Walking away and allowing a company to be wound up by the Court or deregistered. Is it really that simple?
In Australia, winding up an insolvent company requires the director to appoint a liquidator to undertake the formal liquidation process. A liquidation however is not free.
The costs of a liquidation may be prohibitive with directors choosing to ignore creditor’s warning letters, statutory demands and wind-up petitions. The company may have already ceased trading and there appears to be no incentive to address the outstanding debts.
What happens to the company if a director chooses not to act? Is it possible for a company to be deregistered without appointing a liquidator?
A word of warning before we dive deeper!
Debts of a company may become personal debts of a director. There is significant risk of personal exposure by simply “walking away”.
In comparison to the personal debts, the relatively low cost of a liquidation may be a cheaper option and provide directors with some certainty regarding their future personal exposure.
Accordingly, directors should act immediately and seek appropriate advice to allow them to make an informed decision about the possible outcome of any action or inaction taken. Shaw Gidley provide free preliminary advice regarding these matters and we are contactable on (02) 4908 4444. As outlined below, this is a complex topic!
Cost of a Liquidation
Information regarding the cost of a liquidation are discussed in detail in our article “How Do I Close Down My Company And How Much Does A Liquidation Cost?”.
In cases where assets and/or recoveries are available in the company
The proceeds from the sale of those assets are used to pay for the costs of the liquidation and if sufficient, dividends to creditors. In some cases, liquidators may also be able to recover payments made to certain creditors, such as the ATO, within the 6 months preceding the liquidation date (also known as preference payments) to cover some or all of the liquidation costs. In those cases, there may be no upfront cost to the director personally in appointing a liquidator.
If sufficient assets are available in the Company, the costs of the liquidation are free for the directors.
In reality there is always a cost to conduct a liquidation. Believe it or not, quite often, due to a liquidator’s statutory obligations, where there are insufficient funds to pay for a liquidation, the liquidator’s firm wears those costs in the form of unrecovered time charged.
If there are no assets available in the Company
A liquidator may ask a director to contribute funds to pay for the cost of the liquidation. At Shaw Gidley, we will cap the amount directors need to contribute towards the cost to wind up your company so that your liability in this regard is known. This may differ from the overall cost to wind up the company however.
Depending on the type, size, and complexity of a liquidation, the cost may vary between $10,000 to $15,000 for a simple creditor’s voluntary liquidation (insolvent companies). As a guide, with creditor's voluntary liquidations, Shaw Gidley estimates the following cost brackets:
|Simple Liquidation – Sole shareholder/director, less than 10 creditors, no assets, no disputes and no recoveries, no corporate regulator involvement
||$10,000 - $15,000
|Low complexity liquidation - More than 10 creditors, easily realisable assets, straightforward recoveries, minor disputes, no employees, no corporate regulator involvement||$15,000 - $50,000
|High complexity liquidation - numerous creditors including employees, multiple asset categories, secured creditor involvement, recoveries, complex disputes, corporate regulator involvement
While as a general rule the company structure provides protection from personal liability, directors can be exposed to personal liability in a large number of instances. Some of the most common company debts that attach to directors personally are due to:
- Personal Guarantees provided to creditors;
- In certain instances ATO tax obligations attaching to directors personally due to non-lodgement or late lodgement of taxation returns (including for unpaid superannuation);
- The Australian Taxation Office (“ATO”) issuing a Director Penalty Notice (“DPN”) with non-compliance resulting in tax liabilities attaching to directors personally. If directors do not update their personal address details on the ASIC database, they may not even be aware that the ATO have issued a DPN;
- Directors who continue to trade their company and incur debts whilst insolvent can become personally liable for any debts incurred;
- Various other personal exposures including:
- outstanding director and shareholder loans;
- certain environmental protection offences;
- certain liabilities to employees who have been injured;
- exposure resulting from a liquidator recovering ATO preference payments;
- statutory building insurance claims that attach personally; and
- many other obligations we could list!
Interest on some debts may be continuing to accrue with personal exposure continuing to increase! As can be seen, there are many exceptions to general rule that companies provide protection to directors! Accordingly, even if a company is deregistered the directors may still be left dealing with the company’s liabilities!
Taking no action and the possible outcomes
There are certain mechanisms for abandoned companies to be dealt with, including:
- Scenario 1 – Appointment of a liquidator by Court Order
- Scenario 2 – Deregistration of the company by ASIC
- Scenario 3 – ASIC winding up the company
Scenario 1 – Appointment of a liquidator by Court Order
A creditor can initiate legal action to have a company wound up. The minimum debt to wind up a company is $4,000. Additional legal fees can deter creditors from taking action, particularly where they are throwing away good money chasing bad debt.
Wind up actions are most commonly pursued by the ATO or the Worker’s Compensation Nominal Insurer. A Court appointed liquidator will subsequently undertake the winding up and conduct investigations.
Scenario 3 – ASIC winding up the company
ASIC has a discretionary power to wind up abandoned companies in certain circumstances.
ASIC are currently helping employees of abandoned companies who are owned employee entitlements to access the Government’s Fair Entailments Guarantee “FEG” Scheme. The FEG scheme allows eligible employees to claim unpaid outstanding entitlements in a liquidation.
