For some CFOs, there might come a time when the wind up of your company, or of a related company, is inevitable and you’ll need to provide guidance to your board of directors on how to best go about this. Rest assured 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 to make 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 assets of a company 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 simply deregistering a solvent entity as reinstatement requires an application to Court.
This requires directors to make an application to the Australian Securities and Investments Commission (ASIC) to voluntarily deregister the company subject to the following criteria:
- 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’s 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 make a formal declaration that the company has met the above criteria. 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 where a company is insolvent, there are different types of insolvency appointments that can be initiated depending on the outcome that is sought by a director or a creditor. These include:
- Creditors Voluntary Liquidation
- Voluntary Administration
- Court Liquidation
Creditors Voluntary Liqudiation
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.
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 post-COVID economic climate, a lot of businesses experiencing financial hardship. Rising interest rates are putting pressure on 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, 2023 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 be able to 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.
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 provides the opportunity for a Deed of Company Arrangement (DOCA) to be proposed which may involve the sale of a company’s business and/or assets. This type of appointment can afford the company some breathing space from creditors while directors consider the best course of action moving forward.
Appointing a voluntary administrator also provides relief to 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.
An application to court to wind up a company can be made by a creditor of the company, a contributory, a director, a liquidator, ASIC, a ‘prescribed agency’ or the company itself. Most commonly, a creditor makes an application 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 to piece 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. 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.
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.