Members’ voluntary winding up: What is the process for winding up a solvent company?

A members’ voluntary winding up is the process for a solvent company when its members no longer wish to retain the company’s structure because the company has reached the end of its useful life.

Why choose a members’ voluntary winding up?
A members’ voluntary winding up is the only way to fully wind up the affairs of a solvent company. All outstanding creditors are paid in full, and any surplus assets are distributed to its members. A members’ voluntary winding up also protects the members’ interests while the company structure is dismantled.

When is a company solvent?
Usually a company is only considered solvent if it can pay all of its debts as and when they fall due.

However, this strict definition does not apply to members’ voluntary winding up as the appointment lasts for 12 months. If a liquidator forms the view that all creditors will not be paid in full within the 12-month period, the members’ voluntary winding up must convert to a creditors’ voluntary winding up administration.

How is the members’ voluntary winding up process started?
The directors resolve to call a meeting of members to wind up the company. Directors must complete a ‘declaration of solvency’ that states the company is solvent and can pay all its debts within 12 months. The declaration is lodged with the Australian Securities and Investments Commission (ASIC) before the members’ meeting. The solvent company is then wound up on the resolution of its members at the meeting.

What is the effect on the company?
The company structure itself survives the appointment of a liquidator. The control of all assets, conducting any business, and financial affairs are transferred to the liquidator. The directors cease to have any authority. All bank accounts are frozen, any employment can be terminated and the liquidator may engage necessary labour. At the end of the liquidation, the liquidator applies to ASIC to deregister the company, after which the company ceases to exist.

Can a company trade while in liquidation?
A liquidator may continue trading a company if it is in the creditors’ best interest. A trade-on is considered if there is a prospect to sell the business as a going concern, or to complete and sell any work-in-progress. A liquidator is obligated to end trading and wind up company affairs as quickly but as commercially responsible as practical.

What must the directors do to help the liquidator?
Directors must supply the liquidator with all information about the company’s financial affairs and provide a Report on Company Activities and Property (ROCAP) (detailing the assets and liabilities of the company as at the date of appointment of the liquidator) and a director’s questionnaire. Directors must deliver all company books and records, and cooperate with the liquidator throughout the liquidation. Various offence provisions relate to directors that do not cooperate with liquidators.

The investigation process
Many of the investigations normally conducted under a creditors voluntary or court liquidation are not required under a members’ voluntary winding up. As the company is solvent and creditors should be paid in full, there is no need for any recovery actions to be initiated. Preferential payments and insolvent trading are recovery actions that require the company to be insolvent at the time of the transaction, or if there is a loss to creditors.

Liquidators may have to verify what assets are available to them. Commonly, some assets are loans made to shareholders and are sometimes either in dispute or insufficiently recorded. In these cases, the liquidator has to reconstruct the loan accounts to determine the amounts and extent of the debts.

A liquidator must ensure a proper distribution is made to members through the capital accounts of the company. This distribution requires some investigation into a company’s balance sheet, particularly capital reserve accounts and franking accounts. Generally, the company’s external accountant can provide a current and detailed balance sheet showing all equity accounts. The liquidator then pays the distribution to members in the most tax-advantageous way.

How long does the members’ voluntary liquidation process last?
The members’ voluntary liquidation lasts for as long as necessary. Selling assets and paying creditors usually happens within the first few months. Completing the company’s financial statements and final tax returns could potentially delay the distribution to members, particularly if there is a dispute between members. Clearance from the Australian Taxation Office (ATO) is essential before a members’ voluntary liquidation can be finalised.

Can a liquidator pay dividends?
Yes. The role of the liquidator is to sell the company’s assets and distribute them among:

  1. company creditors as a dividend, and then
  2. company shareholders as a distribution.

Are the dividends paid under certain priorities?
Yes. The liquidator must pay dividends under a set of priorities. These priorities include:

  1. the costs and expenses of the liquidation
  2. employee entitlements
  3. non-priority creditors
  4. members.

While the liquidator follows these priorities, all creditors should be paid in full within the first 12 months.

How does the process end?
The members’ voluntary liquidation process ends when the liquidator calls a final meeting of the company’s members. The meeting will only be called after all creditors’ claims are satisfied, all other issues are resolved, and any surplus is distributed to the members. This meeting is a statutory process and attendance by members is optional.

The company is automatically deregistered by ASIC three months after the final meeting is held.

The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

Last Updated: 3.11.2017