- Formerly, it was a requirement in a Voluntary Members Liquidation (MVL) that, if the directors of the company were not prepared to make a declaration of solvency, a first meeting of the creditors had to be called by the liquidator. At this meeting, the liquidator could be replaced.
- As a result of changes to the law in 2016, this meeting is no longer required. However, in its place, there are new reporting requirements and a power for creditors to call a meeting at any time.
- There are pros and cons to this change depending on your perspective, but if it works as intended, the MVL process will be streamlined.
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What is a voluntary liquidation and how is one initiated?
A voluntary liquidation occurs when the members (i.e. the shareholders) or the creditors of a company, rather than the court, resolve to a wind up a company. The process for the two different types of voluntary liquidation is as follows:
- A members’ voluntary liquidation (MVL): This process may be initiated where the shareholders of the company (‘the members’) resolve to wind up the company, but the company is not insolvent. This might be initiated, for example, in the case of company restructuring. This process generally requires that the Board declare the company to be solvent, though we will discuss the exceptions to this below.
- A creditors’ voluntary liquidation (CVL): This is a voluntary liquidation where the company is insolvent. It can be initiated following a creditor vote at the end of voluntary administration or following a terminated ‘deed of company arrangement’ (DOCA). As with an MVL, it can also be initiated by a resolution of the shareholders.
For more information on the liquidation process in general, see the ASIC website.
The old rule: A first meeting must be called
Former section 497 of the Corporations Act 2001 (now amended), required that, where there was no declaration of solvency by the directors, the members could still resolve to appoint a voluntary liquidator by special resolution. However, in that case, a meeting of the creditors had to be called no later than 11 days from that members’ meeting to decide, among other things, whether the liquidator would be replaced by creditors. At this meeting the creditors could also determine whether to appoint a committee of inspection to oversee the work of the liquidator.
An equivalent duty to call a first meeting of the creditors still exists for voluntary administrators. You can read more about this process here.
The new rule: First meeting no longer compulsory
The requirement to hold a first meeting of creditors for an MVL has now been eliminated by virtue of the Insolvency Law Reform Act 2016. However, in its place there is an ability for creditors to call a meeting at any time. At one of these meetings the creditors can replace a voluntary liquidator. For more information, see our article: How to review the conduct of a liquidator.
Note, however, that the liquidator can refuse to hold such a meeting where they consider the request is not reasonable (See section 75-250 Insolvency Practice Rules (Corporations) 2016).
While there is no compulsory meeting requirement, there is still a reporting requirement which requires two documents to be prepared and provided to creditors in prescribed forms:
- a summary of the affairs of the business; and
- a list of the names and details of creditors, including any that are related entities of the company (see section 75-250 Insolvency Practice Rules (Corporations) 2016)
Both these documents must then be lodged with the Australian Securities and Investments Commission (ASIC).
Just as with the new ROCAP – Report on Company Activities and Property for voluntary administrators, this reporting is designed to provide output of the earliest investigations by the liquidator into the company. It may also deliver insight into whether inappropriate behaviour, such as ‘phoenixing’ activity, has been occurring or is about to occur.
Pros and Cons of New Rule
Is the new rule a good thing or a bad thing? It depends who you ask. Here we set out some of the pros and cons of the new rule from the perspective of both the directors of the company and the creditors:
- Pro for the company: As a meeting does not occur automatically, this may mean that for MVLs there is a reduced likelihood of the directors’ choice for liquidator being replaced;
- Pro for the company: As there is a reduced likelihood of a meeting being called, this may reduce the pressure on directors to make a declaration of solvency when they don’t feel comfortable in doing so;
- Pro for creditors: There is now an ongoing power to call a meeting to replace the liquidator. This means that if creditor concerns with the liquidator arise during the liquidation there will be a remedy available.
- Pro for both: Meetings can be a significant expense and, in many cases, there are limited assets to be distributed. If there is no desire for a meeting to be called by any parties then it is to the benefit of all that there is no meeting.
- Cons for creditors. The ability of the liquidator to refuse to convene a meeting could still be a significant barrier to a creditor calling a meeting at a later stage. This may make it more difficult to organise other creditor-friendly interventions such as a committee of inspection.
- An MVL no longer requires a first meeting of creditors in the absence of a declaration of solvency;
- There are pros and cons to this for the companies themselves, directors, creditors and liquidators. However, overall it is intended that this will streamline the MVL process for all parties.