DIY MVL Workbook svpartners.com.au. A company ceases to exist on deregistration. (s.601ad(1))

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2 In the course of professional practice, practitioners may encounter instances where a solvent company is no longer required by its directors and members. Examples may include: A company is not operating. The directors may seek to save ongoing compliance costs of administering the company (such as preparing and lodging tax returns annually, financial accounts and ASIC documents); All available tax losses have been fully utilised and the company is of no further use; The distribution of assets in specie; The desire to distribute capital gains; The death of a principal or member; To remove doubts about potential changes in legislation; Restructuring of holding company balance sheet. In such cases, it is appropriate that the affairs of the company be wound up and that it be dissolved, even though the company may be solvent. This following material deals with the processes leading to the final demise of a solvent company, that has ceased trading and where all creditors have been paid. The end of the company is the point in time when the company ceases to exist. The Corporations Act, 2001 states that a company ceases to exist upon its deregistration: A company ceases to exist on deregistration. (s.601ad(1)) Upon deregistration, any property which belonged to the company at the time of deregistration vests in the ASIC: On deregistration, all the company's property vests in ASIC. If company property is vested in a liquidator immediately before deregistration, that property vests in ASIC. This subsection extends to property situated outside this jurisdiction. (s601ad(2))

3 The decision to de-register a solvent company can be made by the company, its directors or members or by a liquidator of the company. An application for deregistration is required to be lodged with ASIC and can only be made under the following circumstances, s601aa(2): (a) all the members of the company agree to the deregistration; and (b) the company is not carrying on business; and (c) the company's assets are worth less than $1,000; and (d) the company has paid all fees and penalties payable under this Act; and (e) the company has no outstanding liabilities; and (f) the company is not a party to any legal proceedings. If there are circumstances where the company, its directors or members are unable to make application for deregistration, that is, the conditions required by s.601aa(2) are unable to be met (for example, the company s assets are worth more than $1000, or it has outstanding liabilities), then the company can only be dissolved by the appointment of a liquidator. The process of preparing a company for deregistration in circumstances where the company, its directors and its members cannot apply for deregistration is called liquidation. This process of liquidation (or winding up) involves the collecting of assets, realising and reducing them to money, dealing with proofs of creditors by either admitting or rejecting them, and distributing the net proceeds, after providing for costs and expenses, to the persons entitled. (Re: Crust 'N' Crumb Bakers (Wholesale) Pty Limited (1992) 5ACSR70, 72). Insolvent companies are wound up through a compulsory liquidation (court order) or by creditors voluntary winding up. Where a solvent company is to be wound up, the process is initiated by the members of the company. It is known as a members voluntary liquidation. Stated conversely, a members voluntary wind up can only be initiated where a company is solvent. Since the company is solvent, it can be expected that the creditors will be paid in full. Accordingly, the liquidation is under the supervision of the members and does not need to involve the creditors.

4 The Corporations Act draws the distinction between the winding up of solvent companies (dealt with in Part 5.4A) and the winding up of insolvent companies (dealt with in Parts 5.4 sections 459AT-459T and Part 5.4B). Further, while there are distinctions between the liquidation of solvent and insolvent companies, the Corporations Act states that in general, winding up provisions of the Act contained in Part 5.6 apply equally to companies being wound up in insolvency by the court or voluntarily (s513). In the case of private (proprietary) companies, the liquidation of a solvent company can be carried out by a person who is not a registered liquidator. To wind a company up voluntarily, the company does so by passing a Special Resolution (form 205), that is, a resolution requiring at least 21 days written notice (Form 529) and a 75% majority of those members who vote at the meeting (s491): (1) Subject to section 490, a company may be wound up voluntarily if the company so resolves by special resolution. (2) A company must: (a) within 7 days after the passing of a resolution for voluntary winding up, lodge a printed copy of the resolution; and (b) within 21 days after the passing of the resolution, cause notice of the resolution to be published in the Gazette. Prior to the date on which the notice of the meeting of members to pass the special resolution to wind up the company is sent out, the directors (or a majority of them) are required to make a written declaration called a Declaration of Solvency (Form 520) (s494(1)): Where it is proposed to wind up a company voluntarily, a majority of the directors may, before the date on which the notices of the meeting at which the resolution for the winding up of the company is to be proposed are sent out, make a written declaration to the effect that they have made an inquiry into the affairs of the company and that, at a meeting of directors, they have formed the opinion that the company will be able to pay its debts in full within a period not exceeding 12 months after the commencement of the winding up.

