How Voluntary and Involuntary Liquidations Differ

A liquidation is the winding up of a company’s affairs. To complete a liquidation a company’s assets need to be realised, operations ceased or sold, proceeds of assets distributed amongst creditors and any surplus distributed amongst shareholders. The four types of liquidations are:

• Official or Court liquidation
• Provisional liquidation
• Creditors’ voluntary liquidations
• Members’ voluntary liquidations

Official and provisional liquidations are considered involuntary liquidations while creditors and members liquidations are voluntary.

Involuntary Liquidations

Official Liquidation

This type of liquidation begins with an application to the courts usually made by a creditor, shareholder, director of the company or ASIC. The federal or Supreme Court may then issue an order to begin liquidation of the company.

Provisional Liquidation

This form of liquidation rarely occurs. It involves an application made to the Court following a dispute between the directors and shareholders because one party believes the company’s assets are at risk. The Court can order a Provisional Liquidator be appointed to safeguard the company’s assets.

Voluntary Liquidations

Creditors’ Voluntary Liquidations

A Creditors’ Voluntary Liquidation (CVL) is when the company initiates voluntary liquidation because it has insufficient assets to meet its liabilities. The directors and shareholders decide the company should be liquidated and a Liquidator is brought in to deal with creditors’ claims. A CVL allows for an insolvent company to be closed officially and professionally. All enforcement action of creditors then stops.

Members’ Voluntary Liquidations

A Members Voluntary Liquidation (MVL) is when the assets of a solvent company are distributed or transferred to shareholders. MLV’s are instigated by directors and shareholders who can also decide who the Liquidator will be. The benefits of MVL include:

• The transfer of assets to the shareholders is usually exempt from stamp duty;
• The distribution of pre-CGT capital profits to shareholders is generally tax-free
• Farming land can be transferred from a company to shareholders and then other family members at nominal stamp duty via the family farming property transfer exemption
• Shareholders may freely and independently deal with their share of the distributed assets
• Transferred assets may be held in a more tax-effective and simplified manner; and
• The removal of costly company structures that are no longer required

Reporting

ASIC keeps a register and reports statistics of all companies liquidated and reports on them by industry type, state, the value of realised assets, total liabilities and deficiencies.

If you are looking for an expert to provide advice or guide you through a voluntary and involuntarily liquidation, there are multiple consulting agencies that are willing to help you and are just a call away.