This handbook provides an overview of the processes leading to the final demise of a solvent company that has ceased trading, and where all creditors have been paid.

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In the course of professional practice, practitioners may encounter instances
where a solvent company is no longer required by its directors and
members.
Examples may include:
A company is not operating. The directors may seek to save on-
going compliance costs of administering the company (such as
preparing and lodging tax returns annually, financial accounts and
ASIC documents);
All available tax losses have been fully utilised and the company is of
no further use;
The distribution of assets in specie;
The desire to distribute capital gains;
The death of a principal or member;
To remove doubts about potential changes in legislation;
Restructuring of holding company balance sheet.
In such cases, it is appropriate that the affairs of the company be wound up
and that it be dissolved, even though the company may be solvent.
This following material deals with the processes leading to the final demise
of a solvent company, that has ceased trading and where all creditors have
been paid. The end of the company is the point in time when the company
ceases to exist. The Corporations Act, 2001 states that a company ceases to
exist upon its deregistration:
A company ceases to exist on deregistration. (s.601AD(1))
Upon deregistration, any property which belonged to the company at the
time of deregistration vests in the ASIC:
On deregistration, all the company's property vests in ASIC. If
company property is vested in a liquidator immediately before
deregistration, that property vests in ASIC. This subsection extends
to property situated outside this jurisdiction. (s601AD(2))
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The decision to de-register a solvent company can be made by the company,
its directors or members or by a liquidator of the company. An application
for deregistration is required to be lodged with ASIC and can only be made
under the following circumstances, s601AA(2):
(a) all the members of the company agree to the deregistration; and
(b) the company is not carrying on business; and
(c) the company's assets are worth less than $1,000; and
(d) the company has paid all fees and penalties payable under this Act; and
(e) the company has no outstanding liabilities; and
(f) the company is not a party to any legal proceedings.
If there are circumstances where the company, its directors or members are
unable to make application for deregistration, that is, the conditions
required by s.601AA(2) are unable to be met (for example, the company’s
assets are worth more than $1000, or it has outstanding liabilities), then the
company can only be dissolved by the appointment of a liquidator.
The process of preparing a company for deregistration in circumstances
where the company, its directors and its members cannot apply for
deregistration is called liquidation. This process of liquidation (or winding up)
involves the “collecting of assets, realising and reducing them to money,
dealing with proofs of creditors by either admitting or rejecting them, and
distributing the net proceeds, after providing for costs and expenses, to the
persons entitled“. (Re: Crust 'N' Crumb Bakers (Wholesale) Pty Limited
(1992) 5ACSR70, 72).
Insolvent companies are wound up through a compulsory liquidation (court
order) or by creditors voluntary winding up.
Where a solvent company is to be wound up, the process is initiated by the
members of the company. It is known as a members voluntary liquidation.
Stated conversely, a members voluntary wind up can only be initiated where
a company is solvent.
Since the company is solvent, it can be expected that the creditors will be
paid in full. Accordingly, the liquidation is under the supervision of the
members and does not need to involve the creditors.
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The Corporations Act draws the distinction between the winding up of
solvent companies (dealt with in Part 5.4A) and the winding up of insolvent
companies (dealt with in Parts 5.4 sections 459AT-459T and Part 5.4B).
Further, while there are distinctions between the liquidation of solvent and
insolvent companies, the Corporations Act states that in general, winding up
provisions of the Act contained in Part 5.6 apply equally to companies being
wound up in insolvency by the court or voluntarily (s513).
In the case of private (proprietary) companies, the liquidation of a solvent
company can be carried out by a person who is not a registered liquidator.
To wind a company up voluntarily, the company does so by passing a Special
Resolution (form 205), that is, a resolution requiring at least 21 days written
notice (Form 529) and a 75% majority of those members who vote at the
meeting (s491):
(1) Subject to section 490, a company may be wound up voluntarily if the
company so resolves by special resolution.
(2) A company must:
(a) within 7 days after the passing of a resolution for voluntary
winding up, lodge a printed copy of the resolution; and
(b) within 21 days after the passing of the resolution, cause notice of
the resolution to be published in the Gazette.
Prior to the date on which the notice of the meeting of members to pass the
special resolution to wind up the company is sent out, the directors (or a
majority of them) are required to make a written declaration called a
Declaration of Solvency (Form 520) (s494(1)):
Where it is proposed to wind up a company voluntarily, a majority of the
directors may, before the date on which the notices of the meeting at which
the resolution for the winding up of the company is to be proposed are sent
out, make a written declaration to the effect that they have made an inquiry
into the affairs of the company and that, at a meeting of directors, they have
formed the opinion that the company will be able to pay its debts in full
within a period not exceeding 12 months after the commencement of the
winding up.
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Attached to the declaration of solvency, there must be a statement of affairs
of the company, in the prescribed form before making the declaration.
(s494(2)):
There must be attached to the declaration a statement of affairs of the
company showing, in the prescribedform:
(a) the property of the company, and the total amount expected to
be realised from that property; and
(b) the liabilities of the company; and
(c) the estimated expenses of winding up.
This statement is also contained in the Declaration of Solvency (Form 520)
and is usually based on the latest accounts prepared prior to the date of
liquidation.
It is important to note that a Declaration of Solvency (Form 520) has no
effect unless:
It is made at a Director’s meeting;
It is filed with the ASIC prior to the issue of the Notice of Meeting of
the company's members to consider the proposal to windup the
company; and
the Special Resolution (Form 205) to windup the company is passed
within 5 weeks of making the declaration of solvency (Form 520).
