluntary liquidation?
If there is no underlying viable business model, then the best way forward may be the appointment of a liquidator under the creditors’ voluntary liquidation process. This liquidator will then take control of the insolvent company.
For directors, the appointment of a liquidator means that:
- The likelihood of being found personally liable for insolvent trading is minimised. The longer that elapses from the point of insolvency to the appointment of a liquidator, the more risk.
- The possibility of being found personally liable for undertaking a creditor-defeating disposition is reduced. Newly introduced legislation presents considerable personal risk for directors who may try to liquidate a company’s assets in distressed circumstances. As a liquidator will handle the sale of assets, this risk is minimised.
- Creditor claims are dealt with equitably by the liquidator. This removes a considerable amount of stress from directors and ensuring that all stakeholders are treated fairly. The liquidator is responsible for all communications with creditors from the time of appointment in the liquidation process.
- Employees will typically be able to make a claim for unpaid entitlements through the Fair Entitlements Guarantee (FEG) scheme. For instance, employees can claim for up to 13 weeks of unpaid wages under the FEG regime, however, this process can only be initiated once the company is placed in liquidation.
- Where the company owes a debt to the ATO and the directors have been served with a non-lockdown Director Penalty Notice, the appointment of a liquidator to the company may prevent the development of a claim against the directors personally for the debt.
Creditors’ voluntary liquidation appointment process
Where a creditors’ voluntary liquidation is initiated by a company, there is a two-step process:
- The company director(s) must resolve that the company is insolvent and that liquidators be appointed.
- The shareholder(s) must then pass a special resolution to wind up the company.
The liquidator will typically provide all the necessary documents, disclosures and instructions to make sure that this process is done correctly and fairly.
Alternatively, this process can also be initiated with creditors voting in favour of placing a company into liquidation following a voluntary administration or a terminated deed of arrangement.