Creditors' Voluntary Liquidation: The Directors’ Checklist

What is Creditors' Voluntary Liquidation?

A CVL, or Creditor’s Voluntary Liquidation, is a legal process where the directors of an insolvent company (unable to pay debts) voluntarily decide to close the business. As a director, you need to cease trading (to avoid accumulating more debts and wrongful trading) and seek expert help by appointing a licensed insolvency practitioner, known as a liquidator, to handle the liquidation process.

The liquidator sells the company’s assets to pay creditors as much as possible including the banks, suppliers, landlords or anyone that seeks repayment. This is a transparent and straightforward process, and creditors are informed so they can claim what’s owed to them. It’s the most structured way to close a failing company.

Why Choose Creditors' Voluntary Liquidation?

Insolvency Issues: When a company cannot pay its debts as they fall due, CVL becomes a necessary step.

Pressure from Creditors: Persistent pressure from creditors can push directors to opt for CVL to avoid compulsory liquidation.

Business Reorganization: Sometimes, CVL is part of a larger strategy to reorganize and restart the business under new management.

Common Misconceptions about CVL

1 Directors Must Pay CVL Fees:

It’s often thought that directors must personally cover CVL fees. In reality, these costs can be paid from the company’s assets if liquidation is initiated early, protecting directors from personal financial responsibility.

2 CVL is Caused by Irresponsible Management:

CVL may arise from unforeseen external factors like market shifts, loss of key clients, or changes in consumer demand—not necessarily due to poor management.

3 CVL is a Costly and Complex Process:

While costs vary, CVL doesn’t have to be expensive or complicated. Professional liquidators help manage the process, and directors still make key decisions, such as appointing the liquidator. Cooperation and good management can maximize the value of the company’s assets.

The CVL Process and Director’s Responsibilities

1. Decision to Liquidate

When directors determine that the company can no longer pay its debts, they decide to liquidate it. This decision marks the start of the formal process to deal with debts and legal obligations. ASIC monitors this to confirm that everything is done legally.

2. Hold a Board Meeting

Directors hold a formal meeting to officially confirm the decision to liquidate. They must document this decision and prepare necessary paperwork, which ASIC will review.

3. Notification to Creditors

Directors inform all creditors about the liquidation, then start to prepare their claims. ASIC requires public notification to keep the process transparent.

4. Appointing an Insolvency Practitioner

Directors select a licensed insolvency practitioner to manage the liquidation. The liquidator oversees the process from this point forward. Directors should choose someone experienced and reputable.

5. Ceasing Business Operations

The company stops all business activities to prevent further debt. With the liquidator’s assistance, the directors wind down operations and notify employees and clients. ASIC makes sure the business complies with this step.

6. Inventory and Valuation of Assets

The liquidator prepares a list and valuates the company’s assets, with help from the directors. This helps determine the company’s worth and how payments are distributed to creditors. ASIC may review the process.

7. Selling Assets and Settling Debts

The liquidator sells the assets to pay off debts, directors assist by providing information. ASIC makes sure this process is handled properly and creditors are paid fairly.

8. Final Distribution and Closure

After paying all debts, the liquidator distributes any remaining money to shareholders. They then prepare final accounts and submit them to ASIC, which will close and deregister the company.

Our advice

Engage a Liquidator Early:
Early engagement with a qualified liquidator helps ensure compliance with legal obligations and efficient management of asset sales.

Communicate Transparently with Creditors:
Maintaining open communication with creditors can build trust and potentially lead to more favorable negotiations regarding outstanding debts.

Prepare Financial Records:
Keeping up-to-date financial records, such as balance sheets and income statements, will aid in the valuation of assets and help clarify the company’s financial position to creditors.

Explore All Options:
Directors should consider whether CVL is the best course of action, or if other alternatives like a Deed of Company Arrangement may be more suitable for their company’s circumstances.

This information is for guidance only, is indicative and should not be taken to be advice or relied upon for action for legal process.
In call cases, should you have any queries or wish to discuss your own circumstances, find your trusted insolvency practitioners with Insolvency Australia's directory. For expert guidance on choosing the right liquidator for your business, visit Insolvency Australia’s guide to selecting a practitioner.