The 3 types of company liquidation every director should know

Exploring company liquidation is probably not where you ever expected to be.

But after the overwhelm of running a struggling business, juggling stress, responsibilities and expectations – it can sometimes be the right path.

There are three types of liquidation that exist here in Australia – creditors’ voluntary liquidation (CVL), members’ voluntary liquidation (MVL) and court-ordered liquidation. But which is likely to be relevant in your situation?

What company liquidation means for your business

Before diving into the types, let’s start with the basics: what is liquidation?

Liquidation is a formal legal process under the Corporations Act 2001 (Cth) used to wind up a company that’s unable to pay its debts when due. It differs from bankruptcy, which applies to individuals.

An independent Australian Securities & Investments Commission (ASIC)-registered liquidator (or insolvency practitioner) takes control of the business, sells its assets and pays creditors in priority order, ending with deregistration by ASIC.

The outcome of liquidation is always the same, but the process and who initiates it can vary depending on the type.

What is voluntary liquidation?

Voluntary liquidation is when company directors choose to enter liquidation, rather than being forced into it by a court.

3 types of liquidation at a glance

Creditor’s voluntary liquidation (CVL) – COMMON

Directors appoint a liquidator when their company can’t pay its debts to recover as much as possible for creditors in order of priority.

Members’ voluntary liquidation (MVL) – PLANNED

Directors appoint a liquidator when their company is solvent to close it and distribute assets to creditors and shareholders.

Court-ordered liquidation (or court liquidation) – FORCED

A court appoints a liquidator to take over. It’s usually triggered by unpaid debt or a dispute that couldn’t be resolved.

The common route? CVL in-depth

A creditors’ voluntary liquidation (CVL is the most common way to liquidate a company. It’s initiated by the directors, who decide that closing the business in a controlled way is a smarter move than continuing to trade. 

Benefits of creditors’ voluntary liquidation

Initiating a voluntary liquidation is a smart move because it:

• Prevents more losses and making the situation worse

• Ensures the winding-up process follows legal requirements

• Reduces personal liability risk from insolvent trading

• Gives directors a fairer and more orderly outcome

• Offers more control and is faster than a court-ordered liquidation 

• Delivers a clear endpoint instead of ongoing debt pressure

How creditors’ voluntary liquidation works in practice

Here’s a quick summary of what happens when you go into voluntary liquidation:

• Step 1 – Resolve to liquidate: You, the directors, collectively consider your situation and decide to enter voluntary liquidation.

• Step 2 – Appoint a liquidator: You appoint a registered liquidator under the ASIC to wind up your company.

• Step 3 – Liquidator takes control: The liquidator secures your company’s assets and records, and notifies ASIC and creditors.

Step 4 – Liquidator finalises company: The liquidator investigates your company, sells assets, distributes funds to creditors in priority order and deregisters your company.

How long does voluntary liquidation take?

Most creditors’ voluntary liquidations complete within 3-6 months if they’re straightforward with few assets and creditors.

Who gets paid first in a creditor’s voluntary liquidation?

Your creditors are paid in order of priority under Section 556 of the Corporations Act. Here’s what it looks like, from first to last:

1. Secured creditors – Those with registered security interests, for example, banks, finance companies and mortgage providers.

2. Liquidation costs – Liquidator fees, legal expenses (lawyer costs) and indemnity fees (out-of-pocket costs, such as valuers, auctioneers, ads).

3. Employee entitlements – Wages (up to a cap), superannuation, annual and long service leave, retrenchment and redundancy pay. This is often backed by the Fair Entitlements Guarantee if assets don’t cover them. 

Other unsecured creditors –Everyone else, for example, trade suppliers, the ATO for taxes, such as GST/PAYG and landlords.

The three types of liquidation

Here’s a handy comparison table to help you quickly understand the differences, obligations and impacts of each type of liquidation.

Each type of liquidation has different risks, costs and levels of control. Choosing the right one depends on your company’s solvency and goals.

Liquidating when insolvent? Choose CVL

For most directors of insolvent companies, creditors’ voluntary liquidation is the most appropriate and controlled option to wind things up. It puts a professional liquidator in charge to handle creditors fairly and legally.

MVL is only available to solvent companies, and court liquidation brings adversarial stress you can sidestep by acting early.

While it was never something you planned for, voluntary insolvent liquidation helps you avoid personal liability and gives you closure and a fresh start, meaning no more sleepless nights over mounting debts.