Employees of abandoned companies can lodge a request with ASIC to wind up the company. ASIC will exercise its own discretion and consider various factors as outlined in its Regulatory Guide 242 prior to commencing the winding up of a company.
Scenario 2 – Deregistration of the company by ASIC
Two ways ASIC may deregister a company:
- Voluntary deregistration
- Strike-off action
Deregistration terminates the company as a legal entity, relieving the director from their obligations as officeholder with any remaining property of the company vesting in ASIC.
ASIC does not allow directors to deregister their company if it owes money or is insolvent.
To commence the voluntary deregistration process, a director will need to submit a Form 6010, making a declaration stating that the company has no outstanding liabilities, is not a party to any legal proceedings and the assets of the company are worth less than $1,000. This obviously means that the voluntary deregistration process is not available to an insolvent company!
Making a false and misleading statement to ASIC is a breach of section 1308 of the Corporations Act and carries a maximum penalty of 5 years imprisonment. Accordingly, directors should not apply for voluntary deregistration where a company has any outstanding debts.
ASIC initiated deregistration (Strike-off Action)
ASIC may initiate deregistration where a company:
- Has not paid its annual review fee within 12 months of the due date; or
- Has not responded to a compliance notice, has not lodged any documents in 18 months, and ASIC thinks the company is no longer in business.
The company’s status on the ASIC register will update to ‘SOFF’ (strike-off status). ASIC will send a letter to the company’s director and advertise their intention to deregister the company via the ASIC Published Notices website. In our experience, once ASIC has initiated deregistration, it is not unusual for the ATO to take Court action to wind up a company and have a liquidator appointed. This is further discussed below.
Unless the Director contacts ASIC, ASIC will proceed to deregister the company two months after the strike-off action commences. In addition, any of the company’s assets vest in ASIC on deregistration.
It is possible that a company is deregistered without the director’s knowledge, especially in circumstances where the company’s ASIC address details are not kept up to date. A director that continues to trade a deregistered company incurs all company debts personally.
Deregistration may still result in a liquidator being appointed
Creditors may seek to have a liquidator appointed after the strike-off process has been completed and the company is deregistered. This however involves taking steps to have the company reinstated with ASIC and then wound up, adding costs to the Court winding up process.
Creditor considerations to reinstate a company
Creditors should make an economic assessment of the cost and benefits of taking action to reinstate a company following deregistration. The expenses of reinstating the company and seeking to have a liquidator appointed need to be balanced against the probability of any return being received.
Accordingly, as a general rule, once a company is deregistered, the likelihood of a creditor acting reduces and, with the passing of time, diminishes.
How does the ATO approach the issue of abandoned companies?
The ATO will consider the cost of undertaking any further action, versus the likely benefit from undertaking the process of winding up a company. The ATO must be able to rationalise using taxpayers’ money to take action and may therefore consider the debt uneconomical to pursue.
Broadly, prior to considering if any action is required to wind up a company, the ATO will consider:
- The asset position of the debtor – Where the company has no assets to be used in satisfying the company debt, winding up the company may not be appropriate.
- The size and nature of the debt – The ATO may take action to stop the debt from continuing to escalate. In circumstances where the company is deregistered, there is no risk of further debts incurring. Where a company has been deregistered and there are large, unreported tax debts, the ATO will need to have the company reinstated to allow it to lodge any default assessments.
- The risk to the revenue
- The disposition of property may indicate that a debtor is divesting their assets or if it is evident that the debtor is taking steps to limit their ability to pay.
- The cost of liquidation – This not only includes a cost-benefit analysis of initiating liquidation proceedings but also the benefit of preventing the cost of escalating liabilities should they not act. The ATO will also consider the debtor’s full financial position, payment history and their ability to comply with the proposed offer.
Other general factors will also be considered including:
- The debtor’s compliance history, and the compliance history of related parties or entities;
- The age of the debt;
- The type of debt involved (e.g. the ATO may be more likely to pursue Superannuation Guarantee Charge debts as collection of SGC directly affects employees);
- The extent and seriousness of any taxation offences which may have been committed;
- The general conduct of the debtor or related parties or entities;
- Whether the taxpayer cannot be located;
- Whether the company has ceased to trade; and
- Public interest considerations, including preventing this type of conduct in the future.
We anticipate, particularly as more and more companies are abandoned and left to be deregistered, it is likely that the ATO will take steps to prevent this type of behaviour to deter similar future conduct. This will particularly be the case where directors may have had a number of companies which were subject to ASIC initiated deregistration in the past.
Deregistration may not prevent personal liability
As discussed, deregistration of a company will not bring to an end the director’s liabilities. Some tax obligations may also have attached to the director personally including PAYG, GST, superannuation, luxury car tax or wine equalisation tax due to late or non-lodgement of returns, or, as a result of the ATO issuing a Director Penalty Notice. In our experience, the ATO have become more aggressive over the years in pursuing certain personal debts from directors.
Directors seeking certainty and finality should always bring to an end their company’s financial affair by appointing a liquidator, allowing directors to move on with their life with some degree of certainty around future personal exposure.
Even if a company has been deregistered, directors should consider seeking appropriate professional advice to identify any potential future personal exposure.
Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.