Skip to main content

Six ways to close a company in Australia.

Posted in
Six ways to close a company in Australia

Closing a company in Australia is a significant decision that requires careful planning and adherence to legal requirements. Whether it is due to financial challenges, strategic shifts, or other reasons, knowing the options available can help business owners navigate the process smoothly.

This article will explore six ways to close a company in Australia, covering various voluntary methods, liquidation procedures, and key considerations at each stage. Each of these is slightly different and, depending on the situation, may be the most appropriate due to the facts and circumstances at the time.

Key takeaways

  • In Australia, there are six major ways of closing a company: voluntary administration, liquidation, members’ voluntary liquidation (MVL), voluntary deregistration, receivership, and selling the business.
  • Each method has specific criteria and implications, such as addressing insolvency through voluntary administration or choosing a cost-effective option like voluntary deregistration for companies that have ceased trading.
  • Expert guidance, careful planning, and timely decision-making are crucial in navigating closure and effectively managing outcomes.

#1 Voluntary administration (VA)

VA is a process initiated by the company when it faces insolvency and cannot pay its debts. The process involves appointing a Voluntary Administrator (Administrator), usually by the company directors.

The Administrator will assess options and devise the best action for the business and its creditors. The aim is to determine the company’s future: restructuring, liquidation, or a different solution.

Insolvency can occur for many reasons. When a company becomes insolvent, it can seek independent support and guidance from an Administrator who will help assess the business’s financial situation and develop an appropriate strategy for the future.

A VA provides the company with respite from its creditors, allowing time to explore various options, including the potential for ongoing operations. During the VA process, unsecured creditors are prohibited from pursuing or initiating any claims against the company.

Towards the conclusion of the VA, the company may opt for a Deed of Company Arrangement (“DOCA”) with its creditors. Alternatively, the Administrator may recommend formal liquidation for the company.

The VA process typically spans 25 to 30 business days. Upon appointment, the Administrator assumes company control and conducts an investigation. Subsequently, they present a financial report to creditors during a creditors’ meeting. At this juncture, creditors may grant an additional 15 business days to consider accepting a DOCA.

#2 Liquidation

Liquidation is a formal process by which a company chooses to end its operations and distribute its assets among its creditors and shareholders.

There are two types of liquidation in Australia – court liquidation and creditors’ voluntary liquidation (CVL).

In a court liquidation, a Liquidator is appointed by the court, typically upon a creditor’s request due to unpaid debts. When a creditor is owed money, they can apply for the company to be wound up, known as a “wind-up order.”

A CVL is initiated voluntarily by the company’s directors or shareholders. Normally, it is a response to insolvency, disputes, or ongoing financial concerns.

Both forms of liquidation are overseen by registered independent liquidators whose responsibility is to sell the company’s assets. The proceeds are then used to settle debts and finalise the company’s closure.

Registered liquidators have a personal responsibility to the creditors and the Australian Corporate Regulator, the Australian Securities and Investments Commission (ASIC).

The standard duration for a liquidation process ranges from six to 12 months, with costs varying based on factors such as the company’s size, asset holdings, and the number of involved creditors.

#3 Members’ voluntary liquidation (MVL)

MVL involves shareholders agreeing to shut down the business and cease trading, providing solvent companies with a quick and orderly winding-up process. Eliminating the need for creditors’ involvement during liquidation offers a more cost-effective option for shareholders.

The process begins with appointing a Liquidator, who notifies interested parties before finalising the company’s affairs. This includes handling tax returns, realising assets, settling creditors’ claims, and distributing surplus to shareholders.

In order to enter an MVL, the company must be solvent. The liquidation will automatically convert to a creditors’ voluntary liquidation (CVL) if it doesn’t meet the requirements. A solvent company is defined by the ability to repay all debts and creditors within 12 months.

An MVL typically takes three to six months to complete, making it a desirable option for quick closure compared to other methods, such as CVLs. Consequently, an MVL also reduces closure-related costs.

#4 Voluntary deregistration

Voluntary deregistration is one of the most straightforward processes for officially ending a company. It is often chosen when the company has stopped or plans to cease trading. Compared to other closure methods, it is usually the most cost-effective.

