Australia: How a Voluntary Membership Liquidation Can Benefit Appeal Stakeholders
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LOOKING FOR ASSURANCE THAT YOU WILL GET THE BEST POSSIBLE RESULTS? MAKE SURE IT IS COMPLETED CORRECTLY BY EXPERTS.
After two years of unprecedented pressure, are your clients considering closing their business and changing management? A voluntary liquidation of members could offer the best outcome for all stakeholders, including creditors and shareholders, provided it is done properly.
Creditworthy companies can have their cases resolved and properly finalized through voluntary member liquidation (MVL). The MVL process identifies all creditors, including potential creditors, and resolves them in their entirety, and the assets of the company are distributed to its members. Conversely, a poorly conducted MVL can be converted into a voluntary liquidation of insolvent creditors, which can result in penalties for directors who have failed to properly administer the affairs of the company.
The benefits of an MVL appointment are:
- Ensure that due process is followed to identify all creditors.
- The interests of shareholders are taken into account in the distribution by working with registered liquidators.
- Obtain preferential treatment of certain tax obligations, such as when dealing with pre-capital gains tax (CGT) assets or where CGT concessions for small businesses might apply.
- Earning trust from finality – the complete and correct process for finalizing business and delisting a business.
- Rely on the experience of an independent third party to take control of a company’s affairs to help resolve disputes between stakeholders, such as creditors, directors or shareholders. A liquidator protects assets from dissipation and mitigates depreciation in asset values while obtaining independent appraisals and taking steps to resolve any disputes.
- Avoid the costs of maintaining large volumes of books and records by obtaining consent from the Australian Securities and Investments Commission (ASIC) for the “early destruction of company records”.
- Mitigation of risks of internal liquidation of board members for incorporated associations.
A liquidator may liquidate and distribute assets for incorporated associations (for example, non-profit organizations, unlisted public companies, cooperatives, registered clubs, charities, community and social enterprises) in accordance with the rules for mitigate the risks associated with board members winding up their affairs internally. A liquidator may also distribute the remaining assets of the company when the assets exceed $1,000 and voluntary deregistration is not an option due to restrictions under the Companies Act 2001.
Although an MVL may seem simple, it is a complex process subject to a strict regulatory framework with serious and far-reaching consequences. Critically, the flow, timing and filing of statutory documents/forms with ASIC can change the creditworthiness of the company. For example, to liquidate a creditworthy company with ASIC, the solvency statement (ASIC Form 520) requires that it be signed and filed within specific time limits. Any error, which is difficult to repair, can lead a company to demand the voluntary liquidation of creditors, conversely to have sufficient corporate assets to repay all its creditors!
If the solvency statement is completed or filed incorrectly, a request can be made to ASIC to ask the company to continue as a solvent MVL, but this is subject to ASIC approval. Fines may also apply for late filing, which can add an additional financial cost to an MVL – another disadvantage of not hiring an expert.
A solvent MVL can become an insolvent liquidation in several ways and have negative consequences for administrators if the MVL is not completed correctly.
Contact your local Worrells manager who will explain how our experience in winding up and reorganizing solvent and insolvent businesses can avoid costly mistakes.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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