What is Voluntary Insolvency?
Voluntary insolvency is a legal process carried out by company directors when they can no longer meet their financial obligations. Liquidation of the company and its assets typically takes place, which allows the company to pay its debts before creditors force the payments. Voluntary insolvency winds up a company's and its directors' affairs before closing it down.
The team of corporate lawyers at Macmillan Lawyers and Advisors have helped numerous companies initiate voluntary insolvency correctly. As this can be a tough time for owners and directors, we walk you through this process, and make sure that all legal steps are taken.
Key Takeaways
- When voluntary insolvency is done early on, companies with irreversible debt can prevent further financial strain.
- Voluntary insolvency gives your company some time to recover, despite having serious debts to pay off.
- A company going through voluntary administration is still permitted to trade under the administrator’s supervision.
- Voluntary insolvency provides companies with some protection against legal action due to unpaid debt.
Voluntary Insolvency in Australia
According to the Australian Institute of Company Directors, in the 2022 to 2023 financial year, Australia recorded 10,366 corporate insolvencies, the highest since 2019 (11,224 insolvencies). Voluntary administrations increased by 42% in 2023 compared to the previous year, indicating a significant rise in companies seeking restructuring under creditor pressure.
Corporate insolvency is often the only way out of a bad debt situation for many companies. However, it’s important to follow the legal steps to the letter, making sure you get the most out of an unfortunate situation. With that in mind, let’s explore some of the pertinent questions regarding voluntary insolvency for Australian companies.
When Should Directors Consider Voluntary Administration?
As a director, you should consider voluntary administration when your company faces serious financial troubles, but could still be saved. You'll need to act quickly if your business cannot pay debts when they are due, or you expect this situation to arise soon. This option gives your company breathing space while working towards recovery.
Here’s an easy guide to help you understand the different situations that warrant the voluntary liquidation process.
| Situation | Why It Matters | Possible Outcome |
|---|---|---|
| Company is Unable to Pay Debts | Indicates insolvency under Australian law | Voluntary administration may be required |
| Creditors are Threatening Legal Action | Legal action could worsen financial instability | Administrator can protect the company |
| Directors are Worried about Insolvent Trading | Trading while insolvent can lead to personal liability | Administration protects directors |
| Business Operations are No Longer Viable | Continued trading may lead to larger losses | External review can assess viability |
| Asset Values are Declining Rapidly | Loss of asset value reduces return to creditors | Early administration can preserve value |
| Cash Flow has Become Critically Limited | Daily expenses and wages may go unpaid | Administrator may continue trading |
| Creditors are Unwilling to Negotiate | Lack of support makes informal restructuring unfeasible | DOCA may provide a binding agreement |
| Sale or Restructuring is Being Considered | Requires time and legal protection to execute properly | Administration offers a framework for action |
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What is Creditors' Voluntary Liquidation (CVL)?
Creditors' Voluntary Liquidation (CVL) is a formal process where you, as a company director, choose to shut down your insolvent business and appoint a liquidator to sell assets and pay creditors. You initiate this when your company can't pay its debts and recovery isn't possible.
During a CVL, the liquidator takes control of your company and systematically winds up its affairs. They'll investigate why the company failed, sell assets, distribute funds to creditors according to legal priorities, and finally deregister the company from ASIC.
What is Members' Voluntary Liquidation (MVL)?
Members' Voluntary Liquidation (MVL) is a formal process where you wind up your solvent company that's no longer needed. You can use this method when your business has assets to pay all debts, but you want to close operations and distribute remaining funds to shareholders tax-effectively. MVL is not as uncommon as you might think; according to ASIC reports, an average of about 127 companies opted for MVL per month in 2024.
Unlike other liquidation types, an MVL requires directors to sign a declaration of solvency confirming the company can pay all debts within 12 months. This declaration is lodged with ASIC before shareholders vote to approve the liquidation and appoint a registered liquidator.
The liquidator will:
- Realise company assets
- Settle outstanding creditor claims
- Handle final tax returns and clearances
- Distribute remaining funds to shareholders
- Deregister the company from ASIC
What are the Benefits of Voluntary Insolvency?
The primary benefit of voluntary insolvency is the automatic stay on proceedings that begins when you appoint an administrator. This ”moratorium period” stops creditors from taking further legal action against your company, including repossessing essential assets or appointing receivers. This gives your business much-needed time to address its financial problems.
Here’s a list of benefits and why each one matters.
| Benefit | Why It Matters | Possible Impact |
|---|---|---|
| Protection from Legal Action | Stops creditor enforcement while options are assessed | Buys time to formulate a recovery plan |
| Independent Business Review | Administrator provides expert assessment | Helps determine the best course of action |
| Potential to Avoid Liquidation | Offers alternatives to winding up | May allow business continuation |
| Director Relief from Insolvent Trading | Protects against personal liability | Reduces legal risk for directors |
| Improved Negotiating Position | Administrator may gain creditors’ trust | Increases chance of creditors’ support |
| Preservation of Business Value | Trading may continue under administration | Assets and goodwill may be retained |
| Chance to Propose a DOCA | Formal restructuring tool available | May lead to compromise with creditors |
| Transparent Process for Stakeholders | Clear procedures governed by law | Builds confidence among creditors and staff |
Speak to our team at Macmillan Lawyers and Advisors and let us walk you through the voluntary insolvency process. We’re experienced in all of these proceedings and will ensure that you leave the liquidation process as unscathed as possible.
FAQs on What is Voluntary Insolvency?
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