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The term ‘winding up a company’ is the process of bringing an end to a company. As a company owner, it is important to know whether or not your company is solvent. This is because your company’s creditors can forcibly wind up your company if it is insolvent. Your company is insolvent if it is unable to pay its debts as and when they fall due. If your company is insolvent, you should take steps to cease trading. This article will explain:

  • what a creditors’ voluntary winding up is;
  • who can initiate it;
  • what the process looks like; and
  • how to prevent a voluntary wind up of your company.

This article will also distinguish a creditors voluntary winding up from a members’ voluntary winding up.

What Is a Voluntary Winding Up?

Winding up a company is the process where:

  • outstanding company matters are finalised;
  • the company’s assets are sold off;
  • the company’s debts are paid to the extent possible; and
  • the company ceases to exist.

A winding up may occur for many reasons, including if:

  • it has no chance of repaying its debts;
  • it has ceased trading; or
  • you have sold the business.

One of the main reasons a voluntary winding up of a company occurs is if the company is insolvent. It can also be an option if the company is unable to meet the requirements for voluntary administration. The voluntary winding up of a company will require an appointed liquidator to manage the process and finalise the company’s affairs. Once a liquidator is appointed, the company will stop trading, and the directors will no longer run the company.

What Is a Creditors’ Voluntary Winding Up?

Creditors are the people who the company owes money to for providing goods, services or loans to the company. Customers who have not received goods they have already paid for and employees who have outstanding wages may also be considered creditors.

A creditors’ voluntary winding up is the winding up of a company by a special resolution of the shareholders under the scrutiny of the company’s creditors. This occurs when the company is insolvent. If the directors of the company are unable to provide a declaration of solvency, the company can proceed with the creditors winding up.

The situations where a company cannot be wound up through a creditors voluntary winding up are when:

  • a court has already ordered that a company be wound up; or
  • an administrator has already been appointed.

The Process of a Creditors Voluntary Winding Up

  1. a meeting of the directors takes place to resolve that the company is insolvent and that it should be wound up. The directors will then call a members’ meeting to wind up the company;
  2. the members meeting will take place to pass a special resolution (or a circular resolution if no members’ meeting is held) that the company is insolvent and should be wound up. You must complete a summary of affairs on an ASIC Form 509;
  3. the members appoint a liquidator, and the company must provide, within seven days of the winding-up date, a summary statement under ASIC Form 507. This is a statement that outlines the company’s business, its property, financial circumstances and any other relevant affairs;
  4. the liquidator must convene a creditors meeting within 11 days after the date of winding up. At this meeting, the creditors may decide to appoint a committee of inspection or remove the liquidator and appoint another; and
  5. the liquidator will administer the winding up process by paying out creditors with available funds. They will then prepare a final report for creditors, lodge various documents with ASIC and request for the company’s deregistration.

How to Prevent a Creditors Voluntary Winding Up

As a company director, one of your fundamental duties is to ensure that your company does not trade while it is insolvent. One of the best ways to prevent a creditors voluntary winding up is to avoid insolvency altogether. You can do so by ensuring that the company has sufficient funds to pay company debts as and when they fall due.

If your company is insolvent, you should cease trading immediately and seek professional advice about entering into voluntary administration or appoint a liquidator yourself. Continuing to trade when your company is insolvent can result in a breach of your directors’ duties and personal liability for the debts of the company.

Warning signs that your company may be insolvent include when your company:

  • is experiencing cash flow difficulties;
  • is unable to pay creditors or suppliers;
  • has outstanding payments of over 90 days;
  • is unable to pay taxes when they are due;
  • is defaulting on interest or loan payments; or
  • is unable to obtain finance.

Differences Between a Creditors Voluntary Winding Up and a Members Voluntary Winding Up

Solvency

The key difference between a creditors voluntary winding up and a members voluntary winding up is that the members voluntary winding up is only an option if the company is solvent. Solvency is a company’s ability to pay their debts as and when they fall due. If a company is not solvent, it is insolvent.

Creditor Involvement

Another key difference is that a members voluntary winding up usually does not involve creditors. This is because the company is still solvent and in a position to pay its creditors.

Process

The process for a creditors voluntary winding up is more complex than that for a members voluntary winding up. This is generally because the appointed liquidator will have to conduct thorough investigations and analysis on the company’s assets and affairs when paying out creditors.

Key Takeaways

If your company is experiencing financial difficulty, you should seek professional advice and do what is necessary to keep the company active and avoid further debt. Once your company is insolvent, you must not continue to trade as this can result in serious consequences for breaching directors’ duties. If you do not initiate a creditors voluntary winding up, your company’s creditors can initiate insolvency procedures. If you require advice on winding up your company, get in touch with LegalVision’s insolvency lawyers on 1300 544 755 or fill out the form on this page.

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