How to wind up a company
If you’re closing a business in Australia and its a company, there are a few things you need to know. Such as what’s the difference between liquidation and voluntary administration? And what are the new rules?
Your company is an entity that’s like a legal ‘person’ of it’s own. So it can owe it’s own debts and contracts. That gives you, the business owner, a bit of protection from its debts, especially if you don’t sign director’s guarantees (easier said than done sometimes). A sole trader doesn’t have that protection but owes business debts as well as their personal ones.
When it’s time to shut the company down, or it can no longer operate as a business, there are a few options. Like many things the more time you have, the money you have, the more choices you get.
Lots of companies are just finished. Debts are paid, leases ended, or the reason you ran the company no longer applies. You can apply for these companies to be simply de-registered by ASIC.
For many businesses, life is not so simple. There might be outstanding debts, tax due, or a lease to be broken. It gets more complicated here because these companies are not legally allowed to deregister and plenty have been charged with an offence if they try to deregister by not disclosing all their debts.¹
The government recently changed the laws to offer a different set of choices for those closing a business in Australia, owing less than $1 million. But with a few bits of equipment or some decent size premises, it’s pretty easy to owe more than $1 million! For those companies the old rules apply. We’ll cover both sets of rules briefly as we go along.
Closing a business with debts
As of 1st Jan 2021 a business owing less than $1 million can now access a new process administered by an accountant called a Small Business Reconstruction Practitioner (SBRP).
Their job is to get the creditors of the business together with the business owner essentially to agree a payment plan. To access this service ASIC has a registration process, which can be complex. Talk to The Solvers if you’re thinking about this.
If a reconstruction can’t occur or it’s too late, there is a new ‘small business liquidation’ (more on this later). At this stage it is unclear if the special small business liquidation laws are going to be widely used.
Let’s look at ‘the old system’ which applies to businesses with over $1 million in debts (and quite possibly some with less than that).
Voluntary Administration is a process that allows for those considering closing a business in Australia to keep trading (but with an administrator, not the owner in charge).
The idea is it maximises the chances of the business continuing in some form, and the company’s creditors getting more money than if the company shut down straight away. This is the more formal version of what the SBRP would do.
Often it’s too late, or it’s time to close. The Insolve Panel describes a liquidation as ‘selling its assets, investigating its affairs, recovering any legal claims, and distributing the funds received to creditors and/or shareholders’.
- Member’s voluntary liquidation is where the business directors decide to close it down themselves and appoint a liquidator.
- Creditor’s Voluntary Liquidation – the people owed money by the company put it into liquidation and appoint a liquidator
- A Creditor goes to court because their debts are unpaid and the court appoints a liquidator. This is not a good situation!
Be aware, in a liquidation, often debts paid by the company within the 6 months prior to appointment of the liquidator can be treated as a Preference Payment. There are big implications here, so read our article for the full story. The new small business liquidation rules (if they are used) would reduce this Preference Payment period to 3 months.
How much does it cost to liquidate a company in Australia?
Prices vary considerably. It depends on the size of the company, the amount of debt, the complexity of it’s business and how well the directors cooperate.
One of the reasons put forward for the changes for small business was the cost of voluntary administration and liquidation. It will be interesting to see if the new system works in practice.
Previously we have seen, for relatively straightforward liquidations, prices in the order of $6-12,000 for a small company. These are from reputable firms such as those on the Insolve panel. The small business liquidation, if it get used, is perhaps around $5000.
How to liquidate a company yourself
Don’t even think about it. ASIC requires a registered liquidator to do this role. A limited number of people do it for a living and they take personal responsibility for the debts of the company they’re trying to close down. It’s extremely risky if you don’t know what you’re doing.
Even a member’s voluntary liquidation is still a formal appointment. So its important to get the right advice about what to do and not break the law. There are a number of ‘untrustworthy advisors’ out there who will try and tell you different.
Liquidators tell us that unfortunately there is as much work in liquidating small companies as medium ones. So the costs of liquidation seem to baffle us all. In some cases it leaves directors out in the cold because they simply can’t afford the fees. Read about the Letter of Closure option.
Cheap liquidation?
Is this really a thing? This is definitely a case of buyer beware! Some operators advertise $2,200 liquidations (typically using billboards to promote it). They even do ‘Free for a Limited Time’ offers. From what I’ve seen, one of two things happens with these:
A – very quickly you find you don’t qualify for the cheap liquidation and the variations result in the same charge that everyone else is charging.
OR
B – the salesperson makes money by not telling you about the preference you, your family or creditors received and/or the insolvent trading claim they are going to sue you (the director) for.
AND
Often they’ll do A and B! These people are bottom feeders. Note that a small business liquidation, done properly, is supposed to cost in the order of $5,000 excluding your accountants and lawyers costs. If even that’s too much money, read about the Letter of Closure option below.
Letter of Closure; a realistic solution to closing a business in Australia
Often a small business person just shuts the doors and walks away. They’ve borrowed money against their house or car and there’s nothing left except debts to pay. They’re too broke to go broke.
Often untrustworthy advisors make things worse by giving bad advice and telling the owner to hide things and just let ASIC de-register the company. That is both risky and very stressful. Creditors (and the ATO) will find you.
But a Letter of Closure is a new process where the director of the business can inform creditors and the ATO that the business has no money (is insolvent) and therefore cannot meet its debts.
This Letter of Closure provides notice to your creditors, ASIC and the ATO setting out appropriate and necessary information for them to decide whether:
- ASIC pays the costs of winding up the company
- or they take no further action against you and your company and allow it to be de-registered by ASIC.
As part of the process you can prove you’ve had trustworthy advice from a qualified professional.
The Solvers was the first in Australia to provide this service. For more information visit our Letter of Closure page.
Summing it all up, running a business can be rewarding but it is risky. Recent government law changes were designed to make it easier for people to start again, helping and inspiring those who have given everything to their business and are financially and emotionally drained.
Good business people can still have a business that fails, and they can learn from their mistakes. With a second chance they can start again, start employing, start making a profit. Australia needs these people.