5 Attached to the declaration of solvency, there must be a statement of affairs of the company, in the prescribed form before making the declaration. (s494(2)): There must be attached to the declaration a statement of affairs of the company showing, in the prescribedform: (a) the property of the company, and the total amount expected to be realised from that property; and (b) the liabilities of the company; and (c) the estimated expenses of winding up. This statement is also contained in the Declaration of Solvency (Form 520) and is usually based on the latest accounts prepared prior to the date of liquidation. It is important to note that a Declaration of Solvency (Form 520) has no effect unless: It is made at a Director s meeting; It is filed with the ASIC prior to the issue of the Notice of Meeting of the company's members to consider the proposal to windup the company; and the Special Resolution (Form 205) to windup the company is passed within 5 weeks of making the declaration of solvency (Form 520). It is an offence for a director to make a solvency declaration without having reasonable grounds for making the declaration (s494(4)). This includes a resolution that has no effect by reason of s494(3). A director who makes a declaration under this section (including a declaration that has no effect for the purposes of this Act by reason of subsection (3)) without having reasonable grounds for his or her opinion that the company will be able to pay its debts in full within the period stated in the declaration is guilty of an offence. If the company s debts are not paid or provided for within the time stated in the Declaration of Solvency (Form 520), it is presumed that the director did not have reasonable gounds to form an opinion that the company was solvent (s494(5)) If the company is wound up pursuant to a resolution for voluntary winding up passed within the period of 5 weeks after the making of the declaration or, if pursuant to paragraph (3)(c) ASIC has allowed a further period after the end of that period of 5 weeks, within that further period, but its debts are

6 not paid or provided for in full within the period stated in the declaration, it is to be presumed, unless the contrary is shown, that a director who made the declaration did not have reasonable grounds for his or her opinion. In other words, the burden of proof of the reasonableness of the director s opinion that the company is solvent, rests with the director. After the members resolve to wind up the company, they should pass an Ordinary Resolution (which requires a simple majority of those members present and voting) appointing a liquidator and fixing the liquidator s remuneration, s495(1): The company in general meeting must appoint a liquidator or liquidators for the purpose of winding up the affairs and distributing the property of the company and may fix the remuneration to be paid to him, her or them. Once the liquidator has been appointed, all the powers of the directors cease (except as may be agreed by the company in a general meeting and with the consent of the liquidator) s495(2): On the appointment of a liquidator, all the powers of the directors cease except so far as the liquidator, or the company in general meeting with the consent of the liquidator, approves the continuance of any of those powers. After the Special Resolution to wind up the company has been passed, a copy of the resolution together with a notice of resolution is required to be filed at the ASIC within 7 days, s491(2)(a): A company must: (a) within 7 days after the passing of a resolution for voluntary winding up, lodge a printed copy of the resolution; The special resolution must also be published in the Commonwealth of Australia Gazette within 21 days, s491(2)(b): (b) within 21 days after the passing of the resolution, cause notice of the resolution to be published in the Gazette. Once the liquidator has been appointed, there may be occasions where, in the course of the liquidation, he forms the opinion that the company will not be able to pay, or provide for the payment of its debts in full within the period stated in the Declaration of Solvency (Form 520). In such a case, the liquidator must do one of the following as soon as practicable, s496(1):

7 (a) apply under section 459P for the company to be wound up in insolvency; (b) appoint an administrator of the company under section 436B; (c) convene a meeting of the company's creditors. In this case, the Liquidator should contact SV Partners. Once appointed, a liquidator in a members voluntary wind up is able to exercise all of the powers conferred on a liquidator as if the liquidation was a winding up in insolvency (s506(1)) including the powers conferred on a liquidator under ss.477, 478 & 506. He may also apply to the court to obtain permission to exercise any of the powers of the court (s511(1)(b)) or to have the court determine any question relating to the winding up (s511(1)(a)) The duties of the liquidator are contained in the Corporations Act and in case law. These duties can be described as general duties and specific duties. The general duties of the liquidator are: (a) The fiduciary duties of the liquidator to act honestly avoid conflict of interest; and act impartially. (These general duties ensure that the liquidator acts independently) (b) The duty to act with skill and care. (c) The duty to exercise discretion in administering the affairs of the company. The specific duties of the liquidator are :- (a) duty to collect the company s property s478(1) (b) duty to preserve the company s assets. (c) duty to realise the assets. (d) duty to lodge Notice of Appointment with the ASIC (Form 505) within 14 days of his appointment (and any cahnge of office), (s537) and the Australian Taxation Office (Notice of Appointment to ATO) (s.215(1)(a)), Income Tax Assessment Act, 1936)

8 (e) duty to keep records and accounts (s.531) including maintenance of the books and records kept before the winding up s542:- (f) duty to lodge Statement of Receipts and Payments and a Statement of the position (Form 524) of the insolvency every 6 months s539(1) (g) duty to report and investigate. If a company office may have been guilty of an offence or been engaged in misappropriation, a liquidator is required to file a report with the ASIC (s.533) (h) duty to settle a list of contributories s478(1a):- (i) duty to ascertain and settle creditors. In relation to fees in a voluntary winding up, these are fixed by the committee of inspection, or if there is no committee, by the creditors s499(3). The liquidator holds a lien over the funds and assets in his control for his fees as well as the costs and expenses. There is no fixed scale for remuneration although on application by a member, creditor or liquidator, the fees may be reviewed by the court s504. As soon as the affairs of the company are fully wound up, S509(1) requires the liquidator to make up an account showing how the winding up has been conducted (Form 524) and the company s property disposed of; call a meeting of creditors and members in order to lay the account before it S509(2); and within 7 days of this final meeting of the liquidation, the liquidator must lodge with the ASIC a return of the holding of the meeting and a copy of the account (Form 523) s509(3). Three months after lodging the return the ASIC must deregister the company s509(5).

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