Closing a company in Australia is a decision that requires thorough planning and strict compliance with legal requirements. Whether driven by part of a succession of the family business, financial difficulties, taxation, strategic realignments, or other factors, understanding the available options that a Perth business accountant can employ will make a more streamlined process for family business owners.
This article will examine six company closing methods in Australia, including voluntary administration, liquidation and deregistration, and consider key business and tax considerations associated with each stage. Each method differs slightly and may be more suitable depending on the needs of the family in business and the company.
Option 1 – Voluntary Administration
Voluntary Administration (VA) is a process undertaken by a company when it faces insolvency and cannot meet its financial obligations. This process involves the appointment of a Voluntary Administrator (Administrator) by the company’s directors.
The Administrator is responsible for evaluating the company’s financial situation and determining the best course of action for the business and its creditors. The primary objective is to decide the company’s future direction, which may involve restructuring, liquidation, or another solution.
Insolvency can arise from various factors, and when a company becomes insolvent, it can seek independent guidance from an Administrator. The Administrator will assess the company’s financial condition and formulate a strategy for its future.
During the VA process, the company is granted relief from creditor actions, providing time to explore potential options, including the possibility of continuing operations. Unsecured creditors are barred from pursuing or initiating claims against the company during this period.
After the VA, the company may propose a Deed of Company Arrangement (DOCA) to its creditors. Alternatively, the Administrator may recommend proceeding to formal liquidation.
The VA process generally lasts between 25 to 30 business days. Upon appointment, the Administrator takes control of the company and investigates. A financial report is then presented to creditors at a creditors’ meeting, where creditors may be given an additional 15 business days to consider accepting a DOCA.
If the company has any loan-funded share plans with the employees for succession the administrator will review those documents as part of the VA.
Option 2 – Liquidation
Liquidation is a formal process by which a company ceases operations, allocates its assets to settle debts with creditors, and distributes any remaining assets to shareholders.
In Australia, there are two primary types of liquidation: court liquidation and creditors’ voluntary liquidation (CVL).
In court liquidation, a Liquidator is appointed by the court, typically following a creditor’s petition due to unpaid debts. A creditor seeking repayment can apply for a “wind-up order,” requesting that the court dissolve the company.
Conversely, CVL is initiated voluntarily by the company’s directors or shareholders, often in response to insolvency, financial difficulties, or disputes.
Both types of liquidation are managed by registered independent liquidators, who are responsible for selling the company’s assets. The proceeds from these sales are used to pay off debts and complete the company’s closure.
Registered liquidators have fiduciary responsibilities to creditors, the Australian Corporate Regulator, and the Australian Securities and Investments Commission (ASIC).
The liquidation process typically lasts six to twelve months, with costs varying according to the company’s size, the extent of its assets, and the number of creditors involved.
Once the liquidation is complete the liquidator will possibly pay a liquidator dividend to the shareholders that will consider the franking account implications and attach a franking credit to the dividend.
Option 3 – Members Voluntary Liquidation
Members’ Voluntary Liquidation (MVL) is a process where shareholders collectively decide to terminate the company’s operations and cease trading. It offers a streamlined and efficient winding-up process for solvent companies, eliminating the need for creditor involvement and thus providing a more cost-effective option for shareholders.
Many family businesses in Perth will consider a member voluntary liquidation to close their company to enjoy flow-through tax benefits available through either the small business capital gains tax concessions or capital gains tax concessions through a Pre-CGT asset.
A member’s voluntary liquidation might give the family business shareholders access to the 50% capital gains tax discount.
The MVL process begins with appointing a Liquidator responsible for notifying relevant parties and managing the company’s affairs. This includes addressing tax obligations, liquidating assets, settling any claims from creditors, and distributing any remaining funds to shareholders.
To qualify for an MVL, the company must be solvent, meaning it can repay all its debts and obligations within 12 months. If the company fails to meet these criteria, the liquidation process will transition to a Creditors’ Voluntary Liquidation (CVL).
An MVL typically concludes within three to six months, offering a quicker and less costly alternative to other liquidation methods, such as CVLs. This efficiency in the MVL process contributes to reduced closure-related expenses.
A liquidation benefits in that the corporate veil is classically retained through a liquidation.
Option 4 – Voluntary deregistration
Voluntary deregistration is one of the most straightforward methods for formally closing a company. It is often chosen when the company has ceased or plans to cease trading. Compared to other methods, it is generally the most cost-effective closure option.
