When a company’s life cycle has run its course and the corporate entity is no longer required, directors and shareholders must decide how to put the entity to rest. This decision can have a significant impact on the costs incurred to close a company and the tax paid by shareholders receiving their final distributions of equity. It’s important that company directors are aware of their options as well as CFOs who are increasingly responsible for communicating regulatory and risk management considerations to Boards.
If a company no longer conducts any operational functions in accordance with its Constitution, the company structure will be redundant and should be deregistered. There are numerous approaches that can be taken to completely wind up a company’s affairs and deregister the corporate entity.
It is important to make a distinction between companies that are coming to the end of their existence due to insolvency and those that are solvent. If the company is insolvent or potentially facing short- or long-term financial difficulty, the directors should seek advice immediately from a suitably qualified restructuring adviser such as a member of the Australian Restructuring Insolvency and Turnaround Association.
If the company is solvent and is expected to remain solvent until its deregistration, the options available to dissolve the corporate entity are:
- Voluntary deregistration, and
- Solvent winding up (members voluntary winding up).
A company that meets certain criteria can pay a small fee and apply to the Australian Securities and Investments Commission (ASIC) for voluntary deregistration. ASIC’s acceptance of a voluntary deregistration request essentially requires all affairs to be completely resolved at the time of application.
To apply for voluntary deregistration the following criteria must be met:
- All members of the company agree to deregister
- the company is not conducting business
- the company’s assets are worth less than $1000
- the company has no outstanding liabilities (e.g., unpaid employee entitlements)
- the company is not involved in any legal proceedings, and
- the company has paid all fees and penalties payable to ASIC.
If all the above criteria are met, the directors can resolve to voluntarily deregister the corporate entity.
Voluntary deregistration presents some challenges when deregistering an entity that has traded in some capacity up to the point the deregistration application is filed with ASIC. For example:
- In circumstances where a skeleton group of employees remain until the end, their entitlements must be paid up to that final day
- All supplier accounts must be closed prior to that day
- All remaining assets are distributed and paid to members (or as otherwise directed by the Constitution or relevant legislation), and
- All statutory lodgements, taxation and superannuation reporting and payment obligations must be completed before that final day.
If the company cannot satisfy all the above-mentioned requirements at the time of applying for voluntary deregistration, then the appointment of a Members Voluntary Liquidator might be necessary.
Members’ voluntary liquidation (solvent winding up)
The appointment of a liquidator to a members’ voluntary liquidation (MVL) can be made on a pre-planned date and allows an orderly wind down of the final administrative functions of the company.
In a members voluntary winding up, the directors must make a written declaration that they have formed the opinion that the company will be able to pay its debts in full within 12 months after the commencement of the winding up. Then, a special resolution must be passed by the company’s shareholders to wind up the company under Part 5.5 (Voluntary Winding Up) of the Corporations Act 2001.
From the passing of the special resolution, the company must cease to carry on business except so far as is necessary, in the opinion of the liquidator, to effect a beneficial winding up of the company, but the corporate state and powers of the company continue until dissolution.
When winding up a solvent company, either a registered liquidator or a person who is not an officer, employee or auditor of the company can be appointed as the liquidator of the company. We strongly recommend that a registered liquidator is appointed, rather than someone without that qualification. There are many complexities associated with conducting a company liquidation and the risks to an individual who is inadequately resourced or trained to discharge the duties of a liquidator are significant.
During the liquidation, the liquidator will determine that all assets are realised, accounts are closed, employee entitlements paid up, tax returns lodged and all creditor claims are paid in full.
If there are any assets remaining after all debts are paid, after contractual obligations have been met and costs of the liquidation are accounted for, the liquidator will pay those remaining assets either in cash or in specie to the shareholders in accordance with the Constitution, any other guiding resolutions of members or any superior legislation that applies.
Tax advantages of an MVL
There can be significant tax advantages available to shareholders receiving their final distributions of equity from a liquidator in a members’ voluntary winding up.
For example, a return of share capital comprising pre-CGT assets to a pre-CGT shareholder will generally not constitute assessable income in the hands of the shareholder.
A post-CGT shareholder might qualify for the 50% CGT discount or other exemptions depending on their circumstances and whether they are retiring.
The effect on each shareholder can be different and it is critical for the individual to obtain specific advice from an appropriately qualified tax adviser.
Effects of a MVL on the company
When a liquidator is appointed the company must cease to carry on business except for what is needed for the winding up. Ownership of the property of the company remains with the company but control of the company passes to the liquidator, directors’ and officers’ powers are rescinded.
There are generally no adverse implications on directors connected to a MVL or a voluntary deregistration.
At the end of the liquidation, when the company’s affairs are fully wound up, ASIC must deregister the company three months after the liquidator lodges the final return.
Directors and shareholders of companies that are nearing the end of their effective life should take the time to plan for the entity’s deregistration well in advance of needing to extract the remaining value for shareholders. The best sources of professional advice for winding up a company are registered liquidators, qualified tax advisers and accountants with experience in winding-up.