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Module 4 winding up business Monash university
Property Law (LAW 2112)
Monash University
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MODULE 4
WINDING UP A BUSINESS
PART OF A MODULAR TRAINING RESOURCE
© Commonwealth of Australia 2015.
With the exception of the Commonwealth Coat of Arms and where otherwise noted all material presented in this document is provided under a Creative Commons Attribution 3 Australia (website) licence.
The details of the relevant licence conditions are available on the Creative Commons website (accessible using the links provided) as is the full legal code for the CC BY 3 AU licence.
Disclaimer
All of the material published in this Package is provided for general information purposes only. It does not constitute professional advice for any particular purpose, and the Commonwealth of Australia does not warrant or represent that it is accurate, reliable, current or complete. The material should not be relied on as the basis for any decision without users exercising their own independent skill or judgment or seeking professional advice. To the maximum extent permitted by law, the Commonwealth of Australia does not accept any legal liability or responsibility for any injury, loss or damage incurred by the use of, or reliance on, the material contained in this Package.
WINDING UP A BUSINESS
INTRODUCTION
Winding up a business gives rise to a number of financial, commercial and legal issues that usually impact a number of stakeholders.
Whilst this Module focuses on winding up a business which ceases to operate, the Module also considers instances where there is a sale or merger of a business and the business can no longer operate in its current form.
While these issues will be explored in more detail in this Module, it is important to note that:
If your organisation is a company, the winding up process is governed by the Corporations Act 2001 (Cth) (Corporations Act 2001).
If your organisation is an incorporated association, the rules governing the winding up process (including whether any elements of the Corporations Act 2001 apply) will differ from state to state: further detail relating to incorporated associations can be found on page 13 of this Module.
In a partnership, the terms of the partnership agreement will dictate how the partnership is dissolved. Where no formal partnership agreement is in place, the rules will differ from state to state, according to the relevant Partnership Act. If the partnership is constituted by two companies, then the winding up rules of the Corporations Act 2001, considered in this Module, may also apply to each individual partner company.
If your organisation is registered with the Office of the Registrar of Indigenous Corporations (ORIC), the organisation should contact ORIC if it is considering ending the affairs of the organisation. The rules under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) for winding up such an organisation are similar to, and often adopt, the rules of the Corporations Act 2001.
If your organisation is considering winding up or merging, it is strongly advised that you seek independent legal and accounting advice on this matter. This Module serves as a guide only.
This Module provides information about the key factors to consider in winding up a business, including:
the process and legal requirements
the key risks
a broad understanding of solvency
KEY FACTORS TO CONSIDER
The decision to cease to operate or enter into a transaction to sell or merge requires consideration of various factors. The table below explores some of the most important of these for your consideration.
Factor Issues to consider
Viability Is the business viable going forward?
What is the impact of funding changes on the viability of the business and solvency? Please refer to Module 1 'Understanding the financial impact' and the section below entitled ‘Understanding Solvency’.
What will the business need to do to remain viable? Can it restructure, merge or sell in order to remain viable?
Advice Seek timely independent legal and accounting advice. Indemnities What indemnities are available? Insurance What insurance coverage is required going forward? Taxation What is the taxation impact? This is particularly important for private organisations. Type of entity The type of entity will determine which legislation will apply. The Corporations Act 2001 is the law relating to companies Australia-wide.
The various state-based associations’ incorporations Acts apply to incorporated associations. The Act for your state/territory will outline when the Corporations Act may apply, especially in the case of winding up a business.
The CATSI Act governs how registered Aboriginal and Torres Strait Islander incorporated organisations are run. The office of Registrar of Indigenous Corporations (ORIC) is an independent statutory office holder which administers the CATSI Act. Constitution Consult the organisation’s Constitution or Statement of Purpose (in the case of an incorporated association) for specific guidance on meetings and voting thresholds. Assets If ceasing to operate, when and how will assets be sold? If merging or selling, when and how will assets be transferred/assigned? Assets may need to be valued beforehand. Liabilities If ceasing to operate, when and how will liabilities be paid?
Factor Issues to consider If merging or selling, when and how will liabilities be transferred/assigned? Contracts with customers, suppliers, financiers and landlords
If ceasing to operate, what are the break costs and obligations associated with cancelling/ending a contract? If merging or selling, how will contracts be transferred or assigned? Employees If ceasing to operate, what is the impact on industrial relations and employment contracts, in particular employee entitlements and redundancy payments?
If merging or selling, how will the employees be transferred or assigned? How will liability for employee entitlements be factored into the merger or sale arrangements?
Buyer or Merging Party
Is the party with whom a merger or sale is proposed, a good strategic fit for the business? What is the value being offered to sell or merge? Solvency The Board or Committee (in the case of an incorporated association) will need to consider solvency. Please refer to this Module, Understanding Solvency, which follows on page 7. Board meeting Convene a meeting of Directors/committee members (in the case of an incorporated association) to resolve to wind up. Shareholder/ member meetings
Convene a meeting of members/shareholders to vote on the wind up. Engage a liquidator Engage a liquidator to undertake a solvent wind up or enter into a voluntary administration or creditors voluntary liquidation process under an insolvent wind up—refer below.
KEY RISKS
The following table discusses some of the key risks that you need to be aware of prior to considering winding up or selling your organisation, or merging with another entity.
Key risk Description
Insolvent trading Insolvent trading occurs when a business incurs debts which it is unable to pay as and when they become due and payable. The Corporations Act 2001 imposes severe penalties on Directors of companies who trade while insolvent. Directors may be held personally liable in certain circumstances, for example where superannuation guarantee charge obligations are not met.
