Once a company has stopped trading, directors can wind up its affairs through either a members' voluntary winding up or a deregistration. This article explains each process as well as their benefits and drawbacks.
Members' voluntary winding up
Overview of the process
Voluntary winding ups commence when the shareholders of a company pass a special resolution to appoint a liquidator to wind up the affairs of the company.1 As a special resolution, generally a winding up resolution will only be passed if more than 75% of shareholders vote in favour of the winding up.
Once appointed, the liquidator takes charge of the company, sells the company's assets and distributes the proceeds of sale to the company's creditors. Any surplus money or assets are distributed to the shareholders in accordance with the company's constitution.2 Once all the affairs of the company are finalised, the liquidator calls a final meeting and then deregisters the company. On deregistration, the company ceases to exist.3
Solvency
The company must be solvent to proceed with a members' voluntary winding up.
Central to a members' voluntary winding up is a written declaration by the directors of the company that, in the director's opinion, the company will be able to pay its debts in full within a stated period not exceeding 12 months after the commencement of the winding up.4 That declaration must be made within 5 weeks of the shareholders' resolution to wind up the company and filed with ASIC in the appropriate form.
When making that declaration, the directors need to consider whether the company can pay all of the company's debts within 12 months. Those debts include contingent debts (e.g. a potential debt under a guarantee or contested litigation) and non-current debts (e.g. debt from finance or a lease with a term of over 12 months).
A declaration should not be made lightly. It is an offence for the directors to make a declaration without reasonable grounds (s 494(4) of the Corporations Act). If the company's debts are in fact not paid within the period stated in the director's declaration, there is a rebuttable presumption that the directors did not have reasonable grounds for their declaration (s 494(5) of the Corporations Act).
Effect of a members' voluntary winding up
When a company enters into a members' voluntary winding up, the main changes are:
- the directors remain in office but lose all of their powers over the company.5 Instead, the liquidator takes charge of and is in control of the company;
- the company ceases to carry on business;6 and
- the words "in liquidation" must always appear after the company's name.7
Deregistration
Another option available to the directors of a company is to deregister the company without a voluntary liquidation. Deregistration is an administrative process. The directors simply submit the prescribed application form to ASIC. 8 This makes it a fast and cost-effective process.
Before submitting the form, the directors must ensure the company has complied with several conditions, being:9
- the company must not be trading;
- the company must not be party to legal proceedings;
- the company must have less than $1,000 worth of assets and no liabilities; and
- all of the shareholders of the company must have agreed to the deregistration (i.e. unanimously resolved to deregister the company).
On deregistration, the company ceases to exist.10
Deregistration or voluntary winding up?
As a largely administrative process, deregistration without a voluntary winding up is faster and cheaper. However, deregistration does require the directors to complete the hard work of winding up the affairs of the company and ensuring that all of the company's liabilities are paid. Deregistration also does not relieve directors from liabilities arose prior to deregistration. If not done properly, an aggrieved creditor can apply to have the deregistered company reinstated.11 This is far less likely when a voluntary winding up has been completed before the company was deregistered. As a result, deregistration without a voluntary winding up is appropriate only in a limited number of cases where the company is effectively only a corporate shell.
In any other case, the directors should pursue a voluntary winding up. Directors should carefully consider the company's financial position before deciding whether to pursue a members' voluntary winding up. The directors must be certain that the company can pay all its liabilities within 12 months before commencing a members' voluntary winding up. If the company is solvent, a members' voluntary winding up may prove more tax efficient for shareholders depending on the structure of the company and its assets. It also reduces the likelihood of the company being re-registered in the future.
In case of doubt as to whether to pursue a deregistration or voluntary winding up, directors should seek advice early to make the best decision and avoid liability.
Footnotes
1. Section 491(1) of the Corporations Act 2001 (Cth) (Corporations Act).
2. Section 501 of the Corporations Act.
3. Section 601AD(1) of the Corporations Act.
4. Section 494 of the Corporations Act.
5. Section 495(2) of the Corporations Act.
6. Section 493(1) of the Corporations Act.
7. Section 541 of the Corporations Act.
8. Section 601AA(1) of the Corporations Act.
9. Section 601AA(2) of the Corporations Act.
10. Section 601AD(1) of the Corporations Act.
11. Section 601AH(1) of the Corporations Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
