March 1, 2017

To wind up, or to deregister?

It is not uncommon for we 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 2 choices, either pay the debt and then deregister the company, or wind up the company”

And so on….

So 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:

  1. The ATO has applied to Court to have the company reinstated only to then wind it up immediately.  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, it also allows those entitlements to be paid through the Fair Entitlements Guarantee Scheme.
  2. 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).  As the company is already deregistered, it can’t pay the debt or be wound up; a dilemma indeed!  The Director now has two options:
  • Personally pay the PAYG and super component of the debt, or
  • Apply to Court to reinstate the company and then put it into Liquidation within 21 days; an expensive process.

On the 6th February, a third nasty surprise surfaced.  The DPP charged a Cairns Director with making a false or misleading statement to ASIC for voluntarily deregistering his company at a time when the company had liabilities.

The Fair Work Ombudsman had previously obtained a judgement against the company for unpaid employee entitlements.  Instead of paying the judgement, the Director deregistered the company by lodging a Form 6010 with ASIC.  That form requires the Director to swear that the company has no unpaid liabilities.

The Director has been charged with misleading the ASIC, thereby contravening section 1308(2) of the Corporations Act.  The matter has been set down in the Cairns Magistrates Court for 21 March 2017.

Deregistering companies with liabilities is a gamble that could become very costly.  Always seek advice from a lawyer or Insolvency Practitioner if considering this option.

Article written by David Stimpson, Executive Director, Queensland

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