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Are the Liabilities of De- Registered Company really “Dead and Buried”?

Often the advice to a client with a dormant company with outstanding liabilities is to voluntarily deregister the company, usually on the grounds of cost, and in the belief that it completely ends that company’s existence.

However, such advice is often given without a full appreciation of the provisions of Corporations Act 2001 (“Act”), because it ignores the fact that a company that has been voluntarily deregistered can easily be re-registered.

A number of recent cases in the Federal Court have illustrated the Commissioner of Taxation’s willingness and ability to reinstate previously deregistered companies, where those companies have had substantial amounts due to the Australian Taxation Office. The effect of this can come as a shock to those who believe that the liabilities of a deregistered company are ‘dead and buried’.

The Act allows a company to be voluntarily de-registered if the following criteria are satisfied:

  • all the members of the company agree to the de-registration;
  • the company is not carrying on business;
  • the company’s assets are worth less than $1,000;
  • the company has paid all fees and penalties payable under the Act;
  • thecompany has no outstanding liabilities; and
  • the companyis not a party to any legal proceedings.

A director or member of the company, amongst others, can initiate the process. If a company is de-registered, it is a statutory requirement that the directors of the company immediately before de-registration must keep the company’s books for 3 years after de-registration, with potential criminal ramifications if the books are destroyed in that time.

However, the Act also provides that a company can be reinstated by the Court if a person has been aggrieved by the de-registration, and the Court is satisfied that it is just that the company’s registration be reinstated.

Even if there is clear evidence that a company does not possess any assets to meet an outstanding claim for income tax liabilities this will not deter the Commissioner pursuing the re-registration of a company, and invariably, the Court will order the company to be reinstated.

The reason why the Commissioner seeks to reinstate companies where there is an outstanding taxation liability is so that the Commissioner can immediately place the company back into liquidation and appoint a liquidator to the company. Although a company’s resurrection only to immediately put it to death yet again seems counter-intuitive, the Courts have said it is in the public interest to do so, because it allows the provisions of the tax law and the Act to be properly followed. Furthermore, where outstanding taxes are owed, the Commissioner should not be deprived of the opportunity to pursue the claim.

It is to be expected that a liquidator appointed to a re-registered company could be funded by the Commissioner to undertake the usual duties that a liquidator undertakes when a company is placed under liquidation as soon as it is reinstated.

The types of duties that a liquidator must undertake are to:

  • establish that the company is insolvent;
  • determine when the company became insolvent;
  • investigate where there is potential insolvent trading claim against directors;
  • determine if there have been any preferential payments to creditors that may be recovered;
  • ascertain if company’s officers have committed offences under the Act; and
  • determine whether any recoveries could be made.

A liquidator has the ability to hold public examinations, seize books and records and gain access to property and detain persons relevant to the investigation. A liquidator also has the power to recover unreasonable related party transactions or preferential claims.

Each of these could be problematic for people who have deregistered a company with outstanding liabilities because when it is reinstated, a liquidator can then exercise powers to recover company property and to prosecute directors for potential offences under the Act.

In particular, if a company is reinstated, the company is taken to have continued in existence as if it had not been deregistered. A person who was a director of the company immediately before de-registration becomes a director again as from the time when ASIC or the Court reinstates the company. If it is determined that there has been insolvent trading, a director can be held personally liable for those liabilities.

Clearly, incurring taxation debts which cause a company to become insolvent, including as a corporate trustee, can also give rise to a director’s personal liability.

If you are aware of a company with outstanding tax liabilities you need to seek specialist taxation and solvency advice. Simply relying on what is commonly referred to as an “informal liquidation”, by relying on the de-registration provisions of the Act, is realistically not a viable option, unless the company truly has no present or contingent liabilities.

Often the advice to a client with a dormant company with outstanding liabilities is to voluntarily deregister the company, usually on the grounds of cost, and in the belief that it completely ends that company’s existence.

However, such advice is often given without a full appreciation of the provisions of Corporations Act 2001 (“Act”), because it ignores the fact that a company that has been voluntarily deregistered can easily be re-registered.

A number of recent cases in the Federal Court have illustrated the Commissioner of Taxation’s willingness and ability to reinstate previously deregistered companies, where those companies have had substantial amounts due to the Australian Taxation Office. The effect of this can come as a shock to those who believe that the liabilities of a deregistered company are ‘dead and buried’.

The Act allows a company to be voluntarily de-registered if the following criteria are satisfied:

  • all the members of the company agree to the de-registration;
  • the company is not carrying on business;
  • the company’s assets are worth less than $1,000;
  • the company has paid all fees and penalties payable under the Act;
  • thecompany has no outstanding liabilities; and
  • the companyis not a party to any legal proceedings.

 

A director or member of the company, amongst others, can initiate the process. If a company is de-registered, it is a statutory requirement that the directors of the company immediately before de-registration must keep the company’s books for 3 years after de-registration, with potential criminal ramifications if the books are destroyed in that time.

However, the Act also provides that a company can be reinstated by the Court if a person has been aggrieved by the de-registration, and the Court is satisfied that it is just that the company’s registration be reinstated.

Even if there is clear evidence that a company does not possess any assets to meet an outstanding claim for income tax liabilities this will not deter the Commissioner pursuing the re-registration of a company, and invariably, the Court will order the company to be reinstated.

The reason why the Commissioner seeks to reinstate companies where there is an outstanding taxation liability is so that the Commissioner can immediately place the company back into liquidation and appoint a liquidator to the company. Although a company’s resurrection only to immediately put it to death yet again seems counter-intuitive, the Courts have said it is in the public interest to do so, because it allows the provisions of the tax law and the Act to be properly followed. Furthermore, where outstanding taxes are owed, the Commissioner should not be deprived of the opportunity to pursue the claim.

It is to be expected that a liquidator appointed to a re-registered company could be funded by the Commissioner to undertake the usual duties that a liquidator undertakes when a company is placed under liquidation as soon as it is reinstated.

The types of duties that a liquidator must undertake are to:

  • establish that the company is insolvent;
  • determine when the company became insolvent;
  • investigate where there is potential insolvent trading claim against directors;
  • determine if there have been any preferential payments to creditors that may be recovered;
  • ascertain if company’s officers have committed offences under the Act; and
  • determine whether any recoveries could be made.

 

A liquidator has the ability to hold public examinations, seize books and records and gain access to property and detain persons relevant to the investigation. A liquidator also has the power to recover unreasonable related party transactions or preferential claims.

Each of these could be problematic for people who have deregistered a company with outstanding liabilities because when it is reinstated, a liquidator can then exercise powers to recover company property and to prosecute directors for potential offences under the Act.

In particular, if a company is reinstated, the company is taken to have continued in existence as if it had not been deregistered. A person who was a director of the company immediately before de-registration becomes a director again as from the time when ASIC or the Court reinstates the company. If it is determined that there has been insolvent trading, a director can be held personally liable for those liabilities.

Clearly, incurring taxation debts which cause a company to become insolvent, including as a corporate trustee, can also give rise to a director’s personal liability.

If you are aware of a company with outstanding tax liabilities you need to seek specialist taxation and solvency advice. Simply relying on what is commonly referred to as an “informal liquidation”, by relying on the de-registration provisions of the Act, is realistically not a viable option, unless the company truly has no present or contingent liabilities.
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Barry van Heerden

Barry van Heerden

  • Partner
  • Property and Commercial
  • Direct line: (07) 5506 8248
  • Mobile: 0403 452 455