A company will reach the end of its useful life for many reasons. Whatever this reason, an important decision must be made at this point to ensure the method of deregistration provides the best outcome for shareholders and mitigates the risk of adverse future action.
A company can be deregistered by one of two methods:
- An application to the Australian Securities and Investment Commission (‘ASIC’), or
- Appointing a liquidator to formally wind up its affairs.
The two key factors when determining the deregistration method are as follows:
1. Best tax outcome for shareholders
A benefit of a members’ voluntary liquidation involves the tax treatment of distributions being different when these distributions are made by a liquidator.
An ordinary distribution out of a company containing CGT exempt amounts (i.e. small business 50% active asset reduction) would mean shareholders pay tax on the distributions at their marginal rates. Where companies are formally liquidated, any CGT exempt amounts may be distributed to the benefit of shareholders in the most tax efficient manner.
2. Risk of reinstatement
Any person who was a director, secretary or member of a company at the time of deregistration, or (most importantly from a risk perspective) a third party, can apply to ASIC or Court for reinstatement of a deregistered company. In the 12 months to April 2019, approximately 10,000 companies were reinstated, which as a percentage of companies deregistered in this time is about 8%.
If a company isn’t formally wound up by an experienced practitioner it increases the risk that a third party with claims against the company emerges and the Company being reinstated to deal with the claim. The risk of previously unknown claims increases the closer the cessation of trading is to the deregistration date.
The consequences of reinstatement are:
- When reinstated it is taken that the company has continued in existence as if it hadn’t been deregistered therefore subject to the requirements of the Corporations Act (i.e. lodging annual returns, paying fees, producing tax returns).
- The persons appointed as Director at the time of deregistration are also reinstated.
- Additional costs to deal with the reinstatement, including legal fees and payment of outstanding claims.
The appointment of a Liquidator to wind up the company can mitigate the above consequences in the following ways:
- The Liquidator once appointed becomes responsible for statutory lodgements of the company.
- If a liquidation precedes a reinstatement, it is taken that the liquidation continued after the original deregistration and Director powers and responsibilities are not automatically restored.
- The liquidator can seek a fee waiver from ASIC for ‘missed’ lodgements when the Company was deregistered.
- A liquidator will advertise for and investigate claims of creditors to reduce risk of unknown claims emerging after deregistration.
Should any of your clients be considering finalising the affairs of one or more of their companies, William Buck’s experts would be happy to assist in the planning and conduct of this process to ensure the best outcome for the client.
If you have any questions, please contact our Business Recovery Specialists