It is often assumed that once a company has been liquidated, that company is ‘dead and buried’.   However, recent cases have shown this to be a misconstrued understanding.

The Corporations Act 2001 (Cth) (“Corporations Act”) provides the ability to reinstate the registration of a company in a very broad range of circumstances.

The Commissioner of Taxation has, in recent years sought to reinstate companies that have been liquidated and deregistered.

Melren Farms case

In a decision1  handed down in June 2013, the Deputy Commissioner of Taxation (“Commissioner”) was successful in having a previously liquidated company reinstated.

The case involved Melren Farms Pty Ltd (“Melren”), a company that was first registered with the Australian Securities and Investments Commission (“ASIC”) in 1990.  Melren conducted a potato growing business until 2005, at which time Melren was placed into liquidation as a result of a voluntary wind up.  Melren was officially deregistered in 2007.

However, in 2012 and 2013, an investigation of other entities in the Melren group was conducted by a liquidator.  This liquidator identified a number of potential claims in relation to a series of transactions entered into by Melren, which could have resulted in additional tax.  The Commissioner lodged a Notice of Reinstatement Application with ASIC in relation to Melren.  The purpose of the Reinstatement Application was to enable the Commissioner to reinstate the company and then wind-up Melren in a manner that would permit a liquidator to carry out further investigations with the aim of bringing claims against the company’s directors and other members of the Melren group.

The former directors of Melren objected against the reinstatement, meaning that the Federal Court (“Court”) was required to decide whether ASIC should reinstate the company.

The former directors claimed that it was unjust for Melren to be reinstated (6 years after it was deregistered), stating that there was a significant delay in lodging the Reinstatement Application, coupled with the fact that the Commissioner should have identified or been aware of the transactions at the time Melren was originally in liquidation.  However, the Federal Court held in favour of the Commissioner, stating that it was satisfied that it was ‘just’ and ‘appropriate’ to reinstate Melren.  The Federal Court also stated that the former directors did not appropriately challenge the Commissioner’s arguments for reinstatement.

What the Corporations Act says

The registration of a company can be reinstated by one of two methods:

  • Application to ASIC where certain criteria are satisfied (for example, where there are grounds to believe the deregistration was incorrect); or
  • Apply to the court for an order that ASIC reinstates the company.

 

In relation to the second point above, the court may make an order that ASIC reinstate the registration of a company if:

  • an application for reinstatement is made to the court by a person aggrieved by the deregistration; or a former liquidator of the company; and
  • the court is satisfied that it is just that the company’s registration be reinstated.
  • If the reinstatement action is successful, the company is returned to a registered status as if it was never deregistered.  In other words, the company is reinstated as though it had never ‘died’.
  • Consequently, a reinstated company could potentially be found to be trading whilst insolvent, exposing the directors of that company to personal liability of any outstanding amounts.

Cause for reinstatement

There are many aspects a liquidator can look at when a company is in liquidation.  Some of the aspects that are often investigated and may potentially lead to the reinstatement of a deregistered company include:

  • Phoenix activity:  this typically involves directors who transfer assets of an indebted company into a new company of which they are also directors.  The directors then place the initial company into administration or liquidation, with no assets to pay creditors, whilst continuing the business operations in the new company.
  • Insolvent trading:  where directors continue to operate the business where the company is unable to pay its debts as and when they fall due.  Some key indicators of insolvency include poor cash flow, incomplete financial records, continuing loss-making activity, significant unpaid tax and superannuation liabilities.
  • Preferential payments: generally preferential payments arise when the company directors enter into transactions which favour particular creditors over its other creditors (such as paying one creditor but not another).
  • Uncommercial transactions:  this may involve directors entering into transactions that are not in the best interests of the company, which serve to advantage some creditors while disadvantaging the balance of creditors (for example, sale of a former business for less than market value consideration).

 

  • Unfair loans:  broadly, a loan contract may be declared ‘unfair’ if it creates a significant imbalance in the obligations and rights of the consumer and the lender (for example, unreasonable exit fees to refinance).

Clients should be made aware of the circumstances in which a company can be reinstated in order to manage expectations.

Should you require further information regarding liquidations or the possibility of a company being reinstated, please contact your local William Buck advisor.

[1] Deputy Commissioner of Taxation v Australian Securities and Investments Commission [2013] FCA 594 (17 June 2013)