Winding up
There are broadly three forms of liquidations. They are:
Creditor's Voluntary Liquidation: The first form of liquidation is a Creditors Voluntary Liquidation is a resolution of the shareholders that takes place when the shareholders have formed the opinion that the company is insolvent. This means the Company cannot pay its debts as and when they fall due. This requires a special resolution of at least 75% of the members entitled to vote at the shareholders meeting.
Member's Voluntary LIquidation: The second form of liquidation is a Members Voluntary Liquidation. It occurs by way of a resolution of the shareholders when they have formed the opinion that the company is solvent. This means that the Company can pay its debts as and when they fall due. This also requires a special resolution of at least 75% of the members entitled to vote at the shareholders meeting.
Court Liquidation: The third form of liquidation is a court appointed liquidation. This usually occurs when a court orders that a company be wound up on the application of a director or shareholder. This often happens where a dispute has arisen between the parties and they are at an impasse as to how to conduct the business of the company. These form of liquidations are very common where the company operates on a quasi-partnership model between two people who hold 50% each of the shares within the company. This is common because majority resolutions are required to make decisions in relation to the running of the business. Obviously, where you cannot obtain more than a 50% vote, then many decisions may become a stalemate.
Insolvency
The term insolvency means that the entity/person cannot pay their debts as and when they fall due. Even if a company has sufficient assets to pay debts, it may well be insolvent if it cannot liquidate those assets quickly to pay creditors.
There are a number of indicators that a company may be insolvent. They are as follows:
- Continuing losses: If a company is consistently making losses, it may indicate insolvency.
- Liquidity ratios: A company's inability to meet its short-term liabilities or cash flow difficulties may suggest insolvency.
- Overdue taxes: Non-payment or delayed payment of state or federal taxes can indicate financial distress.
- Poor relationship with current lenders: If a company is experiencing difficulties in maintaining good relationships with its lenders, it may be an indicator of insolvency.
- Inability to raise further finance: If a company is unable to secure additional funding or loans, it can be a sign of insolvency.
- No access to alternative financing: When a company cannot access alternative financing options such as from banks, shareholders or directors, it may indicate insolvency.
- Inability to produce timely and accurate financial information: If a company is unable to provide accurate and up-to-date financial information, it may raise concerns about its financial position.
- Inadequate financial controls: Poor financial management and control systems can be indicative of insolvency.
- Absence of a business plan: If a company lacks a viable and realistic business plan, it may suggest financial instability.
- Denial of access to assets: If a company denies access to its assets or fails to disclose relevant financial information, it can be an indicator of insolvency.
It's important to note that the presence of one or more of these indicators does not necessarily mean a company is insolvent. However, these indicators provide guidance for assessing a company's financial health and solvency. If you are experiencing any of these indicators, then you should contact us today. As a director, you have a duty to prevent insolvent trading and if required, should consider appointing a liquidator and seeking legal advice to comply with that obligation. If you don't, you face penalties under the Corporations Act 2001 (Cth)
Liquidators
Liquidators are registered with the Australian Securities and Investments Commission. When they are appointed to a company, they will undertake investigations into the running of the company an if required carry out investigations to determine whether there has been a breach of director duties such as the duty to prevent insolvent trading.
As a director, you are required to comply with a liquidators request and to assist them with their investigations into the affairs of the company.