Are you a company struggling to pay your debts? Are you considering turning it all in? If so, a creditor’s voluntary liquidation (CVL) is a process that will allow a company’s shareholders to voluntarily wind up the company.
So, what is CVL?
A CVL is the winding up a company by a special resolution of the company’s shareholders to appoint a liquidator, usually when the company is (or may be) insolvent.
What does the liquidator do?
Upon the winding up of a company, a liquidator has several duties, including but not limited to:
- assessing and realising the company’s assets for distribution amongst the company’s creditors;
- conducting investigations of the following matters:
- when the company became insolvent and whether any debts were incurred after that date;
- whether the director committed any offences;
- whether there are any payments to particular creditors that are preferential and other transactions that may be recoverable; and
- providing reports to creditors and obtaining relevant approvals from creditors; such as approval for their recommendations and costs to be paid from recoveries made in the liquidation;
- providing reports to the Australian Securities and Investments Commission (ASIC) regarding any misconduct of a director prior to liquidation.
Once the liquidator has completed their investigations and realised that all assets can reasonably be obtained and sold, it will then lodge the necessary documents with ASIC to deregister the company.
What are the effects of a liquidation?
The consequences of liquidation include:
- the management and control of the company vesting in the liquidator;
- creditors of the company losing the ability to commence a claim for monies owed;
- in most cases, the dissolution of the company.
What are the Director’s Duties and Obligations of an Insolvent Company?
Upon the appointment of a liquidator, a director (and any officers of a company) must:
- deliver to the liquidator all books and records that relate to the company (other than those to which an officer is entitled to retain);
- give the liquidator information about the company’s business, property, affairs and financial circumstances;
- provide the liquidator with any further information or documents it requests; and
- attend meetings of the company’s creditors or members as the liquidator reasonably requires.
The duties and obligations of a director of an insolvent company are contained in the Corporations Act 2001 (Cth) (Act). Notably, the powers of a director cease on the appointment of a liquidator, and the liquidator takes control of the company’s operations.
So, what happens when a director is operating a company while insolvent?
If a director allows a company to incur debts while insolvent prior to entering into CVL, the director may become personally liable for those debts.
Also, if a claim is made against a director alleging that the company was trading whilst insolvent, and as a consequence the creditor(s) suffered a loss, the director may be held personally liable when the company goes into liquidation.
Subsequently, if the liquidator determines a breach of the Act by a director, they will lodge a report with ASIC. ASIC will review the matter and if deemed appropriate, take action to prosecute the director, including potentially disqualifying a director from managing a corporation.
What happens if a director has provided a Personal Guarantee?
A personal guarantee is a document signed by a director that guarantees the debt incurred by the company. A director who has provided a personal guarantee will be liable for the company’s debt or commitment if the company does not meet its obligations.
If the company becomes insolvent, and the company’s assets are unable to meet the debts, then the focus will turn towards any personal guarantees the director/s has provided.
If you are a company struggling to pay your debts and thinking of turning it all in, call Rostron Carlyle Rojas Lawyers to discuss. Contact our insolvency lawyers immediately to discuss your options in a judgement-free consult with the experts.
This article is written by way of general comment and any reader wishing to act on information contained in this article should first contact Rostron Carlyle Rojas Lawyers for properly considered legal advice which takes into account your specific situation.