How winding up a company works in Australia

Every company registered with the Australian Securities and Investments Commission (ASIC) comes to an end only one way: it is deregistered. A company that stops trading but stays on the register does not stop existing. It continues to owe the lodgements and fees that come with registration, and its directors keep their duties, until a formal step is taken to end it.

For a solvent company there are two formal routes, voluntary deregistration and a members' voluntary winding up, and both live in the Corporations Act 2001 (Cth) (the Act) (full text). Which one is open to you turns on a single question: can the company pay its debts as they fall due? This article walks through the machinery of both routes, who does what, and what changes if the answer to that question is no.

The threshold question: is the company solvent?

Solvency is defined in s 95A of the Corporations Act 2001 (Cth): a company is solvent if, and only if, it is able to pay all its debts as and when they become due and payable. A company that is not solvent is insolvent. The test is about cash flow, not net assets. A company sitting on valuable property can still be insolvent if it cannot pay its bills on time, and a company with almost nothing can be solvent if its obligations are comfortably met.

The distinction drives everything that follows. The two clean exit routes are only available to solvent companies. If the company is insolvent, a different part of the Act applies, the winding up is conducted for the benefit of creditors rather than members, and the directors carry heightened personal risk. Establishing which side of the line the company sits on, on current figures, is therefore the first job, and it is why advisers ask for the books before anything else.

Who does what when a company winds up

The machinery has a small number of moving parts, and each has a defined role:

• Directors: assess solvency, sign the declaration of solvency where one is required, and remain subject to their duties under the Act until the company is deregistered.
• Members (shareholders): decide by special resolution that the company should be wound up, and appoint the liquidator.
• Liquidator: a registered insolvency practitioner who takes control of the company's affairs, realises its assets and distributes the proceeds.
• ASIC: keeps the register, receives the notices and applications, publishes notice of proposed deregistration and performs the deregistration itself.

Around these four groups sit the advisers. The accountant produces the figures the solvency decision rests on, and the lawyer checks the validity of each step and the directors' exposure along the way. For a small, debt-free company, the members and ASIC may be the only actors in the process.

Route one: voluntary deregistration

A company that has stopped carrying on business can apply to ASIC to be deregistered under s 601AA of the Act. The application is lodged on Form 6010, and can be made by the company, a director or a member. ASIC will only accept it if every one of these conditions is met:

• All members agree: the deregistration needs the agreement of every member of the company.
• No business: the company is not carrying on business.
• Small assets: the company's assets are worth less than $1,000.
• Fees paid: all fees and penalties payable under the Act have been paid.
• No liabilities: the company has no outstanding liabilities.
• No proceedings: the company is not a party to any legal proceedings.

Anything that stands in the way of those conditions has to be dealt with before the application is lodged. An asset worth more than $1,000, a licence or intellectual property should be sold or transferred first, because the application includes a declaration that all six conditions are true. In practice the company should also finalise its tax and superannuation obligations before applying, as the ATO sets out.

Once the application is lodged, ASIC gives notice of the proposed deregistration on its database and publishes a notice. When two months have passed since publication, ASIC may deregister the company, as ASIC explains. Deregistration is the point at which the company ceases to exist. Under s 601AD of the Act, its remaining property vests in ASIC, its directors must keep the company's books for three years, and it can no longer trade, hold assets or take action as a body corporate. Deregistration is not an amnesty: officers can still be liable for things done before the company was deregistered.

Route two: members' voluntary winding up

A company whose assets exceed the $1,000 threshold, or that has debts to be paid out of its own property, cannot simply deregister. The alternative is a members' voluntary winding up under Part 5.5 of the Act, which gives the members control of the process through three steps.

The declaration of solvency

Before the members vote on anything, a majority of the directors may make a written declaration of solvency under s 494 of the Act, stating that they have inquired into the company's affairs and formed the opinion that it will be able to pay its debts in full within 12 months of the winding up starting. A statement of affairs must be attached, setting out the company's property, its liabilities and the estimated expenses of the winding up. The declaration must be made at a directors' meeting, lodged with ASIC before the notice of the members' meeting is sent out, and followed by the winding-up resolution within five weeks.

The declaration is not a formality. Section 494 makes it an offence for a director to make the declaration without reasonable grounds for the opinion, and if the company's debts are not paid in full within the period stated, the Act presumes the directors lacked reasonable grounds unless the contrary is shown.

The special resolution

Under s 491, the company is wound up voluntarily if it resolves to do so by special resolution. A special resolution is passed only if at least 75% of the votes cast by members entitled to vote support it, as s 250MA of the Act provides. Once the resolution is passed, the company must lodge a notice of it with ASIC within seven days and arrange for publication of the prescribed information.

