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01 Mar 2022

How a members’ voluntary liquidation can benefit all stakeholders


3 min

Looking for assurance that you’ll get the best outcomes possible? Make sure it’s completed properly by experts.

After two years of unprecedented pressure, are your clients considering closing their business and moving in a new direction? A members’ voluntary liquidation could deliver the best outcome for all stakeholders, including creditors and shareholders as long as it’s completed properly.

Solvent companies can have their affairs resolved and finalised properly through the formal members’ voluntary liquidation (MVL). The MVL process identifies any creditors, including contingent ones, and resolves them in full, and the company assets are distributed to its members. Conversely, an improperly conducted MVL can be converted to an insolvent creditors' voluntary liquidation, which can result in penalties for the directors for failing to appropriately administer the company’s affairs.

The benefits of a MVL appointment are:

  • Ensuring that due process is followed to identify all creditors.

  • Shareholders’ interests are factored into the distribution by working with expert registered liquidators.

  • Obtaining concessional treatment of certain tax liabilities, such as when dealing with pre-capital gains tax (CGT) assets or instances when small business CGT concessions might apply.

  • Gaining confidence arising from finality—the complete and correct process to finalise the affairs and deregister a company.

  • Leaning on an independent third party’s experience to take control of a company’s affairs to assist resolving disputes amongst stakeholders, such as creditors, directors or shareholders. A liquidator safeguards the assets from dissipation and mitigates the impairment of asset values while obtaining independent valuations and taking steps to resolve any disputes.

  • Avoiding the costs of retaining large volumes of books and records by obtaining consent from the Australian Securities and Investments Commission (ASIC) for the “early destruction of company’s records”.

  • Alleviating board member risks for in-house winding up for incorporated associations.

A liquidator can wind up and distribute assets for incorporated associations (e.g. not-for-profit organisations, unlisted public companies, co – operatives, registered clubs, charitable organisations, community and social enterprises) in accordance with the Rules to alleviate board member risks associated with winding up its affairs in-house. A liquidator can also distribute the remaining company assets when the assets exceed $1,000 and voluntary deregistration is not an option due to restrictions under the Corporations Act 2001.

While a MVL might appear simple, it is a complex process subject to a stringent regulatory framework with serious and wide-ranging consequences. Critically, the flow, timing, and lodging of documentation/statutory forms with ASIC can alter the company’s solvent position. For example, to wind up a solvent company with ASIC, the declaration of solvency (ASIC Form 520) requires it to be signed and lodged within specific dates. Any error, which is difficult to rectify, can result in a company requiring a creditors’ voluntary liquidation instead—converse to having sufficient company assets to pay out all its creditors!

If the declaration of solvency is completed or lodged incorrectly, an application can be made to ASIC to request the company to continue as a solvent MVL, but this is reliant on ASIC’s approval. Fines can also apply for late lodgment, which can add further financial cost to an MVL—another drawback of not engaging an expert.

There are many ways that a solvent MVL could become an insolvent liquidation and have negative consequences for the directors if the MVL isn’t completed properly.

Contact your local Worrells principal who will explain how our experience in solvent and insolvent company winding ups and turnarounds can prevent costly mistakes.

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