Creditors' voluntary liquidation

There is no fixed timeframe for a creditors’ voluntary liquidation (CVL). The length of the process depends on factors such as the company’s assets, number of creditors, complexity of its affairs and whether the liquidator needs to investigate or pursue any claims.

A straightforward liquidation may be completed within several months, while more complex matters can take a year or longer. Once the liquidator has completed the administration and lodged the required documents with ASIC, the company is generally deregistered three months later.

A company entering liquidation does not automatically mean that a director has become personally bankrupt or that the company’s debts become their personal debts. However, the liquidation becomes part of the company’s public record and may be considered by lenders and commercial credit reporting agencies when assessing businesses associated with a director.

Your personal financial position may also be affected if you have personally guaranteed company debts or become personally liable for amounts such as certain tax debts or insolvent trading claims.

Generally, no. A company is a separate legal entity and directors are not usually personally responsible for its debts.

There are exceptions. A director may become personally liable where they have provided a personal guarantee, received a Director Penalty Notice, allowed the company to incur debts while insolvent, owe money to the company or have breached certain directors’ duties. The circumstances of each director should therefore be considered individually.

In most cases, liquidation results in employees’ employment being terminated. Employees who are owed wages, superannuation, leave or certain other entitlements become creditors of the company and some employee entitlements receive priority over ordinary unsecured creditors.

Eligible employees who cannot recover certain entitlements from the company may also be able to claim through the Australian Government’s Fair Entitlements Guarantee (FEG). FEG can cover eligible unpaid wages, annual leave, long service leave, payment in lieu of notice and redundancy pay, but it does not cover unpaid superannuation.

Once the liquidator is appointed, control of the company passes from the directors to the liquidator. Directors can no longer exercise their normal management powers.

Directors must cooperate with the liquidator and provide information, company records and assistance concerning the company’s business, assets, liabilities and financial affairs. The liquidator will also investigate the company’s affairs and whether there are any transactions, claims or potential breaches of directors’ duties that require further action.

Being a director of a company that enters liquidation does not, by itself, prevent a person from being a director of another company.

Directors are generally protected from personal liability for company debts because the company is a separate legal entity. However, personal liability can arise in certain circumstances.

Examples include personal guarantees, Director Penalty Notices for certain unpaid tax and superannuation liabilities, insolvent trading and other breaches of directors’ duties. A liquidator will review the company’s affairs and investigate whether any claims against directors or other parties may be available.

A CVL generally begins when the company’s shareholders pass a special resolution to wind up the company and appoint a registered liquidator. A company can also enter liquidation following a voluntary administration or terminated deed of company arrangement.

Once appointed, the liquidator takes control of the company, notifies creditors, identifies and sells available assets, investigates the company’s affairs and distributes available funds to creditors in accordance with the statutory order of priority. In a CVL, creditors must receive initial information about the liquidation and their rights within 10 business days of the liquidator’s appointment.

Once the company’s affairs have been fully wound up, the liquidator lodges the required final documents with ASIC and the company is subsequently deregistered.

A creditors’ voluntary liquidation means the company is insolvent and its affairs are being formally wound up, so it is a significant step. However, where a company can no longer pay its debts, entering liquidation can provide an orderly way to bring the company’s affairs to an end.

The process places the company under the control of an independent registered liquidator, who deals with creditors, realises available assets, investigates the company’s affairs and distributes available funds according to law. Unsecured creditors are also generally prevented from commencing or continuing legal action against the company without the court’s permission.

For directors, acting early and obtaining appropriate advice can also help ensure they understand their obligations and the options available when a company is experiencing financial difficulty.