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Five Good Reasons to Liquidate a Solvent Company

We have experienced an increase in the number of enquiries and formal members voluntary appointments (“MVL”) that are driven many factors.  Some of the increase can be attributable to directors and their advisors understanding that the cost to undertake a MVL is not as high as they might think.  In some instances however, applying to deregister a company without going through a MVL appointment is still an appropriate path to take.

Benefits of a MVL include the following:

Paying Tax Effective Dividends to Shareholders

Paying tax effective dividends has always been a dominant reason for liquidating a solvent company.  In fact, advisors may be negligent if they don’t recommend liquidating a company to extract the capital gains tax benefits created by the company and passing them to the shareholders.

Generational Change

We have seen many accountants looking at their client structures with a real focus on succession planning to transition wealth to the next generation.  Whilst many older companies were established with the children as shareholders or unit holders in a trust, the next generation may not share a common vision.  Hence the tax effective split of assets via a members’ voluntary liquidation allows the next generation to pursue their own visions as their respective families expand with different needs and horizons.

Risk Management

Where a company has successfully undertaken an enterprise or sold all of investments, there is invariably the possibility that unforeseen liabilities may appear way down the track.  We have seen cases where an accountant has facilitated the sale of a client’s old dormant company to another client only to find out that a claim connected to the original client has materialised years later.  We have also seen examples where a husband who conducted an enterprise through the company, ceases that business and hands the company to his wife who commences a totally different business.  Similar exposures exist that could have been avoided if the company was liquidated.

Minimising Ongoing Company Holding Costs

Annual ASIC lodgement fees and accounting fees to maintain a dormant company can steadily accumulate.  It wouldn’t take too long for the costs to hold onto a dormant company to outrun the cost of a MVL.

Saving Storage Costs of Books and Records.

As more and more records are held electronically, the physical space required to store books and records for tax purposes has diminished.  Nevertheless, there are still companies that incur significant storage costs where physical records are still held.  The security of those records is sometimes at risk where the directors need to transport them when they move locations.  Shareholders can resolve to authorise a Liquidator to apply to ASIC to enable the destruction of the records six months from the date of deregistration.

To minimise the cost of a MVL, here is a list of the major issues to be addressed prior to an appointment;

  • Make sure that the company is solvent.
  • Pay where possible all creditors including related parties.
  • Resolve any outstanding security interests.
  • Finalise any contractual obligations.
  • Attend to any outstanding regulatory lodgements, in particular the Australian Taxation Office.
  • Reconcile retained earnings and capital profit reserves. Obtain specialist taxation advice as appropriate.
  • The implications of the distribution of surplus assets on individual members.

Attending to these main issues will assist in keeping the cost of the liquidation process to a minimum.  Furthermore, addressing these issues should identify situations where a MVL should not be undertaken.  We stress that this is important because once a company is placed into MVL, the only way the process can be reversed is to make an application to the Courts which could be quite costly.

Whilst the Corporations Act allows persons who are not registered liquidators to be formally appointed, now more than ever it is important to comply with the existing and new laws that came into effect on 1 September 2017.

A major change from this date was the requirement for a Liquidator to issue a statutory report to unpaid creditors within three months of the appointment.

The new statutory report is to provide creditors with information about:

  • The estimated value of assets and liabilities.
  • Inquiries that the liquidator has undertaken and those that need to be made.
  • Comment on what happened to the business of the company.
  • The prospects of receiving a dividend.
  • Forms of recovery action that may be available.

We can assist advisors and directors on the MVL process and obviously undertake the formal appointment.  We have found over forty years that working with advisors in such a way produces the best outcome for the client and keeps all costs down.

Category: Dyealogue

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