Which ‘themes’ lead to such an assertion?
Often, we are asked what we recommend for companies dealing with a general set of common circumstances and often follow a similar theme. Our recommendation is generally always to liquidate.
So, what is this theme?
The theme is a company that has successfully traded a business for many years. It’s employees/ independent contractors are paid their full entitlements, its profits are correctly distributed, and it owns no assets—its structure was set up by using the assets of its related asset holding company. (And yes, the asset holding company has a properly registered security on the Personal Property Securities Register, otherwise our advice may be very different.)
The common theme the company faces usually appears in one of two ways.
Firstly, legal action is commenced against the company for damages of one sort or another, which is arguably defendable; however, the cost to defend will be significant.
Secondly, the company engages independent contractors and along comes a government agency that says or suggests that those contractors are actually employees or were not properly authorised to do the work they were engaged for. This results in the government agency imposing a large debt on the company.
The effect of these scenarios is that the company has no assets (they are held by the asset holding company) and now because of the large debt: the company is insolvent. As such, the company has two options:
- The shareholders contribute the necessary funds, or
- The company appoints liquidators.
The more common approach taken by the company, is option two. This is generally because option one may not be feasible.
The benefits of a liquidation scenario include:
- The directors act appropriately by placing the company into liquidation when it became apparent that the company was unable to pay its debts.
- The assets held by the asset holding entity are protected from the liquidator.
- The liquidation usually brings any litigation to an end.
- The shareholders save thousands of dollars in potential legal fees.
However, the disadvantages of a liquidation scenario include:
- A liquidator will review the company affairs to ensure that there are no voidable transactions that are recoverable.
- A liquidator must consider if there is an insolvent trading claim against a director, however in this scenario, typically the company has not traded while insolvent as the directors took action to liquidate the company when it was clear that the company was unable to pay its due and payable debts.
Obviously, while this article is based on some a ‘general’ theme, it is important that each case’s circumstances are considered in conjunction with appropriate advice.