Winding up your company: deregistration vs voluntary liquidation

There are many reasons why shareholders may decide to wind up their company. 

For example, it may have been:

• a special purpose vehicle set up for a specific project, such as a property development, that is now complete and warranty periods expired (as detailed below);
• structured in a way that is no longer effective or relevant to the stage the company is at in its business lifecycle;
• a company that owned a business which has been sold and only the company shell remains; and/or
• part of a farming or other production enterprise which is restructured as part of succession planning.

Whatever the case, permanently closing a company is often more complex than people realise – especially when the company has traded a business in the past.

While shareholders may immediately look to deregistration as the most appropriate avenue, this can often be the best course of action but isn't always the best approach. For many companies, members voluntary liquidation is more suitable due to the potential taxation minimisation benefits and mitigation of future risks.

When deregistration is the best option to wind up a company

Deregistration is relatively easy and involves formally removing your company’s registration with ASIC.

It is usually only recommended by our team as being appropriate when the company:

• has no trading history;
• has no liabilities;
• has no possible contingent or unforeseen claims; and/or
• has assets of less than $1,000.

Once deregistered, there are no further compliance costs to pay.

The trouble with deregistration is that while it is relatively simple and cost-effective to implement, it is just as simple and cost-effective for a creditor to revive the company and trigger actions that could give rise to causes of action against the directors or other stakeholders.

Deregistration provides limited assurance should there be future claims resulting in liabilities that were unknown at the time of deregistration. In these circumstances, a creditor may attempt to have the company reinstated to deal with any contractual claims related to the goods and services previously supplied. The process of re-registering a deregistered company is far more straight forward if the company had simply been deregistered as opposed to a company that had been wound up following a members voluntary liquidation.

Before you wind up a company that has previously incurred debt, carried on an enterprise or owned assets, always consider engaging with your accounting and tax adviser. This will enable you to confirm that there are no tax minimisation strategies that can be accessed by undertaking a liquidation of a company as opposed to a deregistration. In certain circumstances, the company may be able to access capital gains tax and/or stamp duty concessions by undertaking a members voluntary liquidation as opposed to simply enacting the deregistration process.

When members voluntary liquidation is the best option to wind up a company

Members voluntary liquidation (MVL) is when shareholders choose to wind up and deregister a solvent entity that has reached the end of its useful life.

MVL differs from deregistration in that a liquidator is appointed to manage the process. This includes settling debts with creditors (if any), realising or transferring the remaining assets, and distributing the remaining funds to shareholders.

In addition to managing the winding up process, the liquidator may also assist in the lead-up to the commencement of the MVL. They will review the company’s operations and assess whether any unforeseen issues exist that may otherwise lead to increased costs or delays in the deregistration of the company.

A ‘simple’ MVL can be completed in as little as four to six months. Simple means that the company has minimal officeholders and no:

• assets (except cash);
• liabilities;
• registered interests on the Personal Property Securities Register (PPSR); and
• remaining contracts, agreements, or outstanding lodgements.

More complex MVLs take longer to complete. However, due to their complex nature, shareholders can often benefit from significant savings and benefits compared to what would otherwise be achieved through deregistration.

Benefits of a MVL

A MVL offers a number of benefits over deregistration, including (in appropriate circumstances) tax-effective shareholder distributions.

In addition to confirming that all outstanding liabilities of the company have been paid, a liquidator will obtain clearances from the ATO and applicable State Revenue Office/s. By obtaining these clearances from the statutory authorities, the shareholders of the company gain assurance that the obligations owed to the statutory authorities – be it outstanding liabilities or lodgements – have been met in full and no recourse will be sought at a later date.

Upon receiving the final clearances, the liquidator can make a final distribution to shareholders.

In making the final distribution, the liquidator can avail themselves of the Archer Brothers principle, which essentially means the distribution maintains the character it had within the company. In this way, distributions consisting of the company’s income remain income and capital payments remain capital. This is particularly relevant when dealing with capital items such as non-taxable capital gains, capital royalties, pre-CGT profits, or profits subject to the 50% small business reduction.

