Members' Voluntary Winding Up

What is a members' voluntary winding up?

This is the process of winding up a solvent company, done when the members no longer wish to retain the company structure. There can be a number of reasons for the members wanting to do this, but usually it is because the company has reached the end of its useful life. If the company is wound up at a meeting of its members, it is called a voluntary winding up. If the company is solvent when it is wound up, it is a called members' voluntary winding up.

Why choose a member's voluntary winding up?

This is the only process for fully winding up the affairs of a solvent company. It ensures that outstanding creditors are paid in full and protects the members' interests while the company structure is dismantled and the surplus assets are distributed to its members.

How is the process started?

The solvent company is wound up at the request of its members. The directors will resolve that a meeting of members should be called to wind up the company. The directors must complete a declaration stating that the company is solvent and that the company can pay all its debts within 12 months. This Declaration of Solvency is lodged with the ASIC before the members meet. The members will then meet and resolve to place the company into liquidation.

When is a company solvent?

Usually a company is considered solvent only if it can pay all of its debts as and when they fall due.

This strict definition does not apply to members voluntary winding up. A company will be solvent if it will be able to pay its creditors within 12 months after the appointment. The liquidator must convert the members' voluntary winding up to a creditors' voluntary winding up (for an insolvent company) if they form the opinion that all creditors will not be paid in full within that 12 month period.

What is the effect of the winding up on the company?

Control of company assets, conduct of any business and any other affairs transfer to the liquidator. The directors cease to have any authority to act and all dealings must be done by the liquidator. The powers of the liquidator are very similar to that of a liquidator appointed to an insolvent company, but the scope of work that is necessary is very limited.

What must the directors do to help?

The directors must deliver up all company books and records in their possession and provide whatever other assistance is requested by the liquidator. Due to the nature of the appointment, it is rare that the directors will object to providing whatever assistance is required.

What does the liquidator do?

The liquidator will:

(a) realize any remaining assets - it is common that most if not all of the physical assets are sold before the appointment. At times the only assets are cash-at-bank and loans to shareholders;
(b) pay any outstanding creditors - it is common that all creditors have been paid before the appointment;
(c) lodge outstanding tax returns, pay any taxes and obtain tax clearances;
(d) distribute surplus funds (and possibly assets in specie) to members; and
(e) hold a final meeting of members.

Can a company trade during the winding up?

Usually the business of the company would have been closed or sold before the appointment. The liquidator may continue to trade any ongoing business, but only if doing so will improve the distribution payable to members. There is no limit on how long this trading may continue. The liquidator's role is to wind up the affairs of the company, so they will end trading as soon as practical.

The investigation process

There is no need for many of the investigations that would normally be carried out in a liquidation. As the company is solvent and creditors should be paid in full, there is no need for any recovery actions against them. Issues like preferential payments and insolvent trading do not apply as most of these recovery actions require the company to have been insolvent at the time of the transaction or a loss to creditors.

Liquidators may have to verify what assets are available to them. It is not uncommon that some of these assets are loans that have been made to shareholders, and sometimes these loans are either in dispute or not well recorded. Sometimes the liquidator will have to reconstruct these loan accounts to determine exactly who is owed what.

The liquidator will also have to ensure that the proper distribution is made to members through the capital accounts of the company. This may entail some investigation into the company's balance sheet, particularly capital reserve accounts and franking accounts. Generally the company's external accountant will be able to provide a detailed and up to date balance sheet showing all eequity accounts.

The liquidator will want to pay the distribution to members in the most tax advantageous manner. This is generally why the liquidator will want the balance sheet prepared in some details and will want to satisfy himself that the distribution is done correctly.

How long does the process last?

The liquidation lasts for as long as is necessary. Selling assets and paying creditors will usually occur within the first few months. The process of completing of the company's financial statements and final tax returns may delay the distribution to members, particularly if there is a dispute between the members.

Can a liquidator pay dividends?

Yes. The role of the liquidator is to sell the company's assets and distribute them amongst:

(a) the company's creditors as a dividend; and then
(b) the shareholders of the company as a distribution.

Are the dividends paid under certain priorities?

Yes. The liquidator must pay dividends under a set of priorities. These include:

(a) the costs and expenses of the liquidation;
(b) employee entitlements,
(c) non-priority creditors; then
(d) members

While these priorities will be followed by the liquidator, all creditors should be paid in full within the first 12 months.

How does the process end?

The process ends with the liquidator calling a final meeting of the company's members. This meeting will be called only after all creditors have been satisfied, all other issues have been resolved and the surplus has been distributed to the members.

This meeting is a statutory process and attendance by members is optional. The company will be automatically de-registered by the ASIC 3 months after the final meeting is held.

Disclaimer
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

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Last Updated: 28.7.2008