If a company wants to enter into liquidation, it can do so through a members’ voluntary winding up. This option is available to a company when it is solvent. It is not available if the company is insolvent, in which case voluntary liquidation is available through a creditors’ voluntary winding up.
What are Some Reasons for a Members’ Voluntary Winding Up?
If a third party purchases the business’ assets or they are transferred, the members of the company may not intend to use the company further. In such cases, the company would ordinarily be either deregistered or wound up through a members’ voluntary winding up. Some large corporate groups may restructure where subsidiary companies may no longer be required and the assets are distributed.
Who Can Initiate a Member’s Voluntary Winding Up?
Creditors are not involved in a members’ voluntary winding up because the company must be solvent, and so in a position to pay its creditors. Members make the decision to wind up the company by way of a special resolution requiring 75% of members who attend and vote at a meeting after 21 days notice has been provided.
Declaration of Solvency
Before the members determine whether to wind up the company, the directors of the company must provide a declaration of solvency. The declaration requires a majority of the directors to declare they have inquired into the company’s affairs and formed the opinion that the company can pay its debts in full within 12 months from the commencement of the members’ voluntary winding up. The declaration must be lodged with ASIC. Making a false declaration is an offence under the Corporations Act 2001 and penalties can apply.
What Happens if the Declaration of Solvency is Not Reasonable?
A director can only make a declaration of solvency if it has reasonable grounds. If the company doesn’t pay its debts in the 12 month period, it is assumed that the director(s) did not have any reasonable grounds to provide a declaration of solvency. It is an offence if a director makes a declaration of solvency without reasonable grounds.
What Happens Next?
A copy of the resolution winding up the company must be lodged with ASIC within 7 days and notice of the resolution is published in the Gazette. If the members vote to wind up the company, the members then vote to appoint a liquidator. At this point, the members also fix the director’s remuneration.
If during their appointment, a liquidator forms the opinion that the company is insolvent it must either:
- Apply to the court to have the company wound up in insolvency;
- Appoint an administrator to the company; or
- Hold a meeting of creditors.
If you own or run a company and require advice in respect of a members’ voluntary winding up, get in touch with our insolvency lawyers on 1300 544 755.