Attwood Marshall Lawyers Commercial Litigation Partner Charles Lethbridge looks at how companies hoping to keep on top of debt can restructure or consolidate business entities that no longer trade or represent any commercial purpose.
Introduction
After a few years of unprecedented pressure, many companies are looking for ways to ease business pressure brought about by the recent economic downturn and a looming recession.
While the Reserve Bank of Australia’s (RBA) aggressive cash rate response aims to steady inflation, key trade indicators continue to trend downwards, and external administrations have recently surged. Another key indicator, the number of credit enquiries undertaken by businesses, has increased recently by a massive 87 per cent year-on-year, signalling increased caution amongst businesses and declining business confidence.
The credit crunch in recent months, brought about by the RBA’s monetary policy, has meant that many companies have been unable to refinance or raise funds to maintain liquidity. Many companies may consider ceasing trading.
In this article, we look at the alternatives available to companies to closing a company.
It may be a big step: recognising when a spiralling corporate structure should be hemmed in. Directors could have spent years building up a network of subsidiaries or related businesses, whether for tax or legal reasons, or for fulfilling a corporate strategic need.
But in the current economic climate of rising interest rates, supply chain disruptions and inflation, it may be time for companies to start reassessing that sprawling network.
If a company is wanting to close its business and move in another direction, there are options available which could deliver the best outcome for all stakeholders, including creditors and shareholders, if it is undertaken properly.
On the informal side, a company can reach settlements with creditors or make payment arrangements with them, for example, the Australian Tax Office (ATO). Alternatively, they could restructure their debts or implement new strategies to turn around their businesses.
There are also more formal solutions such as liquidation. Company directors are aware that their company can be ordered into liquidation by a Court at the petition of a creditor, but what about voluntary liquidation?
For companies that are solvent and that want to rejig their corporate structure, voluntary liquidation allows them to dissolve dormant entities that are no longer being used – freeing up capacity to satisfy outstanding liabilities elsewhere in the business.
A company may have ceased business operations, but it will stay in existence and require ongoing maintenance until it is deregistered. If there is no incentive to keep that company alive, it ought to be deregistered.
If a company has assets worth $1,000 or less, the company can be deregistered on request. Otherwise, it must be voluntarily wound up.
Here, we explore these two formal processes in greater detail.
1. Voluntarily Deregistering a Company
A company is only eligible to apply for voluntary deregistration if all its members have agreed to go down that path. The company’s assets must be worth less than $1,000 and it cannot be conducting any business, have any outstanding liabilities or be involved in any legal actions.
Company directors also need to make sure that all outstanding fees and penalties have been paid to the Australian Securities and Investments Commission (ASIC). Otherwise, any application for deregistration will be rejected. Likewise, all tax and super obligations must be settled with the ATO before the deregistration process is completed. If a company holds an Australian Financial Services Licence or an Australian Credit Licence, these must also be cancelled.
ASIC recommends that deregistration applications are submitted at least two weeks before the company’s annual review fee is due. That way, the fee for the following year will be cancelled before it is automatically renewed.
Once a company is deregistered, it no longer exists as a legal entity – which means any lawsuits against that company come to an end, and no new legal proceedings can be launched against it.
However, company directors must be cautioned against seeking to deregister a company to escape creditors or pending litigation against the company. A company can be reinstated after it has been deregistered by way of an application to ASIC, or pursuant to an order of the Court.
A Court order for reinstatement can be sought by entities who are disadvantaged by a company’s deregistration, including creditors and shareholders of the company.
2. Winding Up a Solvent Company
A members’ voluntary liquidation is available for companies with assets worth over $1,000. There are several steps to winding up a solvent company. The first is that most directors must lodge an official declaration of solvency, setting out their belief that the company will be able to pay off its debts within a year of the winding up process beginning. Members must then vote on, and pass, a special resolution to wind up the company. At least 75 per cent of members need to be in favour.
A notice must then be submitted for publication on the ASIC website, after a liquidator is appointed and begins the process of winding up the company. The liquidator’s role is to take steps to confirm the liabilities of the company, correspond with the tax authorities to obtain final tax clearance, to distribute any remaining assets of the company to members, and to arrange for a final meeting of shareholders to be held to finalise the liquidation and lodge minutes of the final meeting with ASIC.
The winding up itself is usually conducted by a registered liquidator, typically a chartered accountant from an accounting firm. The procedure for embarking upon a members’ voluntary liquidation is set out in Part 5.5 of the Corporations Act 2001 (Cth).
Attwood Marshall Lawyers – helping business owners navigate difficult times
With a dedicated insolvency, litigation and dispute resolution team, it is our intent to support businesses when they are facing difficult times, helping them understand their options for either getting their business through financial uncertainty or winding up a company as cost-effectively and efficiently as possible. We work closely with specialist insolvency accountants in this area to make sure you get the right advice on all aspects of this complex area of law.
With over 75 years’ experience helping businesses of all shapes and sizes, we thoroughly understand the processes and ramifications of insolvency and the toll this can take on business owners.
For more information or further advice, please contact our Commercial Litigation Department Manager Amanda Heather on direct line 07 5506 8245, mobile 0425 260 837, or email aheather@attwoodmarshall.com.au
