On 10 December 2020, the Federal Government made changes to Australia’s insolvency framework. As a part of these changes, a new, Simplified Liquidation Process was introduced on 1 January 2021.
The new Simplified Liquidation Process is a streamlined creditors voluntary winding up for Companies that have liabilities less than $1 million. Where a restructure is not possible, it is intended to enable small businesses to be wound up faster, enabling greater returns for creditors and employees.
The Simplified Liquidation Process will retain the general framework of the existing Creditors Voluntary Liquidation Process, with modifications to reduce time and cost.
To be eligible for the Simplified Liquidation Process, the insolvent Company must meet the following criteria for the Liquidator to adopt the process:
- Liabilities of the Company must not exceed $1 million;
- The Company will not be able to pay its debts in full within 12 months;
- The Company’s tax lodgements are up to date (do not have to be paid), including Superannuation Guarantee Charge lodgments;
- Within five (5) business days of the appointment, the Company’s Director must give the Liquidator a report on the Company’s business affairs and a declaration that they believe the Company is eligible for the Simplified Liquidation Process;
- The Company, its Director or a former Director (within the last 12 months) cannot have used or been a director or former director of another company that has been subject to a Debt Restructure or the Simplified Liquidation Process within the previous seven years (unless the other company is a related company that is simultaneously being liquidated or restructured).
What you Need to Know
- 1. To adopt the Simplified Liquidator process, the Company must first enter the standard Creditors Voluntary Liquidation (“CVL”) process via the Directors and Shareholders passing a resolution that the Company is unable to pay its debts as and when they fall due and that the Company be placed into
- 2. Within five (5) business days of the appointment, the Company’s Director must give the Liquidator a report on the Company’s business affairs and a declaration that they believe the Company is eligible for the Simplified Liquidation Process.
- 3. The Liquidator may adopt the Simplified Liquidation Process if they believe on reasonable grounds that the eligibility criteria are met and not more than 20 business days have passed since the CVL appointment date.
- 4. The Liquidator must give each member and creditor 10 business days’ notice before adopting the Simplified Liquidation Process and include an outline of the Simplified Liquidation Process, a statement that they believe on reasonable grounds that the eligibility criteria will be met and inform creditors that they will not adopt the Simplified Liquidation process if directed not to do so by creditors that represent at least 25% in value.
- 5. The liquidator must not adopt the simplified liquidation process if more than 25% in value of creditors provide a written statement to the liquidator requesting the liquidator not to follow the simplified liquidation process. The Liquidation will continue as a standard CVL.
- 6. The liquidator must cease to follow the simplified liquidation process and revert to a CVL if the eligibility criteria for the Simplified Liquidation Process are no longer met and or the liquidator believes on reasonable grounds that the company, or a director of the company, has engaged in conduct involving fraud or dishonesty and that conduct has had, or is likely to have, a material adverse effect on the interests of creditors as a whole or a class of creditors as a whole.
Difference between Simplified Liquidation Process and standard Creditors Voluntary Winding Up
- No meetings of Creditors are held in a Simplified Liquidation process;
- Creditors cannot form a Committee of Inspection;
- The three (3) month statutory report to creditors is issued in a simplified form and encompass details of any work performed to date by the Liquidator, an opinion on when the liquidation may be finalised and the likelihood of a dividend being paid to creditors;
- The Liquidator may only declare and distribute a dividend once;
- Unfair preference payments are not recoverable if paid in the 3 months prior to the winding up, if less than $30,000 and not a related creditor.
- The liquidator in a Simplified Liquidation Process is required to report alleged misconduct to ASIC only if there are reasonable grounds to believe conduct constituting an offence under a law of the Commonwealth or a State or Territory in relation to the company may have occurred and that conduct has, or is likely to have, a material adverse effect on the interests of creditors as a whole or a class of creditors as a whole.
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