To qualify for deregistration, the following conditions must be met:
- All members must consent to the deregistration.
- The company must not be conducting any business activities.
- The company must have no outstanding liabilities.
- The company must not be involved in any legal proceedings.
- The company’s assets must be valued at less than AUD 1,000.
- The company must have settled all fees and penalties due to the Australian Securities and Investments Commission (ASIC).
The final step in the deregistration process involves submitting Form 6010 to ASIC, accompanied by a nominal deregistration fee. ASIC’s deregistration process typically takes two to three months before the company is formally Gazetted. During this period, the company will remain on the ASIC register but will be designated as ‘deregistered.’
It is important to note that, unlike other closure methods, a deregistered company can be reinstated. Upon reinstatement, the company regains its registered status as if it had never been deregistered.
Option 5 – Receivership
Receivership allows a company to operate under the supervision of a Receiver, who is responsible for repaying creditors while allowing the company’s owners to retain some authority.
In this process, a secured creditor, such as a financial institution, appoints an independent Receiver to manage the recovery of debts owed by the company. Secured creditors can appoint a Receiver due to their secured interest in the company’s assets.
The Receiver’s primary duty is to the secured creditors. The Receiver is authorised to collect and liquidate the company’s assets to fulfil the secured creditor’s claims. This authority is not limited to only the secured assets; the Receiver may also sell all the company’s assets if necessary to settle outstanding debts. Additionally, the Receiver is required to provide reports on their activities and findings to unsecured creditors.
Simply because a company is in liquidation does not relieve the company of its ASIC reporting requirements.
Option 6 – Sale of the business
Another option is to sell the business and then close the company. This strategy enables owners to maximise the return from the sale while maintaining control over the process, followed by an orderly dissolution of the company.
The sale could enjoy tax benefits and integrate some closure options discussed above.
The sale can potentially be a complex decision so a Perth family business should ask themselves the 13 key questions when selling the family business.
Common Challenges and Pitfalls in Closing an Australian Company
One significant challenge in closing a company is underestimating the time and costs involved. The duration and expenses of the closure process can vary based on the method chosen. It is crucial to allocate adequate time and consider securing a fixed fee arrangement to mitigate unexpected financial burdens.
Tax implications also warrant careful consideration. Although a distressed company might appear to have no tax liability due to losses, a comprehensive tax review is prudent to ensure that all potential tax obligations are properly addressed.
Moreover, protecting the company’s directors is essential during the closure process. Securing adequate Directors’ & Officeholders’ Insurance run-off coverage, typically for seven years in Australia, can protect against potential liabilities that may arise during and after the closure.
How to Mitigate Risks and Ensure a Smooth Closure
Effective planning and expert advice are essential when closing a company. Each business is unique and influenced by its history, size, and industry, so it is crucial to carefully assess the most appropriate closure strategy.
Preparation for unforeseen challenges is also critical in the closure process. Although closing a company is not ideal, it is a scenario that should be anticipated. Keeping well-organized accounting records, maintaining proper documentation, and ensuring operational efficiency can greatly ease closure.
When closure becomes necessary, prompt decision-making is vital. After thoroughly exploring all options for business sustainability, it is important to make decisions swiftly. Acting while the company is still under your control allows for more effective management of the closure process and its outcomes.
Regulatory Compliance and Reporting
Australian companies must comply with the Corporations Act 2001 and adhere to the guidelines set by the Australian Securities and Investments Commission (ASIC), which oversees the Act.
The closure process involves specific reporting obligations, which vary depending on the closure method. For example, liquidation is managed by the appointed liquidator, whereas your ASIC agent or accountant can handle voluntary deregistration.
Trading While Insolvent and Directors
A critical issue is the potential liability for directors who allow the company to trade while insolvent. Directors must avoid this situation and immediately act if financial distress becomes apparent.
Conclusion
Closing a company in Australia involves carefully considering various factors, including taxation, financial status, regulatory compliance, and strategic objectives. Each of the six closure methods offered distinct advantages and considerations, underscoring the importance of tailored solutions based on the company’s specific circumstances. By adhering to regulatory guidelines and preparing adequately, business owners can navigate the closure process efficiently, mitigate potential risks, and ensure a smooth transition while remaining compliant with taxation, legal, ASIC and corporate requirements.
At Westcourt, we focus only on families in business – from start-up, expansion and closure. Given our commitment to independent advice, proven tax excellence, deep global networks and small firm service levels we are a first choice for families looking at all their options including winding down their enterprise – so why no give us a call?