It is an offence for a director to make a solvency declaration without
having reasonable grounds for making the declaration (s494(4)). This
includes a resolution that has no effect by reason of s494(3).
A director who makes a declaration under this section (including a
declaration that has no effect for the purposes of this Act by reason of
subsection (3)) without having reasonable grounds for his or her opinion
that the company will be able to pay its debts in full within the period stated
in the declaration is guilty of an offence.
If the company’s debts are not paid or provided for within the time stated in
the Declaration of Solvency (Form 520), it is presumed that the director did
not have reasonable gounds to form an opinion that the company was
solvent (s494(5))
If the company is wound up pursuant to a resolution for voluntary winding
up passed within the period of 5 weeks after the making of the declaration
or, if pursuant to paragraph (3)(c) ASIC has allowed a further period after the
end of that period of 5 weeks, within that further period, but its debts are
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not paid or provided for in full within the period stated in the declaration, it
is to be presumed, unless the contrary is shown, that a director who made
the declaration did not have reasonable grounds for his or her opinion.
In other words, the burden of proof of the reasonableness of the director’s
opinion that the company is solvent, rests with the director.
After the members resolve to wind up the company, they should pass an
Ordinary Resolution (which requires a simple majority of those members
present and voting) appointing a liquidator and fixing the liquidator’s
remuneration, s495(1):
The company in general meeting must appoint a liquidator or liquidators for
the purpose of winding up the affairs and distributing the property of the
company and may fix the remuneration to be paid to him, her or them.
Once the liquidator has been appointed, all the powers of the directors
cease (except as may be agreed by the company in a general meeting and
with the consent of the liquidator) s495(2):
On the appointment of a liquidator, all the powers of the directors cease
except so far as the liquidator, or the company in general meeting with the
consent of the liquidator, approves the continuance of any of those powers.
After the Special Resolution to wind up the company has been passed, a
copy of the resolution together with a notice of resolution is required to be
filed at the ASIC within 7 days, s491(2)(a):
A company must:
(a) within 7 days after the passing of a resolution for voluntary
winding up, lodge a printed copy of the resolution; The special
resolution must also be published in the Commonwealth of Australia
Gazette within 21 days, s491(2)(b):
(b) within 21 days after the passing of the resolution, cause notice of
the resolution to be published in the Gazette.
Once the liquidator has been appointed, there may be occasions where, in
the course of the liquidation, he forms the opinion that the company will not
be able to pay, or provide for the payment of its debts in full within the
period stated in the Declaration of Solvency (Form 520). In such a case, the
liquidator must do one of the following as soon as practicable, s496(1):
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(a) apply under section 459P for the company to be wound up in insolvency;
(b) appoint an administrator of the company under section 436B;
(c) convene a meeting of the company's creditors.
In this case, the Liquidator should contact SV Partners.
Once appointed, a liquidator in a members voluntary wind up is able to
exercise all of the powers conferred on a liquidator as if the liquidation was a
winding up in insolvency (s506(1)) including the powers conferred on a
liquidator under ss.477, 478 & 506. He may also apply to the court to obtain
permission to exercise any of the powers of the court (s511(1)(b)) or to have
the court determine any question relating to the winding up (s511(1)(a))
The duties of the liquidator are contained in the Corporations Act and in
case law.
These duties can be described as general duties and specific duties. The
general duties of the liquidator are:
(a) The fiduciary duties of the liquidator to
act honestly
avoid conflict of interest; and
act impartially.
(These general duties ensure that the liquidator acts independently)
(b) The duty to act with skill and care.
(c) The duty to exercise discretion in administering the affairs of the
company.
The specific duties of the liquidator are :-
(a) duty to collect the company’s property s478(1)
(b) duty to preserve the company’s assets.
(c) duty to realise the assets.
(d) duty to lodge Notice of Appointment with the ASIC (Form 505)
within 14 days of his appointment (and any cahnge of office), (s537)
and the Australian Taxation Office (Notice of Appointment to ATO)
(s.215(1)(a)), Income Tax Assessment Act, 1936)
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(e) duty to keep records and accounts (s.531) including maintenance
of the books and records kept before the winding up s542:-
(f) duty to lodge Statement of Receipts and Payments and a
Statement of the position (Form 524) of the insolvency every 6
months s539(1)
(g) duty to report and investigate. If a company office may have
been guilty of an offence or been engaged in misappropriation, a
liquidator is required to file a report with the ASIC (s.533)
(h) duty to settle a list of contributories s478(1A):-
(i) duty to ascertain and settle creditors.
In relation to fees in a voluntary winding up, these are fixed by the
committee of inspection, or if there is no committee, by the creditors
s499(3). The liquidator holds a lien over the funds and assets in his control
for his fees as well as the costs and expenses. There is no fixed scale for
remuneration although on application by a member, creditor or liquidator,
the fees may be reviewed by the court s504.
As soon as the affairs of the company are fully wound up, S509(1) requires
the liquidator to make up an account showing how the winding up has been
conducted (Form 524) and the company’s property disposed of; call a
meeting of creditors and members in order to lay the account before it
S509(2); and within 7 days of this final meeting of the liquidation, the
liquidator must lodge with the ASIC a return of the holding of the meeting
and a copy of the account (Form 523) s509(3).
Three months after lodging the return the ASIC must deregister the
company s509(5).
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