The process of closing a business is known as winding it down. Your company can go into liquidation through a members’ voluntary winding up if it is solvent (able to pay its debts). In contrast, an insolvent business is unable to pay its debts when they become due. Knowing whether your company is solvent or insolvent is essential for business owners. This is due to the fact that creditors can forcefully wind up your business if it is insolvent through a creditors’ voluntary winding up.
How Does a Voluntary Winding Up Work?
A company can go out of business for a variety of reasons, including the following:
- The company has been sold to you;
- It has ceased all business; or the company has been reorganized (more frequently in larger corporate groups).
The steps involved in winding down a business are:
- Completing unfinished business matters;
- Paying off debts owed by the company;
- Liquidating all company assets; and putting an end to the existence of the company.
If your business is unable to fulfill the requirements for voluntary administration or voluntary deregistration, voluntarily winding up the business may be an option. A liquidator will be appointed to oversee and conclude the winding down of a business. The company will no longer trade at this point, and the directors will no longer run it.
What Is a Voluntary Winding Up by Members?
The owners of the business are the members, or “shareholders.” A company’s members cannot initiate a voluntary winding up unless the company is solvent.
In order to have a better chance of recouping their initial investment, members may wish to liquidate the business while it is still solvent. This is due to the fact that creditors receive repayment first in the event of an insolvent business. The members will only receive any remaining company assets in this scenario.
How Does a Voluntary Winding Up by Members Work?
By following the steps outlined below, members of a solvent company can decide whether or not to liquidate the business.
- The majority of company directors use the ASIC Form 520 to submit a declaration of solvency to ASIC. This declaration informs ASIC that the company’s directors believe it will be able to pay all of its debts within a year of the voluntary winding up;Within five weeks of the directors’ solvency declaration, the company members pass a special resolution and file an ASIC Form 205 informing ASIC that a special resolution has passed;
- Within 14 days, an ASIC Form 505 is used to appoint a liquidator and file a notice of appointment with ASIC; and the final documents are submitted to ASIC by the liquidator, who concludes the company’s affairs.
- If the liquidator has reason to believe that the company will not be able to pay its debts in full within a year of the winding down, they must either:
Organize a Meeting of Creditors;
- Designate an unpaid administrator; or petition the court to declare the business bankrupt.
- Declaration of Solvency One of the most important parts of the members’ voluntary winding-up process is the statutory declaration of solvency. As a result, as a director of the company, it is essential to know how to file the declaration.
To obtain a declaration of solvency, a majority of the company’s directors must examine the situation and determine that the company will be able to pay all of its debts within a year. A description of the company’s assets and any liabilities is included in the declaration.
Most importantly, the declaration won’t work unless:
- It is decided at the board meeting;
- Before notifying members of the meeting, it is submitted to ASIC on the appropriate form; Additionally, the special shareholder resolution to wind down the business expires within five weeks of its adoption.
- In your declaration, as a company director, you are responsible for ensuring that you are able to back up your opinion with accurate and sincere information. If you make a false declaration, you may be subject to fines and other penalties because it is illegal to do so.
Know more: What is the process of liquidation of company
What Distinguishes a Creditors’ Winding Up From a Members’ Winding Up?
Process: The voluntary winding up process for members is simpler than the voluntary winding up process for creditors. This is because the liquidator will have to thoroughly investigate the company’s assets and liabilities in a creditors’ voluntary winding up.
Solvency: The company’s solvency is one of the main distinctions between a creditors’ voluntary winding up and a members’ voluntary winding up. A voluntary winding up by members is only an option if the business is solvent. A creditors’ voluntary winding up or another insolvency procedure must be used to liquidate the insolvent business. Solvency is the ability of a company to pay its debts as they become due.
Because the company is still in a position to pay its creditors in full, a members’ voluntary winding up typically does not involve the creditors. However, creditors and members are involved in a creditors’ voluntary winding up.