Bankruptcy & InsolvencyNewsSLF Lawyers NewsI’m a director and shareholder; the company is solvent; what is and should I be considering a Member’s Voluntary Liquidation?

Whilst insolvent companies are the subject of the majority of winding ups, solvent companies can also be wound up on the initiation of its directors and shareholders (ie members).

This may take place when members no longer wish to retain the current structure of the company or the company is no longer needed and not serving a useful purpose.

A Members’ Voluntary Liquidation or MVL is the method by which a solvent company is wound up and its assets are distributed to its members. The winding up itself is usually conducted by a registered liquidator. A MVL is only available if the company is solvent. Unlike the majority of winding ups, the creditors have no involvement because they will be repaid in full.

The purpose of the winding up is to distribute the assets to the members in accordance with the company’s constitution, and close the company down to its ultimate deregistration.

Part 5.5 of the Corporations Act 2001 (Cth) (Act) governs the procedure for companies entering into a MVL.

The first step in initiating a MVL is to have the directors resolve to call a meeting of members to wind up the company. A majority of the directors of the company are required to make a written declaration in the approved ASIC form to the effect that they have made an inquiry into the affairs of the company and have formed the opinion that the company is able to pay its debts in full within 12 months of the commencement of the winding up (section 494(1)). This declaration is known as the declaration of solvency.

Any declaration of solvency is not to be made lightly. A director who makes a declaration of solvency without having reasonable grounds for his or her opinion that the company will be able to pay its debts in full within the period stated in the declaration is guilty of an offence. If the debts of the company are not paid or provided for in full within the period stated in the declaration, it is presumed (unless the contrary can be shown) that a director who made a declaration did not have reasonable grounds for his or her opinion.

Furthermore, the Act provides that the declaration of solvency is ineffectual unless:

1. it is made at the meeting of directors;
2. it is lodged with the Australian Securities and Investments Commission (ASIC) prior to the issue of notices calling the meeting of the shareholders to consider the proposal to wind up the company; and
3. the resolution to wind up the company is passed within five weeks of the making of the declaration.

Assuming a declaration of solvency is obtained, prior to the meeting of shareholders, the company should also obtain in writing, from a liquidator, a consent to act as liquidator if so appointed at the meeting.

Noting the 5 week timeframe as referred above, a meeting of the shareholders is then to take place which must:

1. consider a special resolution to wind up the company; and
2. if passed, consider an ordinary resolution to appoint a liquidator and may at that meeting fix the amount of remuneration for the liquidator.

A special resolution requires the support of 75% of the members who attend and vote (after being given 21 days‘ written notice of the meeting).

Once the special resolution has been passed, the powers of the directors of the company will cease and the liquidator will commence the tasks necessary in order to wind up the company’s affairs.

During a MVL, a liquidator may continue to trade a company, but only if it is in the creditors’ best interests. A liquidator is obligated to end trading and wind up a company’s affairs as quickly but as commercially responsible as possible.

The normal investigations that are conducted by liquidators with respect to insolvent companies which are wound up are not required under a MVL. This means there is no need for any recovery actions to be initiated such as preferential payments and insolvent trading as these recovery actions are only applicable if the company was insolvent at the time of the transaction, or if there is a loss to creditors.

Once the liquidator has completed their process (including realising all assets and paying all dividends), the liquidator will call a final meeting of the company’s members (attendance by members at this meeting is optional). After this meeting the liquidator resigns as liquidator of the company and the company is automatically deregistered by ASIC three months after the final meeting is held.

Article written by Anthony Cocolas of our Brisbane office, for further information please contact (07) 3839 8011.