There are two types of liquidation in the business world. Voluntary and Compulsory. The voluntary kind happens when the shareholders and directors decide to place a company into liquidation. In the other case, the company is forced to close. Any which way, such a process stops all trading and operations of the company in question. A formal insolvency process requires licensed insolvency practitioners. There are many legal obligations on all parties involved. These need to be followed to the letter in order to avoid unnecessary legal issues and further expenses. It is a decision that requires a lot of consideration. It is a decision that is never made lightly by the directors. In order to make it as easy as possible, we will outline everything that goes into the process. We will cover all that the process involves. Also, we will go over what courses of action are available.
1. The definition
The process can be initiated only by the company’s directors. The only way for it to proceed is with approval from the shareholders. Once that is agreed upon, the company is in the hands of an insolvency practitioner. Such a professional will handle and oversee the process. it is their job to close down the company and sell assets. This is because these assets can be used to pay debts and provide much-needed cash. Upon completion of the process, the company is officially dissolved. That also means it is no longer in the registrar of companies. This process is usually chosen for companies that cannot pay their bills. Also, companies that are not profitable find voluntary insolvency to be a good choice. This is known as the Creditor’s Voluntary Liquidation. More on that later. There is a more tax-savvy option. This is called the Member’s Voluntary Liquidation.
2. When is a company insolvent?
You need to know which of these two is the best option. This is based on if your company is solvent or not. So, how do we even designate our company as insolvent? Firstly, the cash flow test. Can your company pay its bills or not? If the answer is no, the company is cash-flow insolvent. Does your company have more liabilities or assets? This is called the balance sheet test. If liabilities outweigh the assets, the company is insolvent. Only when you determine the answers can you make the next steps. Your decisions need to be educated and based on research.
3. CVL (creditor’s voluntary liquidation)
In this case, your company cannot pay its bills and debts are being chased for payments. This is the best route to take if the company has creditors asking for the money to be repaid. They want to avoid Compulsory liquidation. If that happens, your personal finances are no longer protected. For this to go through, it requires at least two-thirds of shareholders to sign off on it. CVL shows that you are capable of making proactive decisions. You will meet your debts and take control of difficult situations. You are showing that you are not ignoring your obligations. If you initiate voluntary liquidation, you will have to choose an insolvency practitioner. You will have to comply with the legal obligations to your creditors. Also, this will not impact your personal credit score or finances. For a solvent company, the other option is better.
4. MVL (Member’s voluntary liquidation)
This is the best route to take for companies that are deemed solvent. This means that the company can pay its bills. Also, the company has enough assets in its possession. The amount of these assets varies from country to country. Why would someone choose this route? This is the best choice for those owners that no longer want to keep the company alive. This is a tax-efficient way of doing just that. The reason for closing a solvent company does not matter. MVL enables you to close up shop quickly, efficiently and free up funds. Mind, not all of those funds will be readily available to you. All the finances taken out of the business are subject to taxes. This means you will pay a percentage of that money in the form of taxes. This is usually less than the income tax. This money is subject to different taxes.
This is an option that is fast and effective. And the goals are simple. Mitigate any further losses for the directors and creditors alike. If you appoint a liquidator, it will most likely absolve you of personal liability under the director penalty regime of the Australian Taxation office. To determine if your company is insolvent is not an easy task. You will need to do your own research. Possibly with professional help that you will have to hire. Liquidation does not mean the end. It is a hard choice that can give you the headroom to make future plans.
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