Different ways a business can close

Voluntary deregistration

Voluntary deregistration shuts down your company as a legal entity and removes all obligations of the officeholders including paying annual ASIC fees, lodgement of reports and updating company details.

A company can only become deregistered if it follows certain criteria. If your company owes money to creditors or is insolvent and cannot pay back its creditors, deregistration is not an option. If this is the case, you will need to involve a liquidator.

Before you voluntarily deregister your company, you will need to fulfil these requirements:

• all members of the company agree to deregister

• the company is not conducting business

• the company's assets are worth less than $1000

• the company has no outstanding liabilities (e.g. debts)

• the company is not involved in any legal proceedings

• the company has paid all fees and penalties payable to ASIC, and

• it is recommended that all the company’s tax and superannuation obligations are up to date. To find out what you need to do, visit the Australian Taxation Office's website. 

If your company does not fulfil these requirements, it likely will need to be wound up by a liquidator. See below for more details.

It is important to note that even if your company is worth less than $1000 before it is deregistered, all remaining assets vests in either ASIC or the Commonwealth. As such, you should ensure that all company assets are dealt with accordingly before it is fully deregistered. This is because once a company does not exist as a legal entity, the officeholders no longer have legal rights to the company’s assets.

Making false or misleading statements carries a heavy penalty where some offences can lead to 5 years imprisonment. It is therefore recommended that before you voluntarily deregister your company, you seek legal advice if you are unsure, and in any event, conduct thorough searches including:

• share registries - if your company owned shares, regardless of whether the shares are held beneficially or as a trustee

• land titles offices - if your company owned real property, or held any other interest over real property e.g. mortgage or caveat and

• bank accounts - regardless of whether your company owned the account beneficially or as a trustee.

Steps to Winding up a company

If your company is worth more than $1000 and is solvent, it goes through the process of winding up.

Winding up a company involves selling a company's assets and distributing the proceeds amongst creditors and shareholders.

Step 1: Declaration of Solvency

In order for the deregistration of a solvent company, a majority of directors need to make a Declaration of solvency. This informs ASIC that you believe you will be able to meet pay back all creditors in full within 12 months of the commencement of the winding up.

The form that must be signed is called a 520 form.

Step 2: Special Resolution

After the lodgement of the 520 form, a special resolution must be passed by the company members to wind up the company. They must have 21 days of notice in writing of the meeting to vote on the resolution. In order for the winding up to go ahead, 75% or more of members have to vote in favour of resolution. The resolution will also appoint an accredited liquidator or liquidators. The formal date the ‘winding up’ begins is the date this resolution is passed.

This step requires the lodgement of the 205 Form (notification of resolution) and the liquidator needs to lodge the 505 Form to advise ASIC of their appointment as liquidator in charge of winding up.

Step 3: Notice of Special Resolution

After the special resolution has passed, it must be published on ASIC’s Published notices website by the end of the next business day. To do this, you will need to sign up to the website.

Step 4: Liquidator conducts winding up

The liquidator begins the process of winding up. They lodge with ASIC a list of receipts and payments from debtors and creditors on the anniversary of their appointment as liquidator. The form required for this is Form 5602. 

If the liquidator does not believe the company is solvent during this process they must wind up in insolvency and appoint a voluntary administrator.

Step 5: Liquidator finishes the winding up process and lodges final documents

After the liquidator finishes winding up, they must submit the 5603 Form (End of administration return) within one month. The company will then be deregistered by ASIC within three months after 5603 has been lodged.

Effects of Deregistration

When a company is deregistered, it's still shown on ASIC registers. The status will show as 'Deregistered'. 

What happens to company records?

Under the Corporations Act 2001, all records are property of ASIC after deregistration however they should not be sent to ASIC. The directors of the company prior to deregistration must keep the company’s records for 3 years. If the company is being liquidated, the liquidator must keep company books and records for five years after deregistration.

Winding up an insolvent company

If your company is insolvent, it cannot be in business or trading as per usual. If a company does indeed conduct business heavy penalties applies under the Corporations Act. There are different ways to go about this as we will discuss below. 

Voluntary administration

If you’ve received advice that your company can return back to solvency, you can appoint a qualified liquidator who will be appointed as voluntary administrator. 

The voluntary administrator’s job is to bring the company back into solvency through the settling of debts in the best way possible. This can be the best course of action in some cases.

The voluntary administrator takes control of the company and investigates and reports to creditors about the company’s financial standing. If they believe that the company cannot be saved, the voluntary administrator arranged the company’s affairs in such a manner that would lead to a better return to creditors than if the company shut down or wound up. These aims are expressly written in a deed called the DOCA (Deed of Company Arrangement).

The Voluntary Administration Process

Step 1: A voluntary administrator is appointed.

