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01 Apr 2011

Members Voluntary Liquidations – A little used art?

READ TIME

4 min

Many directors and some of their advisors never consider what they should do with a company once it has fulfilled its role and its reason for being no longer exists. This is not something that is ever needed for many companies as it is always contemplated that they will continue into the future - and other processes will occur if they fail.

But more than occasionally a company is set up for a short term purpose or project, or the business is sold from the company and only the structure and possibly a few assets remain. What to do now? How do you get rid of this structure? Getting rid of a solvent company may have some tax advantages for the shareholders, but it removes all of the reporting and other obligations associated with being an officer of a corporate entity.

A member's voluntary liquidation is the winding up of a solvent company, usually done after the company has reached the end of its useful life. This process ensures that any outstanding creditors are paid and protects the members' interests while the company structure is dismantled and the surplus assets are distributed.

Anyone can be a liquidator of a solvent company, but not everyone would want to be. Many of the statutory processes and reporting requirements still exist regardless of whether the company is solvent or not. It is not as simple as handing out the cash and assets to the shareholders and turning off the lights as you leave the building.

The solvent company is wound up on the resolution of its members. The directors will resolve that a meeting of members should be called to wind up the company and will complete a declaration stating that the company is solvent. The members can then resolve to place the company into liquidation – usually by them signing a notice of resolution. This and the Declaration of Solvency needs to be lodged with ASIC during the process.

Usually a company is considered solvent only if it can pay all of its debts as and when they fall due. This strict definition does not apply to member's voluntary winding up as it is contemplated that all assets will be sold and that money will also be available for debt repayment. A company will be solvent for these purposes if it will be able to pay its creditors within 12 months after the appointment - even if that means having to wait to sell otherwise non-liquid assets to generate those funds.

The liquidator will do the usual things necessary to wind up the affairs of the company, including realizing any remaining assets, calling for proofs of debts and paying any outstanding creditors, lodging outstanding tax returns, paying any taxes and obtaining tax clearances. They will then distribute the surplus funds (and possibly assets in specie) to members and hold a final meeting of members.

Usually there is no need to conduct any of the investigations that would normally be done in the liquidation of an insolvent company. As all creditors should be paid in full within the first 12 months (and usually a lot sooner than that) there is no need to recover preferential payments and make claims for insolvent trading. If creditors are not paid within the 12 months, the members’ voluntary (solvent company) will revert to one of a few choices, usually a creditors’ voluntary (insolvent company) and these investigations may be carried out. The company will then continue to be wound up as an insolvent company.

But at times the liquidator may have to conduct some other investigations. They may have to verify what assets are available to them and look at disputed loan accounts. Sometimes the liquidator will have to reconstruct these loan accounts to determine the extent of these debts. Sometimes they will have to look at distributions of assets before the liquidation to determine whether one or more shareholders have been disadvantaged or preferred.

The liquidator will then have to ensure that the proper distribution is made to members through the capital accounts of the company. This may entail some investigation into the company's balance sheet, particularly capital reserve accounts and franking accounts as the liquidator will want to pay the distribution to members in the most tax advantageous manner.

For these reasons, even winding up solvent companies is often left to registered liquidators.

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