You should seek independent accounting and legal advice when determining solvency.
Solvency is primarily a cash flow based test
The preparation of a forecast cash flow will assist in determining if a company or incorporated association is able to pay all its debts as and when they become due and payable
Please refer to Module 1 Understanding financial impact.
There are also other indicators of solvency which should be considered. These include but are not limited to the following:
the amount of cash held
whether assets exceed liabilities
the ability and timing required to convert assets readily into cash in order to meet liabilities
the ability to negotiate the timing and quantum of payments to creditors/suppliers/statutory authorities
the ability to secure financing or bank funding
the ability to obtain equity or third party contributions/investments
the ability to meet any potential or contingent liabilities that crystalise
the trading/income and expenditure of the company or incorporated association.
APPROACHES TO WIND UP
The following diagram outlines the different approaches regarding solvency when ceasing and winding up a business, and the legislation underpinning these.
SOLVENT WIND UP OF A COMPANY
The Corporations Act 2001 outlines two ways (other than by the courts) to wind up a company that is solvent.
LIQUIDATION
The process is usually initiated by the company, because the company or the purpose for which the company was established is no longer required.
A company must be solvent to initiate a members’ voluntary liquidation (MVL). The Directors will need to make a Declaration of Solvency.
A MVL involves the orderly winding up of a company’s affairs and includes ceasing or selling its operations, realising the company’s assets, distributing the proceeds of realisation among its creditors, and distributing any surplus among its shareholders.
A MVL does not require a registered liquidator to be the liquidator of the company, although the liquidator must have the necessary skills and experiences. Section 532 of the Corporations Act 2001 outlines who may act as a liquidator of a company and the exceptions for a MVL.
Under subsection 495(2) of the Corporations Act 2001, upon appointment of a liquidator, all the powers of the Directors cease except so far as the liquidator, or the
A significant drawback of a deregistration can be that if a person or company is aggrieved by the cancellation of the registration of the company, they may make an application to the court to have the company reinstated.
The effect of a successful application is that the company shall be deemed to have continued in existence as if its registration had not been cancelled. The Directors would be reinstated and would then be required to attend to statutory matters such as filing annual returns for the period between deregistration and reinstatement. In the reinstatement of a company that has been liquidated, it is the liquidator who has these obligations.
The liquidator can make a distribution of undisclosed assets at the time of appointment as part of the MVL process whereas any undisclosed assets at the time a company is deregistered will vest in ASIC.
THE KEY STEPS TO PLACE A COMPANY INTO MEMBERS’ VOLUNTARY
LIQUIDATION
(Liquidation commences on the passing of the resolution at Step 8)
Generally a company will enter into voluntary administration or creditors’ voluntary liquidation. If an insolvent winding up process is required, a court can also appoint a liquidator.
Given the potentially complex nature of insolvency issues, you will need to seek independent legal and accounting advice if you believe your organisation may be insolvent. A liquidator undertaking an insolvent winding up must be registered with ASIC.
LINKS TO ACTS
The following are links to the relevant Acts.
ASSOCIATIONS INCORPORATION ACTS
WA Act
SA Act
Victorian legislation website - Associations Incorporation Act 1981 (Vic) Act number 9713/
NSW Act
NT Act
ACT Act
TAS Act
QLD Act
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act)
CORPORATIONS ACT 2001
Corporations Act
PARTNERSHIP ACTS AND OTHER INFORMATION
For links to each state Partnership Act, as well as links to each state’s government business authority see: Business.gov – Dissolving Partnerships
Please obtain legal advice relevant to your specific circumstances.
LEGAL FRAMEWORK FOR NOT-FOR PROFIT (NFP) ORGANISATIONS
The following section discusses the legal framework in which Directors of NFPs operate.
NOT-FOR-PROFIT ORGANISATIONS
‘Not-for-profit’ is essentially a taxation status rather than an indication that an organisation does not make an income and a profit. The essential feature is that these organisations cannot distribute profits to their members. NFPs are usually companies limited by guarantee or incorporated associations. NFPs need to inform the Australian Tax Office that they are winding up or closing and must ensure it transfers remaining assets to another ‘deductible gift recipient’.
Not-For-Profit Organisations which are charities can find further resources through the Australian Charities and Not-For-Profits Commission at: ACNC Website or by calling 13 22 62.
Justice Connect is an NGO which administer the Not for Profit Law Information Hub , a service which provides information relevant to not-for-profit law applicable in NSW, Victoria, and the Commonwealth. The service includes information about ending an organisation’s affairs. You can access the hub via the Website at: Not For Profit Law Information Hub.
Justice Connect may be able to arrange for free legal assistance to be provided to eligible NFPs in Victoria and NSW. For further information, see: Justice Connect Not-for- Profit Law.
COMPANIES LIMITED BY GUARANTEE
Larger NFPs that operate nationally often incorporate as a company limited by guarantee. Section 9 of the Corporations Act 2001 defines company limited by guarantee as ‘a company formed on the principle of having the liability of its members limited to the respective amounts that the members undertake to contribute to the property of the company if it is wound up’.
The directors of these companies are subject to the director’s duties set out in the Corporations Act 2001. The National Safety Council of Victoria case ( Commonwealth Bank v. Friedrich 1 ) made it clear that the duties of a company director are the same, regardless of whether the company is for profit or not-for-profit.
INCORPORATED ASSOCIATIONS
1 Commonwealth Bank v. Friedrich (1991) 9 ACLC 946.
Module 4 winding up business Monash university
Course: Property Law (LAW 2112)
University: Monash University
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