A voluntary administrator can be appointed by:

• the directors (by resolution of the board and in writing)

• a secured creditor (with a security interest in all or substantially all of the company’s property)

• a liquidator (or provisional liquidator).

Voluntary administration begins on the appointment of the voluntary administrator.

Step 2: Meeting of creditors

The voluntary administrator must hold the first meeting of creditors within eight business days of being appointed, unless the court allows an extension of time.

At least five business days’ notice of the meeting must be given to creditors.

• Creditors can vote at the meeting to:

• replace the administrator, and/or

• form a committee of inspection.

Step 3: Investigation and report

The voluntary administrator will investigate the affairs of the company and create a report to the outstanding creditors on the alternative options available to the company. These will be discussed at the next step.

Step 4: Second meeting of creditors

In this meeting the creditors and the voluntary administrator must decide the company’s future. This meeting must occur within 25 business days of being appointed. The creditors can decide to:

• Return the company back to the directors.

• Accept a DOCA (as discussed above) which will need to be signed within 15 business days of the meeting.

• Put the company into liquidation. This would lead to the voluntary administrator to become the liquidator.

Role of the voluntary administrator

The voluntary administrator must follow the above steps. By taking control of the company, they have the full extent of power of the directors, where they can sell or close the company business and sell individual assets. Indeed, while the voluntary administrator is appointed by the company directors, they are meant to be fair and impartial, acting in the best interests of both the creditors and the directors. The voluntary administrator is also responsible for reporting to ASIC possible offences by people involved in the company.

After the creditors have made their decision, the voluntary administrator must make a detailed account of all receipts and payments made with ASIC. 

The voluntary administrator, if they incur and expenses during their appointment, they are paid with the available assets of the company. If there is insufficient funds available, the administrator is personally liable to pay these costs. As such, they must decide whether to continue to use or occupy property owned by another party to conduct their investigation.

Deed of Company Arrangement

If a company enters a DOCA, the deed must be signed within 15 business days of the second meeting (as will be discussed below). If this does not occur, the company will go into liquidation.

The DOCA is a binding deed. It binds all unsecured creditors (creditors that do not have a security interest in the company such as a mortgage) and it binds secured creditors (creditors that have a security interest) that voted in favour of the deed. The court can make an order that binds people by the deed even if they voted against it in the creditors deed. If a creditor has a personal guarantee against a company director however, they can still act on it to be repaid their debt.

Contents of the deed

The deed must contain certain information including:

• Name of the deed administrator (the voluntary administrator’s name)

• Assets that will be used to pay outstanding creditors

• Details and extent of the debt that would be paid

• Order in which creditors will be paid i.e. Employees have priority in outstanding wages.

• The rights that are suspended against the company.

• Conditions that create the DOCA.

• Conditions in which the DOCA is terminated.

• Prescribed provisions as per the Corporations Act including the powers of the voluntary administrator and appointment of the people who will assist the process (committee of inspection) 

Monitoring the deed

The voluntary administrator must ensure the company carries through the commitments of the DOCA. Creditors and directors can also play a role in monitoring the DOCA. They can contact the administrator to raise issues such as missed deadlines for repayment or other express terms of the deed not being met.

The consequences of not meeting the terms of the deed are discussed at the meeting of the creditors and implemented in the deed. The deed administrator must give notice to parties as soon as possible after becoming aware of a contravention of the DOCA.

Changing the deed

The voluntary administrator can call a creditors meeting after the creation of the deed to consider a proposed variation to the DOCA. The creditors can also request the administrator to call a meeting if they pass a resolution for the variation of the deed or if over 25% of the creditors ask the voluntary administrator in writing to do so. They can also call a meeting if its less than 25% and greater than 10% if they pay for the cost of holding the meeting. The administrator can call a meeting if the people requesting the meeting agree to pay the costs of the meeting.

These requests must be reasonable however otherwise the voluntary administrator does not have to comply. They must state reasons as to why the request is unreasonable.

Creditor claims in the DOCA

In order for dividends to be paid to the creditor, they need to give the voluntary administrator proof of debt by completing the proof of debt form. The creditors need to attach copies of receipts and invoices relevant to the claim.

How a deed comes to an end

A DOCA comes to an end when:

• the obligations under the DOCA have been fulfilled and creditors have been paid

• the DOCA automatically terminates following certain conditions being met (as set out in the DOCA). In this case, the DOCA may provide that the company will go into liquidation because the conditions have been met

• the deed administrator calls a meeting of creditors (on their own initiative or at the direction of creditors or the committee of inspection if one has been formed), and creditors vote to end the DOCA. This may occur because there has been a breach of the DOCA or it is unlikely the terms of the DOCA can be fulfilled. At this time, creditors may be asked to vote to put the company into liquidation, or

• the DOCA is terminated because a creditor, the company, ASIC or any other interested person applies to the court and the court is satisfied that:

• creditors were provided false and misleading information when the decision to accept the DOCA proposal was made
• the voluntary administrator’s report left out information material to the decision to accept the DOCA proposal
• the DOCA cannot proceed without undue delay or injustice
• the DOCA is unfair or discriminatory to the interests of one or more creditors or against the interests of all creditors.

