Liquidate or be Deregistered? Why Doing Nothing can Backfire

If you’re considering discontinuing your business, or your company is no longer required, you might be wondering whether you should:

• voluntarily liquidate, or
• do nothing and let it be deregistered, or possibly
• let it be wound up by the ATO or another creditor.

Deregistration may appear to be a cheaper and simpler option at first glance, but it may not be the magic bullet it seems to be.

While it can feel like a big step to appoint a liquidator to your company, liquidation often emerges as a smarter and more comprehensive solution.

Deregistration vs Liquidation Definitions

First, let’s look at the differences between the two:

Deregistration: the Do-Nothing Option

Deregistration is the end of a company’s existence. It can be voluntary, initiated by the directors, or ASIC-initiated, which generally occurs for non-compliance with Australian Securities and Investments Commission (ASIC) fees and lodgements.

Voluntary deregistration involves cancelling your company’s registration by lodging the necessary form with ASIC. When your company is deregistered, it ceases to exist as a legal entity and your obligations as an officeholder end. If you’re reading this, your company probably has debts it cannot pay and voluntary deregistration would not be the right option for you.

Your company can also be deregistered for non-payment of ASIC annual review fees and/or failure to respond or lodge ASIC compliance notices.

During 2020/21, 80,735 companies were deregistered voluntarily and 52,368 were ASIC-initiated deregistrations.

Liquidation: the Proactive Option to Deal With Your Company

Liquidation or winding up, on the other hand, is the process of appointing a specialist professional, known as a liquidator, to bring your operations to an end and selling and distributing the company’s assets to satisfy creditor claims, with any remaining distributed to shareholders.

Liquidation of solvent companies (that can pay their debts in full) is called members’ voluntary liquidation and can have capital gains tax savings, or effectively wrap up a company’s affairs to minimise the risk of future claims like warranties.

For companies that can’t pay their debts they can appoint a liquidator. An insolvent liquidation, where the company appoints a liquidator is known as a creditors’ voluntary liquidation. If you don’t take steps to deal with your insolvent company and its debts, a creditor, such as the ATO can apply to court to have your company wound up and their own liquidator appointed. This is known as court liquidation.

Once a liquidation is finalised, the liquidator will apply to ASIC to deregister the company.

On average, about 8,000 companies enter liquidation or another insolvency process each year in Australia.

When to Choose Deregistration

If your company is solvent and ceased operations, and you have no outstanding debts or liabilities, minimal assets or activities, and/or no plans to resurrect in the future, deregistration is an appropriate, cost-effective option. The process is easier and faster, and the costs are relatively low. You would only opt for a members’ voluntary liquidation in these circumstances if there were capital gains tax savings that could be accessed, or if you were worried about claims against the company emerging at some future time.

However, if your company is facing financial difficulties and cannot pay its debts, you may end up with a criminal conviction if you voluntarily deregister. In this instance, if you don’t voluntarily appoint a liquidator, you may be hoping for ASIC-initiated deregistration of your company, which can take 12 to 18 months. But abandoned companies don’t always fade quietly into the past.

Downsides of Waiting for ASIC Deregistration

Waiting for ASIC to deregister the company can take a long time. While you’re waiting a few bad things could happen:

• The ATO or another creditor could apply to wind up the company and a court liquidator is appointed, often with an adversarial approach.
• The ATO could issue a director penalty notice (DPN), which you may miss, making the directors personally liable for the company’s BAS and superannuation debts.
• If you apply for personal finance, you’ll probably need to provide your company financial accounts, which could cause your application to be rejected.

Even if your company is deregistered by ASIC there can be some significant downsides, which can make your situation increasingly complex.

Deregistration can Come Back to Bite you

When your company is deregistered:

• If it has been inadvertently deregistered, your company ceases to exist as a legal entity, meaning you can no longer trade, enter into any further contracts, operate its bank account or legally undertake any steps in its name, or on its behalf.
• Any outstanding debts or unresolved legal issues remain, and deregistration makes the process of resolving them more complicated.
• Property owned by the company vests in ASIC. Property held on trust vests in the Commonwealth. This means they’re the only ones able to deal with it.
• If a claim against the company emerges, deregistration can be reversed. A creditor can challenge it through ASIC (shortly after deregistration) or they can apply to court to have the company reinstated and a liquidator appointed. This means you may not have closure for a number of years after abandoning your company, or worse, skeletons re-emerge to haunt you when you’ve moved on.
• The ATO can issue a DPN for unpaid BAS and super giving you 21 days to appoint a liquidator to avoid becoming personally liable for the debt. The problem is that it takes to two to three months to apply for a company to be reregistered with ASIC. You could go to court for an urgent registration application and appoint a liquidator to overcome this. However, the costs of this, if able to be achieved, will likely outweigh voluntary liquidation. Accordingly, unless your company has no BAS or super debt, or you’re planning to go bankrupt, you could experience significant financial liability years after your company becomes dormant.

When to Choose Liquidation

Even though liquidation has its own downsides, such as higher costs, loss of control, and a lengthier and more complicated process, if your company is insolvent or you’re solvent but worried about the risk of a future claim, it’s generally a better, more certain and faster option than deregistration.

Benefits of Opting for Liquidation

When you choose to liquidate:

• You don’t have to wait 12 to 18 months for ASIC to deregister; a straightforward liquidation can be finalised in under three months.
• Your company affairs are formally and legally wound up. This reduces the risk of claims coming back to haunt you, e.g. for warranties where the creditor could reinstate the company to pursue the director.
• Outstanding debts are written off, and directors are generally relieved of further personal liability.
• You avoid the risk of a 21-day director penalty notice (DPN), and reduce the risk of a lockdown DPN being issued.
• Any legal proceedings and action against your company are generally halted or stayed, meaning you avoid harassing letters and calls
• Eligible employees can claim unpaid wages, annual leave, redundancy pay, and other entitlements from the government if they can’t be paid.
• The liquidator ensures fair and transparent dealings with company assets and creditors’ claims.

Liquidation Closes the Door

When deciding between liquidation or deregistration, it’s essential to consider the specific circumstances and implications for your company carefully.

It’s always recommended that professional advice be sought from insolvency practitioners and legal experts to fully understand the consequences and make an informed decision.

They can assess your specific circumstances, guide you through the available options, and help you choose the most suitable path for winding up your company.

In our experience, voluntary liquidation with a registered liquidator is often the best way to go. You’ll find that a lot of your fears or concerns may be unfounded when properly understanding the liquidation process. Deregistration leaves the door open for future anguish. Liquidation closes the door.

If you’re weighing up deregistration vs liquidation, see how we can help with our Instant Online Assessment. Alternatively, you can get it touch with our team of debt solution specialists today on 1800 861 247 for professional, non-judgemental support and advice on the best way forward.