Insolvency and Liquidation

What is Insolvency?

The meaning of insolvency is categorised as a state wherein a company is not solvent. Meaning that it is unable to pay its debts as and when they fall due.

Insolvency is also defined by the statutory procedures that surround insolvent companies. Usually when a company insolvent one of the below liquidation processes will be enacted.

Creditors Voluntary Liquidations

Creditors’ voluntary liquidations (CVL) are a formal insolvency process that occurs when the company’s directors and subsequently its members determine that the company is insolvent, or likely to become insolvent and can no longer satisfy its debts.

A CVL allows for the appointment of a qualified person (the Liquidator) who is tasked with immediately realising the Company’s Assets for the benefit of the creditors of the company.

Benefits of Creditors Voluntary Liquidation

There are many benefits to the creditor’s voluntary liquidation, including:

• Brings the Company’s affairs to an end and allows its assets to be realised for the benefit of the creditors of the Company.

• An expert is able to take control of the difficult situation and relieve the stress that may be experienced.

• Legal action that has been commenced prior to the appointment of the Liquidator is automatically stayed;

• Avoid a winding up commenced by the Court.

• Lower costs

• Avoiding risks of continued insolvent trading and breach of directors’ duties

• Allows for the employees of the Company to be immediately terminated and where there are insufficient funds, they may seek to make a claim under the Fair Entitlement Guarantee Scheme.

The Process of a Creditors Voluntary Winding Up

The process of commencing a creditors voluntary liquidation is as follows:

• a meeting of the directors of the company takes place to resolve that the company is insolvent or likely to become insolvent and accordingly, that the company should be wound up. The directors will then call a members’ meeting to wind up the company;

• the members meeting will take place to pass a special resolution (or a circular resolution if no members’ meeting is held) that the company is insolvent and should be wound up.

The directors of the Company must complete a summary of affairs on an ASIC Form 509;

• the members appoint a liquidator, and the company must provide, within seven days of the winding-up date, a summary statement under ASIC Form 507. This is a statement that outlines the company’s business, its property, financial circumstances and any other relevant affairs;
• the liquidator must issue a report to creditors within 11 days after the date of winding up. The creditors have the power to request a meeting of creditors to be convened for the purposes of removing the liquidator and appointing an alternate should they deem it appropriate;
• The Liquidator also undertakes various investigations into the affairs of the Company and the reasons for its failure to enable a report to creditors to prepared within three (3) months of appointment; and
• the liquidator will continue to administer the winding up process by paying out creditors with available funds. They will then prepare a final report for creditors, lodge various documents with ASIC and request for the company’s deregistration.

At RRI Advisory we have extensive experience undertaking CVLs and can quickly and efficiently assess a client’s position to determine if this option is suitable for their needs.