Voluntary liquidations surge as financial threats loom

We’ve all heard that Court liquidations are on the rise as the ATO and other creditors seek to avail themselves of the Court winding up proceedings to seek recovery of unpaid debts. But did you know there’s one insolvency regime that continues to be the most common form of liquidation in Australia? Creditors’ Voluntary Liquidations (CVLs) are by far the most used regime to wind up an insolvent company.

We are seeing record numbers of CVLs, particularly as the ATO continues its aggressive tax collection activities. The statistics are fairly compelling. According to ASIC, there were 3,016 CVLs in 2021-2022, 4,400 in 2022-23, 5,001 last financial year, while this financial year to date (as at 22 September 2024) there have been 1,463 CVLs. And during the first quarter of FY25 Jirsch Sutherland handled 57 CVLs across a wide range of industry sectors.

The types of industries taking the CVL route are varied but, unsurprisingly, the two industries that particularly stand out are construction and accommodation & food services. However, a wide range of businesses in other sectors continue to take advantage of the regime to wind up their companies.

What is a Creditors’ Voluntary Liquidation?

A Creditors’ Voluntary Liquidation occurs when a company is deemed to be unable to pay its debts as they fall due. It’s initiated by the company’s directors and it is the members (shareholders) who determine that the business is insolvent or is likely to become insolvent. The purpose of a CVL is to wind up the affairs of the insolvent company and to provide a fair and equitable distribution of the company’s remaining property among the creditors in the order prescribed by Law.

A CVL is a two-step process:

1. The company director/s must resolve that the company is insolvent and that a registered liquidator be appointed.
2. The shareholder/s must then pass a special resolution to wind up the company (this requires at least 75% shareholder approval).

In summary, once a liquidator is appointed, they take control of the company. The company business may cease trading and the directors can no longer make decisions about the affairs of the company or its assets. After the shareholder meeting, the liquidator will notify the creditors of their appointment and the affairs of the company will be deal by the liquidator/s.

What are the benefits of a CVL?

• Reduced personal liability: opting to appoint a liquidator may reduce the likelihood of being found personally liable for insolvent trading. That’s why it’s important to act quickly. The longer the time period between a company becoming insolvent and a liquidator being appointed, the greater the risk.
• Selling assets: a liquidator handles the sale of assets in an orderly manner, rather than directors who may try to liquidate company assets in distressed circumstances.
• Reduced stress: a liquidator deals with creditors’ claims equitably according to the Act. It ensures all stakeholders are treated fairly and removes the stress of directors dealing with creditors, as the liquidator is responsible for communicating with creditors.
• Employee entitlements: a significant benefit to employees is that once a company is placed into liquidation, employees will typically be able to make a claim for unpaid entitlements (other than unpaid superannuation) through the Fair Entitlements Guarantee (FEG) scheme.
• Mitigating director liability for tax debt: where the company has a tax debt and directors have received a non-lockdown Director Penalty Notice (DPN), the appointment of a liquidator within the required timeframe (typically 21 days from the date of the DNP) may prevent a personal claim being made against the directors for the unpaid company tax.

What is the role of a registered liquidator?

The liquidator has number of roles including:

• Identifying, locating and securing the company’s assets
• Selling the company’s assets
• Identifying the reasons for the company’s failure
• Investigating the company’s financial affairs
• Identifying voidable transactions such as preference payments, director related and uncommercial transactions
• Identifying whether there are actions against directors for breach of directors’ duties
• Reporting to and holding meetings with creditors
• Distributing any surplus company assets to creditors
• Reporting to ASIC any offences committed by company officers
• Deregistering the company via ASIC.

How Jirsch Sutherland can help

Jirsch Sutherland is one of Australia’s leading voluntary insolvency firms, with 16 Registered Liquidators supported by a large team of insolvency specialists around the country. If you have any queries about CVLs or want to speak with one of our experienced liquidators, please contact us on 1300 547 724 or email enquiries@jirschsutherland.com.au.

And for more information about the different types of liquidations, head to: https://www.jirschsutherland.com.au/insolvency-services/corporate-insolvency/liquidations/.

Andrew Mattinson
Principal
Jirsch Sutherland

¹Corporations (Commonwealth Powers) Act 2001 (NSW); (VIC); (QLD); (SA); (TAS); (WA).