For some Chief Financial Officers, there might come a time when the wind up of your company, or of a related company, is inevitable. The decision on when to wind up a company is very important. Just as important is what type of wind up approach is appropriate in the company’s current circumstances. You will also need to provide guidance to your board of directors on how to best go about this. Rest assured that there are a variety of approaches that can be taken to achieve the outcome you, and they, may be seeking.
Let’s say the company has wound down its operations and is no longer trading, or a group of entities has been restructured, rendering one or a number of entities in that group redundant. Where there are no outstanding liabilities or the liabilities do not exceed the company’s assets, this presents the opportunity for a solvent wind up. There are a few options available depending on the circumstances of the company. These include:
- Members voluntary liquidation
- Voluntary deregistration
- ASIC-initiated company deregistration
Members Voluntary Liquidation
This type of liquidation is only possible to undertake if the company is solvent. Solvency is the ability of a company to pay its debts as and when they fall due. This is not always a straightforward assessment and may require expert advice in situations where contingent liabilities exist.
To commence a member’s voluntary liquidation (MVL), a resolution must be passed at a directors meeting declaring the company is solvent. A shareholders meeting must then be held, and a special resolution passed, which involves 75% of shareholders in attendance voting in favour, to wind up the company.
There are tax benefits with distributing a company’s assets through an MVL, allowing shareholders to access tax concessions through small business CGT concessions and the distribution of pre-CGT reserves. It can also be seen as a more thorough solution to deregistering a solvent entity, as reinstatement requires an application to the Court.
Voluntary Deregistration
This requires directors to make an application to the Australian Securities and Investments Commission (ASIC) to deregister the company subject to the following criteria voluntarily:
All shareholders of the company must agree to the deregistration
- The company must not be carrying on a business at the time of the application
- The company assets must be worth less than $1,000
- 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.
The application to ASIC requires directors to declare that the company has met the above criteria formally. If it is found that the company did not meet the necessary criteria, this may be considered a false or misleading statement to ASIC which carries a maximum penalty of five years imprisonment.
ASIC-initiated Company Deregistration
If a company remains dormant for a long period of time, ASIC may take action to deregister it if it meets the following criteria:
- The company has not paid its annual review fee within 12 months of the due date
- The company has not responded to a company compliance notice, has not lodged any documents in 18 months, and ASIC thinks it’s not in business, or
- The company is being wound up, and there is no liquidator.
ASIC has the ability to reinstate the company, and if this occurs, all ASIC annual review fees from the years that the company was deregistered will become payable.
Winding up an insolvent company
In situations of corporate insolvency, where a company is unable to meet its financial obligations, there are different types of insolvency appointments that can be initiated. These often depend on the outcome sought by a director or a creditor and who is initiating the process. These include:
- Creditors Voluntary Liquidation
- Voluntary Administration
- Court Liquidation
Creditors Voluntary Liquidation
Despite what the name suggests, a Creditors Voluntary Liquidation (CVL) is not initiated by a creditor. Commencing this type of appointment requires the directors to pass a resolution that the company is insolvent. It also requires a general meeting of the company’s shareholders to pass a special resolution in favour of winding up the company. Obtaining advice from a qualified insolvency practitioner, such as a member of the Australian Restructuring Insolvency and Turnaround Association (ARITA), is critical to ensure the correct process is being followed and that the stakeholders involved understand the potential implications of initiating the winding up process.
We touched on the meaning of solvency and what it takes to pass a special resolution earlier.
You may be asking, in what scenarios would a CVL be the right option for me?
In the current economic climate, many businesses are experiencing financial hardship. Rising interest rates are putting pressure on the company’s reserves. The rising cost of materials, particularly in the construction industry, has resulted in large players exiting.
Following a moratorium on debt recovery action during the pandemic, 2024 has seen the ATO recommence recovery of outstanding tax dollars. This has resulted in thousands of director penalty notices (DPNs) being issued to directors in respect to outstanding tax liabilities. If a DPN is not acted on within 21 days of the issue date, this gives the ATO an opportunity to pierce the corporate veil and make a director personally liable for the company’s tax debts.
Depending on the type of DPN issued, directors may avoid personal liability for the company’s tax debt if they appoint a liquidator or voluntary administrator within 21 days of the date of issue. This is where a CVL can offer directors in this situation some peace of mind.
