It is not uncommon for us long-suffering Insolvency Practitioners to have the following conversation with a company director:
Director: “Rather than spend money to wind up my company, can I just deregister it?”
Insolvency Practitioner: “You can voluntarily deregister your company only if it is effectively dormant with less than $1,000 in assets and no liabilities” (there are some other conditions, but we won’t bore you with those here).
Director: “Oh, but apart from some tax, the company doesn’t have any debts.”
Insolvency Practitioner (with enduring patience): “Well, I’m afraid tax qualifies as debt.”
Director (now taking the high moral ground): “But it’s all penalty interest and such.”
Insolvency Practitioner: “Yes, terrible isn’t it… So, you have two choices: either pay the debt and then deregister the company, or wind up the company.”
And so on….
It’s a conversation we have regularly, and the distinction between winding up and deregistration trips up directors far more often than it should.
The two processes might seem interchangeable on the surface, but they are legally distinct, and choosing the wrong one can have serious consequences.
What Is Voluntary Deregistration?
Voluntary deregistration is the process by which a company applies to ASIC to be removed from the register.
Once deregistered, the company ceases to exist as a legal entity, meaning it can no longer trade, hold assets, enter contracts, or be sued.
It’s designed to be a simple, low-cost exit for companies that have genuinely run their course. Under the Corporations Act, a company is only eligible for voluntary deregistration if all of the following conditions are met:
- All members agree to the deregistration
- The company is not carrying on business
- The company’s assets are worth less than $1,000 in total
- The company has no outstanding liabilities
- The company is not a party to any legal proceedings
- The company’s ASIC fees and charges are up to date
The critical word there is liabilities. It means all liabilities — trade creditors, employee entitlements, ATO debts, and any other outstanding obligations.
A company that ticks all of those boxes can be deregistered for a modest ASIC fee with no need for a liquidator.
A company that does not tick all of those boxes can’t and shouldn’t go down that path.
What Is Winding Up?
Winding up (also called liquidation) is the formal process of bringing a company to an end under the supervision of a registered liquidator.
The liquidator’s role is to realise the company’s assets, pay creditors according to their priority under the law, and distribute any surplus to shareholders before the company is deregistered.
There are two main forms of voluntary winding up:
Members’ Voluntary Liquidation (MVL): Used when a company is solvent. Directors must sign a declaration of solvency before proceeding. An MVL is a clean, efficient way to close down a company that has run its course but has assets to distribute.
Creditors’ Voluntary Liquidation (CVL): Used when a company is insolvent. In a CVL, creditors have a greater role in the process, and the liquidator’s focus shifts to investigating the company’s affairs, pursuing recoveries, and distributing whatever is available to creditors.
Winding up is more involved and more costly than deregistration, but it serves a good purpose.
It provides a structured, legally recognised process that protects directors, creditors, and employees alike.
Which Path Is Right for Your Company?
The decision is usually straightforward once you look at the company’s actual position honestly.
Deregistration is appropriate when:
- The company is genuinely dormant and has been for some time
- There are no outstanding debts of any kind, including to the ATO
- Total assets are worth less than $1,000
- There are no employee entitlements owing
- There are no pending or threatened legal proceedings
Winding up is appropriate when:
- The company has debts it cannot pay
- There are assets to be realised and distributed
- There are unpaid employee entitlements
- The company has ongoing contracts, leases, or obligations
- Directors want the legal protection and finality that comes with a formal process
If there is any doubt about which category your company falls into, that doubt itself is usually a signal to seek advice before doing anything. The risks of getting it wrong fall almost entirely on the directors.
The Risks of Deregistering When You Shouldn’t
So, going back to our conversation from the introduction, what happens if a director ignores the advice and proceeds to deregister a company with liabilities?
Well, in the past, Directors have received two nasty surprises:
- The company gets reinstated and immediately wound up
The ATO and other creditors have the right to apply to the Court to have a deregistered company reinstated.
Apart from “Public Interest”, the purpose of taking this action may be to allow a Liquidator to pursue antecedent transactions and insolvent trading actions against the Directors.
If the company owes employee entitlements, reinstatement also allows those entitlements to be paid through the Fair Entitlements Guarantee Scheme.
In short, reinstatement often leads to exactly the outcome the director was trying to avoid, plus legal costs.
- Director Penalty Notices don’t go away with the company
Despite the deregistration of the company, the ATO has served a Directors Penalty Notice (“DPN”) on the Directors.
Ordinarily, a DPN requires the company to either pay the debt or go into Liquidation within 21 days, otherwise the Directors become personally liable for the ATO debt (insofar as it pertains to PAYG and superannuation).
The problem is that a deregistered company can’t pay its debts or be wound up, so the director is left with two unappealing options: pay the debt personally, or apply to the Court to reinstate the company and then immediately place it into liquidation within 21 days.
Both are expensive. Neither is where you want to be.
- Criminal charges for making false statements to ASIC
In February 2017, a Cairns director was charged with making a false or misleading statement to ASIC after voluntarily deregistering his company while it had outstanding liabilities.
The Fair Work Ombudsman had obtained a judgment against the company for unpaid employee entitlements.
Rather than dealing with that judgment, the director lodged a Form 6010 with ASIC, which required him to declare that the company had no outstanding liabilities.
That declaration was false, and the director was charged with contravening section 1308(2) of the Corporations Act.
This case was a wake-up call showing us that deregistering a company with liabilities can constitute a criminal offence.
A Special Word on ATO Debt
The ATO deserves particular attention here because it is so often the debt that directors try to minimise or dismiss.
Penalty interest, general interest charges, and superannuation guarantee charges have a way of accumulating quietly, and directors are frequently surprised by how significant the total liability is by the time they seek advice.
The ATO has substantial powers to recover its debts, and it’s not a creditor that you can afford to ignore. Beyond the DPN regime discussed above, the ATO can also hold directors personally liable for unpaid superannuation guarantee amounts, regardless of how the company is closed.
It has invested heavily in compliance and data-matching, and it actively pursues both reinstatement of improperly deregistered companies and personal recovery action against directors.
If ATO debt is part of the picture, professional advice is essential.
Is Winding Up Worth the Cost?
The most common objection directors raise about winding up is the cost.
Engaging a registered liquidator, paying their fees, and going through a formal process feels like an unnecessary expense when applying to deregister seems to cost almost nothing.
But that line of thinking only holds up if deregistration is actually available to you. If it isn’t, the cost of doing it anyway can be many times greater once you factor in legal fees and potential personal liability for company debts.
For solvent companies with assets to distribute, a Members’ Voluntary Liquidation is often more efficient than directors realise, and it provides genuine legal finality.
For insolvent companies, a Creditors’ Voluntary Liquidation draws a clear line under the company’s affairs and, if managed well, can significantly reduce directors’ exposure to personal liability.
It’s also worth knowing that for businesses that are struggling but potentially viable, the Small Business Restructuring (SBR) process may be worth exploring.
Introduced in 2021, the SBR process allows eligible small businesses to put a restructuring plan to creditors while the directors remain in control.
Get Advice Early
Deregistering companies with liabilities is a gamble that could become very costly.
If you are concerned about your company’s position and unsure which path is right, contact SV Partners for an obligation-free consultation.
Our practitioners work with directors across Australia to find the most appropriate solution for their circumstances.