The liquidator

At the same general meeting, the members appoint a liquidator, as s 495 requires. Only a registered liquidator can act in the role: liquidators are registered with ASIC under the Insolvency Practice Schedule in Schedule 2 of the Act, and ASIC maintains a public Register of Liquidators. From the moment the resolution is passed, the company must stop carrying on business except so far as the liquidator thinks necessary to dispose of it properly, under s 493.

The liquidator then realises the assets, pays the company's debts in full and distributes anything left to the members. The winding up ends with a final meeting of members, the lodgement of the final documents with ASIC, and deregistration. The company's corporate existence continues throughout the winding up and ends only at deregistration.

What happens if the company is insolvent

If the company cannot pay its debts as they fall due, the voluntary routes are not available, and the directors' position changes materially. Two duties deserve particular attention. Under s 588G of the Act, a director must not allow the company to incur a debt while it is insolvent, where there are reasonable grounds to suspect that it is insolvent or will become so. That section is a civil penalty provision, and the same conduct is a criminal offence if the director's failure to prevent the debt was dishonest. Under s 286, the company must also keep financial records that correctly record and explain its transactions, and retain them for seven years. Directors who have let their record-keeping slide discover this at exactly the wrong moment.

An insolvent company is dealt with through different processes: a winding up in insolvency conducted for the benefit of creditors, or voluntary administration. In either case the members lose control of the outcome. The liquidator's job becomes realising the assets and paying creditors in the order the Act prescribes, rather than returning money to shareholders. A director who suspects the company is insolvent should not keep trading and hope. The risk under s 588G crystallises when the company incurs a debt while insolvent, and advice obtained afterwards cannot undo that.

Where the process commonly goes wrong

Winding up goes wrong in a handful of predictable ways:

• The company is parked but never deregistered: A company that has stopped trading but stays on the register still owes ASIC its annual review fees and lodgements, and its directors keep their duties. The cost of doing nothing quietly accumulates, and the directors' personal exposure does not run down.
• Assets over the threshold are overlooked: Deregistration is only available while assets are worth less than $1,000. A company with a vehicle, equipment or stock above that must dispose of or distribute the assets first and wait out the notice period, or use the winding-up route instead.
• Property left behind vests in ASIC: Anything the company still owns when it is deregistered vests in ASIC under s 601AD, and retrieving it afterwards means going through a reinstatement application. Realising assets before deregistration is far cheaper than recovering them after it.
• The solvency assumption fails mid-winding-up: If the liquidator forms the opinion that the company will not pay its debts in full within the period stated in the declaration, s 496 obliges them to wind the company up in insolvency, appoint an administrator, or convene a meeting of creditors, and the creditors may replace the liquidator the members chose. The winding up then proceeds as a creditors' voluntary winding up.
• The special resolution fails: Winding up needs 75% of the votes cast. If the members cannot reach that threshold, the company can be stuck: deregistration may be unavailable because of the company's assets, and the voluntary winding up cannot proceed without the resolution.

When to bring in a lawyer, accountant and liquidator

Winding up rewards early advice. An accountant's first job is to establish solvency on current figures and to prepare the statement of affairs if a declaration of solvency is contemplated. A lawyer checks the process at each step: whether the special resolution was validly passed, whether the declaration and the notices were lodged on time, and what personal exposure the directors carry, particularly if the company is insolvent or close to it. If the winding-up route is chosen, the liquidator must be registered with ASIC, and agreeing the liquidator's remuneration when they are appointed avoids disputes later.

A company that is already insolvent should not delay. Directors in that position typically need advice as soon as they first suspect the company cannot pay its debts, because the insolvent trading duty is assessed from the moment a debt is incurred while the company is insolvent, not from the moment the problem becomes undeniable.

The declaration of solvency is where personal risk concentrates

For a solvent company, the whole process turns on one document signed before the members ever vote: the declaration of solvency. It commits the directors to an opinion that the company can pay everything it owes within 12 months. Signed on reasonable grounds, it puts the winding up on rails. Signed on hope, s 494 converts it into an offence, with a statutory presumption working against the directors if the debts are not in fact paid.

The way to control the process is to answer the solvency question early, on current figures, with an adviser in the room. For a solvent company that means a clean deregistration or a members' voluntary winding up ending with ASIC deregistering the company. For a company close to insolvency, the same early assessment separates a planned exit from a claim under s 588G. A conversation with a lawyer while the books are still in order is a small cost measured against either outcome.