The company goes into liquidation if the court believes the DOCA should be terminated.

Voluntary administration effect on insolvent company

While the company is in voluntary administration:

• Unsecured creditors cannot begin, continue, or enforce the claims against the company without a court or administrator’s consent.

• Secured creditors cannot enforce their security interest without a court or administrator’s consent.

• Creditors with a personal guarantee from a director cannot act on the guarantee without the courts consent.

• Creditors cannot commence a court application to put the company in liquidation.

• Owners of property used by the company or those who lease the property to the company cannot recover their property during this period.

Liquidation for an insolvent company

If a company does not believe that they will be able to save a company, or if a court decides to liquidate the company’s assets, they will need to appoint a liquidator. Usually the voluntary administrator will act as the liquidator in these circumstances.

Similar to a voluntary administrator, the liquidator takes control of the company so its affairs can be wound up in an orderly and fair way to benefit creditors.

The most common type of liquidation is a creditors’ voluntary liquidation where an insolvent company’s shareholders vote to appoint a liquidator or when the creditors of that company vote for liquidation following the voluntary administration process as seen above.

The other type of liquidation, a court liquidation, a liquidator is appointed by the court following an application by one of the creditors. However, directors and shareholders can also make a liquidation application to the court. 

Role of a liquidator

Similar to a voluntary administrator, their role is to:

• protect, collect and sell the company’s assets

• investigate and report to creditors about the company’s affairs, including:

• unfair preferences (payments made to certain creditors over others) that may be recoverable
• uncommercial transactions that may be set aside
• possible claims against the company’s officers (including insolvent trading)
• creditor-defeating dispositions, including illegal phoenix activity

• inquire into the failure of the company – and possible offences by people involved with the company – and report to ASIC

• distribute money from the collection and sale of assets after payment of the costs of the liquidation, including the liquidator's fees (subject to the rights of any secured creditor) – first to priority creditors, including employees, and then to unsecured creditors.

Reports to creditors

Within 10 business days of their appointment as liquidator they must give creditors notice of their appointment and advise creditors on their right to:

• request information, reports and documents
•  direct that a meeting of creditors be held
•  give directions to the liquidator
•  appoint a reviewing liquidator
•  remove and replace the liquidator
• Complain to ASIC or the court about the liquidator’s conduct in connection with their duties
• Inspect certain books of the liquidator

The liquidator must send a report to creditors within three months after their appointment containing information about:

• the company’s estimated assets and liabilities
• inquiries undertaken and further inquiries that may need to be undertaken
• what happened to the company’s business
• the likelihood of creditors receiving a dividend (part repayment of their debt)
• possible recovery actions as outlined above.

Recoveries from creditors

A liquidator can recover, for the benefit of all creditors, certain payments the company made to individual creditors (known as ‘unfair preferences’) in the six months before the start of the liquidation.

A creditor receives an unfair preference if, during the six months before liquidation, the company is insolvent and the creditor suspects (or ought to suspect) the company is insolvent and receives payment of their debt (or part of it) ahead of other creditors. To be an unfair preference, the payment must put the creditor receiving it in a better position in the winding up than other unsecured creditors.

Not all payments from the company to a creditor in the six months before liquidation are unfair preferences. The Corporations Act provides various defences to an unfair preference claim.

If a liquidator seeks to recover a payment that has been made to you, the liquidator should provide you with reasons and evidence to establish that claim. You may wish to obtain independent legal advice on the merits of the liquidator’s claim before repaying any money.

Creditors’ meetings

A liquidator may call a creditors’ meeting from time to time to inform creditors about the liquidator’s progress, to find out creditors’ wishes on a matter or to approve the liquidator’s fees.

You can use a creditors’ meeting to ask questions about the liquidation and tell the liquidator what you know about the company.

ASIC is also entitled to attend and participate in a meeting of creditors should there be a reason to do so.

Committee of inspection

A committee of inspection may be formed to assist and advise the liquidator in both a court liquidation and creditors’ voluntary liquidation. The committee of inspection also:

• monitors the conduct of the liquidator
• may approve certain steps in the liquidation
• may give directions to the liquidator.

The liquidator must have regard to, but is not always required to comply with, such directions.

To conclude closing a company can be a very complex process. Especially when dealing with an insolvent company where a liquidator or voluntary administrator must be appointed. The more simple methods however including voluntary deregistration can be completed on our website under the register company tab.