To deregister a company, there are specific conditions that need to be met:

  • All members must agree to deregister.
  • The company should not be conducting business.
  • The company must not have any outstanding liabilities.
  • The company must not be a party to legal proceedings.
  • The company’s assets should be less than AUD1,000.
  • The company must have paid all fees and penalties payable to ASIC.

The final step is submitting Form 6010 to ASIC with a nominal deregistration fee. ASIC’s action to deregister can take two to three months until it’s Gazetted. After this period, the company stays on the ASIC register but is labelled ‘deregistered.’

It is worth noting that, unlike other closure methods, you can reinstate a deregistered company later. Once reinstated, it regains registered status as if it never deregistered.

#5 Receivership

Receivership enables a company to function under the oversight of a Receiver, tasked with repaying creditors while retaining some authority for the company’s owners.

In this process, a secured creditor, such as a bank, appoints an independent Receiver to facilitate the recovery of debts owed by the company. Secured creditors can appoint a Receiver due to their secured interest in the company.

The Receiver’s primary responsibility is towards the secured creditors. The Receiver can gather and liquidate the company’s assets throughout the procedure to satisfy the creditor’s claims. Not restricted to selling only secured assets, the Receiver can sell all company assets to settle outstanding debts. Additionally, they must provide reports on their findings to unsecured creditors.

#6 Selling the business

One other option involves selling the business and subsequently closing the company. This strategy allows owners to maximise the sale’s return while retaining control, followed by a systematic closure of the company.

Common challenges and pitfalls during closing an Australian company

Underestimating the time and cost of closing the company can be a critical mistake. The duration and expenses involved can vary depending on the type of closure. It’s essential to allocate sufficient time and consider locking in a fixed fee to avoid unexpected financial burdens.

Tax implications are another crucial aspect to consider. While it might seem that a distressed company would incur no tax liability due to losses, conducting a thorough tax review is wise to ensure all potential tax obligations are adequately addressed.

Additionally, ensuring director protection is critical when closing a company. Obtaining adequate Directors & Officeholders’ Insurance run-off, typically seven years in Australia, can safeguard directors from potential liabilities arising during and after the closure process.

How to mitigate risks and ensure a smooth close

Careful planning and expert guidance are crucial when considering closing a company. Every business situation is unique and influenced by factors such as its history, size, and industry. Therefore, it’s essential to thoroughly evaluate the most suitable approach before proceeding with closure.

Preparation for the unexpected is also vital in the closure process. While closing a company is not an ideal scenario, it is a possibility that should be anticipated. Maintaining organised accounting records, proper documentation, and overall operational efficiency can significantly facilitate a smoother closure process when the time comes.

When closure becomes inevitable, timely decision-making is key. After exploring all avenues for business sustainability, it is essential to make the decision promptly. Acting while the company is still under your control allows for better management of the closure process and its outcomes.

Regulatory compliance and reporting

Australian companies must adhere to the Corporations Act 2001 (Act) and follow the guidelines of ASIC, the regulatory body overseeing the Act.

Closure of a company entails specific reporting obligations. The responsible party depends on the closure type; for instance, liquidation is managed by the appointed liquidator, while your ASIC agent or accountant can handle voluntary deregistration.

Trading while insolvent and directors

A crucial point to emphasise is that directors can face severe charges and consequences if they allow the company to trade while insolvent. Directors must ensure this situation never arises, and if financial distress is imminent, they must address it promptly.

Conclusion

Closing a company in Australia requires careful consideration of various factors, including financial status, regulatory compliance, and strategic objectives. Each of the six methods discussed offers distinct advantages and considerations, highlighting the importance of tailored solutions based on the company’s circumstances. By following regulatory guidelines, business owners can navigate the closure process efficiently and mitigate potential risks, ensuring a smooth transition and compliance with legal requirements.

Close your company with finality with Acclime

Let Acclime assist your business throughout the company closure process. Our experienced team can guide you through the legalities, ensure all regulatory requirements are met, and handle administrative tasks. We understand the complexities of closing a business and can provide tailored solutions to minimise disruption and ensure a smooth wind-down of your company in Australia.


Related services

Related guides

About Acclime.

Acclime helps established multinational companies and startups start and operate their business in Australia and beyond. By seamlessly navigating our clients through the complexities of the local regulatory systems, we maximise opportunities while ensuring compliance.

Explore other guide categories