To this end, a distribution of these capital items through a MVL ensures they retain their character, thereby assisting to reduce the assessable income of shareholders. This is opposed to a simple deregistration where these capital distributions are treated as ordinary dividends. Treating payments as ordinary dividends could result in shareholders facing significant and avoidable personal tax liabilities, particularly in the case of unfranked dividends.

The optimal approach to MVL

When deciding to wind up your company via MVL, it’s important to work with experts who understand the ins and outs of the process. Seemingly minor recommendations can have significant financial and even reputational implications.

For instance, it’s worth remembering that all liquidations are publicly advertised on ASIC without mention of whether or not the liquidation is a solvent or insolvent winding up. If we imagine that ABC Company set up ABC Company No.10 to deliver a single project, and ABC Company No.10 is listed in the winding-up notices, anyone reading it may falsely conclude that the holding company (ABC Company) itself is in financial trouble.

To prevent this impact on the company’s reputation, we would recommend that the company change its name to its ACN or some other alternate name that would not unwittingly trigger any reputational concerns. After a period of six months, the winding up can commence and the insolvency notice will only show the ACN or the desired innocuous new name – not the former company name.

Other important factors for an effective MVL include completing a pre-liquidation review that contemplates all of the following occurring, if possible and appropriate, before the liquidation process begins:

1. Create a wind-up plan to minimise the scope of works required to be completed by the liquidator and, in turn, the cost of the MVL.
2. Confirm that all known creditors are paid and/or legal advice is obtained in relation to disputed and/or contingent claims.
3. Confirm the company is not a lessee of any property.
4. Confirm that the company has been removed from any tax consolidated group or will be at the next reporting date.
5. Complete all known tax lodgements and lodge the returns as final.
6. Realise all physical assets, subject to alternative taxation advice.
7. Ensure the ASIC register is up to date.
8. Make sure all PPSR registrations are released.
9. Confirm the rights of shareholders (if multiple classes of shares exist) to participate in any distribution of surplus company assets.

The risk of not undertaking this pre-liquidation review is that in the event that unforeseen assets, liabilities or reporting obligations arise, the MVL is likely to be delayed, increase in cost and (in some circumstances where disputed debts and/or contingent claims surface) the liquidation may need to be converted to an insolvent winding up which can have personal implications for directors and stakeholders.

Statute of limitations for MVLs

Depending on the type of enterprise the company ran, it may be the case that a MVL cannot be commenced immediately after the cessation of the company’s operations. For example, a statute of limitations applies to some companies operating in the construction industry which company directors and members should be aware of. Certain statutory warranties apply to all builders performing building works.

If you are unsure of the warranties that exist and recourse that otherwise may be sought against the company, it is highly recommended that you seek legal advice prior to commencing a MVL. In conjunction with this legal advice, the proposed liquidator can assist during any warranty period to devise a strategy to ensure the most time and cost-effective means to wind down the company.

Assistance following completion of the MVL to store and manage records

At the completion of the winding up, the company and its officers have obligations to retain the company’s books and records for specified periods.

We recommend that the liquidator be retained during the retention period to assist the company and its officers with their ongoing record keeping obligations. This assistance generally includes:

• listing and cataloguing of records;
• storing the records securely during the retention period and providing reasonable access to the records as required – which can include providing access to third parties to inspect the records and responding to subpoenas during the statutory retention period of five years following the completion of the winding up; and
• destruction of the records at the expiry of the retention period.

Engage RSM to assist with your MVL

At RSM, our approach to every MVL is to assign a team of experienced Chartered Accountants led by both an RSM Registered Liquidator and an RSM Registered Tax Agent to assist in designing and implementing your wind up plan.

These experts work together with you and are available throughout the planning phase and the winding up phase to address any accounting, taxation, or liquidation concerns or questions you may have.

Following the finalisation of the MVL, RSM can also assist you to ensure that your statutory obligations continue to be met by arranging for the collection, storage and eventual destruction of the company’s books and records.

Our Restructuring and Recovery divisions across Australia are home to some of the most experienced MVL experts in the country. We use highly effective systems and processes that add value at every stage of the journey – ensuring our fees are very competitive and our process efficient.

For a free initial consultation, contact the Restructuring and Recovery team at your local RSM office. 

FOR MORE INFORMATION

For a free initial consultation, contact the Restructuring and Recovery team at your local RSM office.