Closing a solvent company through a members’ voluntary winding up
Overview
A company does not cease to exist merely because it has stopped trading.
It may still hold cash, investments, property or other assets. It may also have outstanding tax obligations, employee entitlements, shareholder loan accounts, contracts or other liabilities that need to be resolved before the company can be closed.
A members’ voluntary winding up, commonly referred to as a members’ voluntary liquidation or MVL, provides a formal process for dealing with those matters.
It is available where the company is solvent and its directors can form the opinion that all company debts will be paid in full within 12 months after the winding up begins.
The liquidator takes control of the company, deals with its remaining assets and liabilities, distributes the surplus to its members and completes the steps required for the company to be deregistered.
When is an MVL appropriate?
An MVL is commonly used after:
- a business or substantial asset has been sold;
- a company has completed the purpose for which it was established;
- the owners have retired or ceased trading;
- a corporate group is being simplified;
- an investment or property-holding company is no longer required; or
- a company has accumulated assets that must be dealt with before it can be closed.
It may also be appropriate where a company has been inactive for some time but still has unresolved balance sheet items, including shareholder loans, related-party balances or historical reserves.
Voluntary deregistration is not always an alternative.
Among other requirements, a company applying for voluntary deregistration must have no outstanding liabilities and assets worth less than $1,000. All members must agree to the deregistration, the company must not be conducting business or involved in legal proceedings, and all ASIC fees and penalties must have been paid.
Where material assets remain, or the company’s affairs require a formal process, an MVL will generally be the appropriate method of bringing the company to an end.
The directors must first establish solvency
An MVL begins with the directors, not the liquidator.
A majority of the directors must make an inquiry into the company’s affairs and form the opinion, at a directors’ meeting, that the company will be able to pay its debts in full within a period not exceeding 12 months after the winding up begins.
The directors record that opinion in a declaration of solvency. A statement of the company’s affairs must be attached, setting out:
- the company’s property and the amount expected to be realised from it;
- the company’s liabilities; and
- the estimated expenses of the winding up.
The declaration must be based on the company’s actual financial position. It is not enough for the balance sheet to show that assets exceed liabilities. The directors must consider whether those assets can be realised in time and whether sufficient funds will be available to pay all company debts within the stated period.
This may require consideration of outstanding tax returns, disputed claims, guarantees, employee entitlements, contractual obligations, litigation and assets that cannot be quickly converted into cash.
A director who makes the declaration without reasonable grounds for the opinion commits an offence.
If the company’s debts are not paid or provided for within the period stated in the declaration, the legislation creates a presumption, unless the contrary is established, that the director did not have reasonable grounds for making it.
How is the appointment made?
The declaration of solvency is lodged with ASIC using Form 520 before notice of the members’ meeting is sent.
The members then meet to consider a special resolution that the company be wound up voluntarily. The resolution must ordinarily be passed within five weeks after the declaration is made, unless ASIC allows a longer period.
At the same meeting, the members appoint a liquidator. The winding up begins when the special resolution is passed.
The company must notify ASIC of the special resolution, and the liquidator must notify ASIC of the appointment. Notice of the winding-up resolution must also be published on ASIC’s Published Notices website.
What happens after the appointment?
The company continues to exist, but control of its affairs passes to the liquidator.
The directors are generally prevented from managing the company’s business or dealing with its property unless authorised by the liquidator or the Court. They remain responsible for assisting the liquidator and must provide the company’s books, records, property and information.
Current and former officers may be required to:
- explain the company’s transactions and financial position;
- identify its assets and liabilities;
- provide accounting and taxation records;
- assist with the collection of debts;
- clarify related-party transactions and loan accounts; and
- help complete outstanding financial statements and tax returns.
What does the liquidator deal with?
The work required will depend upon what remains in the company.
A company holding only cash and maintaining current financial records may be relatively straightforward. A company holding property, investments, disputed debts or poorly documented related-party accounts may require considerably more work.
The liquidator will generally:
- take control of the company’s bank accounts and records;
- identify and secure the company’s assets;
- collect debts owed to the company;
- sell or transfer assets where appropriate;
- determine the company’s creditors and liabilities;
- deal with employee entitlements;
- reconcile director, shareholder and related-party loan accounts;
- complete outstanding statutory and taxation requirements;
- pay or provide for creditor claims; and
- determine the amount available for distribution to members.
Although the company is expected to be solvent, the liquidator cannot simply rely on the balance sheet supplied at appointment. The assets, liabilities and members’ entitlements must be verified before the company’s surplus can be distributed.
ATO notification and tax clearance
The liquidator must deal with the company’s taxation affairs before making final distributions and completing the liquidation.
The liquidator must notify the Commissioner of Taxation after appointment.
