Understand the Different Types of Liquidation Options

Finance

When businesses go into liquidation its assets is realized to repay the creditors before the company closes and its name gets deregistered from the ASIC. The liquidation process is of two main types – 

  1. Solvent liquidation
  2. Insolvent liquidation

Insolvent company liquidation, the company is capable of paying their debts and function smoothly, but the decision is taken because a director needs to retire or the business serves no useful purpose. It is also popular as Members’ Voluntary Liquidation [MVL].

In involuntary liquidation, the company is unable to operate because of financial issues. The purpose of involuntary liquidation is to offer as much dividend as possible to the creditors. It is generally aimed at the creditor’s interests. 

Insolvency Experts are ASIC certified insolvency practitioners with experience in every sector. You can partner with them as a liquidator. The team is competent in handling the solvent or insolvent company’s liquidation process.

Solvent liquidation process

Members’ Voluntary Liquidation process needs input from a certified insolvency practitioner. As the company is solvent creditors get full payment and solvency declaration gets signed by a majority of business directors. 

The process takes less than five weeks because everyone is on the same page. Shareholders pass a wind-up resolution and hire a liquidator. Notice gets posted in the Gazette in two weeks and the solvency declaration is sent to the ASIC within 15 days. 

Insolvent liquidation process

Insolvent liquidation starts because the company falls behind in paying its bills because of a lack of funds [also called ‘cash flow insolvency’] or business asset value is lower than its liabilities [termed as ‘balance-sheet insolvency’]. Insolvent liquidation processes are of two types.

  • CVL or creditors Voluntary Liquidation
  • Compulsory Liquidation 

CVL 

The directors of the company initiate a CVL as it realizes that company cannot be able to pay the debts and are insolvent. Usually, the creditor’s threat to take legal actions and the directors find no hope in rescuing the business, so in the interest of both parties a CVL is started. It means before the creditor’s liquidation petition gets approved in the court the company directors initiate a CVL. 

The CVL process increases the potential of the creditors to receive their debts because all the business assets get sold. A liquidator gets appointed to carry all the tasks associated with the liquidation process like asset evaluation, selling, and distribution among the creditors according to their ranks. 

The basic timeline of what occurs in a CVL

  • Shareholders vote on approval of the wind-up resolution
  • After wind-up resolution approval, the documents are submitted to Companies house in two weeks
  • Notice is posted in the Gazette in 14 days.
  • There is a need of 75%+ creditors vote approval of the proposal and liquidator appointment.
  • Assets get sold and funds get distributed properly among creditors.
  • Director’s behavior is also investigated for illegal or wrongful trading.

Compulsory liquidation

When a single creditor files a wind-up petition in the court and gets approval, the company gets forced into compulsory liquidation. The court appoints the liquidator, who liquidates the company assets to pay the outstanding debtors. 

For more information contact Insolvency Experts anytime!

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