Voluntary Administration
This appointment can commence by directors passing a resolution once they have determined that the company is insolvent or likely to become insolvent. Less commonly, a secured creditor may also appoint a voluntary administrator.
The benefit of a Voluntary Administration (VA) is that it doesn’t necessarily lead to the cessation of the company. A VA allows for a Deed of Company Arrangement (DOCA) to be proposed, which may involve the sale of a company’s business and/or assets. A DOCA typically involves debt restructuring to allow the company to settle its obligations in a manageable way. This type of appointment can afford the company some breathing space and delay having to pay creditors while directors consider the best course of action moving forward.
Appointing a voluntary administrator also relieves directors from incurring further company debts whilst insolvent, which would otherwise increase any insolvent trading claim made against them were the company to be liquidated.
Once a voluntary administrator is appointed, they will assess any DOCA that is proposed and recommend the best option for both the business and its creditors, being either of the three following options:
- Give control of the company back to the directors
- Execute a DOCA, or
- Place the company into liquidation.
Ultimately, creditors will decide on the outcome during a meeting and will consider the voluntary administrator’s recommendation in forming their decision.
Court Liquidation
A creditor can apply to the court to wind up a company of the company, a contributory, a director, a liquidator, ASIC, a ’prescribed agency’ or the company itself. A creditor usually applies to wind up a company if other debt recovery options have failed. Before taking this step, it is helpful for the creditor to consider the commercial benefit as it can be a costly process. An insolvency practitioner may be able to assist you in piecing together various sources of financial information to give you an idea of what the outcome may be for creditors should the winding up application succeed.
To initiate a court liquidation process, a creditor will serve a Statutory Demand on the company and may need to complete the necessary bankruptcy form before proceeding to court. If the company fails to pay the sum demanded within 21 days of the making of a statutory demand, the creditor may proceed to make a winding up application via court. Following a winding up hearing the court may order the appointment of a liquidator, often referred to as a bankruptcy trustee in this context, to oversee the dissolution of the company.
Winding up a solvent company
Winding up a solvent company through a Members’ Voluntary Liquidation (MVL) provides a dignified exit strategy for businesses that can still meet all financial obligations within 12 months of ceasing operations. The process should be undertaken with guidance from a financial advisor to ensure full comprehension of potential financial and tax implications.
It begins with the company’s directors making a Declaration of Solvency, affirming the company’s ability to settle its debts in the stipulated timeframe fully. An inaccurate declaration can lead to severe penalties.
Following the Declaration of Solvency, the company’s shareholders must pass a special resolution with at least a 75% majority to initiate the winding up. A liquidator is then appointed to manage the dissolution process, overseeing the sale of assets and ensuring all creditors, secured and unsecured, are compensated.
An MVL not only facilitates the orderly closure of the company but often results in a distribution of surplus assets to shareholders, ensuring all legal and financial responsibilities are handled efficiently while preserving the company’s reputation and integrity.
A Proactive Approach
Allowing a company to continue to exist when it is no longer trading or no longer solvent exposes both the company and its directors to ongoing administration costs and also to potential creditor and legal claims.
In some circumstances, creditor action might put a company in a position where it is unable to continue to trade solvently and directors must seriously consider whether they need to appoint a liquidator or external administrator to avoid personal exposure to insolvent trading recovery proceedings.
In recent times the ATO has been issuing credit default notices against companies’ public credit agency ratings which can have significant implications on a company’s lines of credit with lenders and suppliers. A default notice can trigger a covenant breach which could give a creditor the right to cancel contracts and potentially initiate wind up proceedings.
Garnishee notices issued by the ATO against company’s bank accounts and directly to debtors is becoming more common. These legitimate recovery actions can have immediate impact on a company’s ability to access sufficient working capital to continue to trade.
Getting ahead of the impact on a company’s solvency by obtaining advice from an insolvency practitioner in these situations is often key to the company’s chances of survival or to it’s orderly wind down. Often, the directors’ personal protection from insolvent trading claims relies on the timely appointment of a liquidator or voluntary administrator.
If you would like to have a confidential discussion on what options might be suitable for you, please contact your local William Buck Restructuring and Insolvency expert.