The ATO will then advise the liquidator of the amount that should be retained for tax-related liabilities that are, or may become, payable. Until that advice is received, the liquidator will not distribute any assets.
If there are outstanding income tax returns, business activity statements or other lodgements, these will generally need to be completed. Any resulting tax liabilities, amendments, refunds or other issues must then be dealt with before final clearance can be obtained.
In practice, distributions to members will generally not be completed until the liquidator is satisfied that the company’s tax position has been finalised and sufficient funds have been retained for any amount that remains payable.
Other clearances
There is no single list of clearances that applies to every MVL.
Depending on the company’s activities and assets, the liquidator may need to obtain balances, releases or confirmation from:
- state or territory revenue authorities;
- local councils and water authorities;
- workers compensation authorities or insurers;
- superannuation funds;
- secured creditors and financiers;
- landlords;
- licensing authorities; or
- other industry regulators.
The purpose of these enquiries is to ensure that all material liabilities have been identified and that funds are not distributed to members while a creditor or statutory liability remains outstanding.
Payment of creditors and distributions to members
Creditors must be paid, or properly provided for, before the surplus can be distributed to members.
The liquidator must allow for:
- the costs and expenses of the winding up;
- employee entitlements;
- secured and unsecured creditor claims;
- taxation and statutory liabilities;
- interest where applicable;
- disputed or contingent claims; and
- the expected cost of completing the liquidation.
Once sufficient provision has been made, the liquidator may make one or more interim distributions to members. The final distribution is made after the remaining liabilities and costs have been resolved.
The amount received by each member will depend upon the company’s constitution, the rights attaching to each class of shares and the source of the funds being distributed.
The principle established in Archer Brothers Pty Ltd (in voluntary liquidation) allows a liquidator to appropriate a distribution against a particular fund or reserve where that fund is properly identified in the company’s accounts.
For example, the company’s records may separately identify paid-up share capital, retained profits or a capital profits reserve. The liquidator may determine the order and source of distributions from those separately identified accounts.
This does not give the liquidator an unrestricted discretion to choose the taxation treatment of a payment. The distribution must be supported by the company’s records and the liquidator’s accounts.
Tax advice should therefore be obtained before the appointment, particularly where the company has substantial retained profits, capital reserves or pre-CGT assets or gains.
What if the company is not as solvent as expected?
The liquidator must continue to assess the company’s solvency throughout the appointment.
If the liquidator forms the opinion that the company will not be able to pay or provide for all of its debts within the period stated in the declaration of solvency, the Corporations Act requires the liquidator to act as soon as practicable.
The liquidator must either:
- apply to the Court for the company to be wound up in insolvency;
- appoint a voluntary administrator; or
- convene a meeting of creditors.
If a creditors’ meeting is convened, the winding up proceeds after the meeting as a creditors’ voluntary winding up. The creditors may also appoint another person as liquidator.
An MVL does not therefore automatically remain a solvent winding up merely because the directors signed a declaration at the beginning.
How long does an MVL take?
The 12-month period in the declaration of solvency is the period within which the company’s debts must be paid or provided for. It is not a statutory deadline for the liquidation itself to be completed.
A simple MVL may be substantially completed within several months.
A longer period may be required where the company has:
- property or investments to sell;
- outstanding tax returns;
- complex shareholder loan accounts;
- disputed or contingent liabilities;
- incomplete records;
- litigation;
- multiple classes of shares; or
- unresolved issues between members.
ATO clearance and other statutory confirmations can also affect the timing of the final distribution.
Bringing the company to an end
Once all assets have been dealt with, all liabilities have been paid or provided for, the company’s taxation and other material affairs have been resolved and the surplus has been distributed, the liquidator can end the administration.
A final meeting of members is no longer required.
The liquidator lodges an end-of-administration return with ASIC. The return must be lodged within one month after the external administration ends.
ASIC then deregisters the company at the end of the three-month period following lodgement, unless the Court orders otherwise. On deregistration, the company ceases to exist.
Preparation can reduce the time and cost
An MVL is easier to complete where the company’s accounting and taxation records are current before the appointment.
The directors and the company’s accountant should identify and address, as far as possible:
- outstanding tax and statutory lodgements;
- unpaid employee entitlements and superannuation;
- director and shareholder loan accounts;
- related-party balances;
- secured debts and registered security interests;
- contingent or disputed claims;
- assets held by or for other entities;
- the company’s share structure;
- historical reserves and retained earnings; and
- the records supporting the company’s franking account.
An MVL is not simply an administrative step to remove a company from the ASIC register. It is a formal winding up in which the company’s assets, liabilities, taxation affairs and members’ interests must be resolved before the company can cease to exist.
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